Open Source Commentary from Navica's CEO,
Bernard Golden
November 2007
In This Issue
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The Future of Open Source
Commercial Open Source: Can It Scale?
I recently came across a blog
posting on InfoWorldby Savio Rodrigues of IBM that
claims that open source (so called “pure open source”
business models that give away a product and attempt to monetize
it by selling services to some portion of the user base) does
not scale; that in order for an open source company to move
beyond $100 million it must move to the so-called Fedora model,
in which access to certain products is unavailable except
by payment. This refers to the fact that Red Hat insists that
you sign up for its subscription if you want access to RHEL;
if you’re too cheap for that, you can use the free,
unsupported Fedora.
Savio proves that pure open source doesn’t scale by
analyzing (in another blog posting) some stats from a blog
posting by Matt Asay on CNet, in which Asay asserts
that pre-acquisition JBoss identified 7000 viable leads per
month, which it could pursue via low-cost internal direct
sales. Savio calculates that JBoss must have been closing
only 3% of its qualified leads, which is, in his words, incredibly
low, since an inside sales rep should close 25% of leads.
From this, Savio states that open source business models don’t
scale beyond $100 million. He goes on to quote, approvingly,
Marc Fleury (founder of JBoss) that the only true viable software
model is the proprietary model.
What this strikes me as is a failure to really come to terms
with what open source means to IT, and, by extension, the
software industry. It is judging open source by the standards
of proprietary software business models and finding it lacking,
instead of thinking through what business opportunities are
made possible by the new mode of software distribution.
First off, it is an unsupported assertion that there aren’t
enough customers to take an open source business beyond $100
million. Where is that written? Given that open source can
be easily adopted by a far broader user base than proprietary
software – made possible by cheap distribution and no
financial barrier to user trial – why is it not possible
that the potential market is far, far larger? His argument
fails to fully comprehend the power of price elasticity, richly
explored by Clayton Christensen; simply put, reduced prices
don’t mean less money is spent on a given item; reduced
prices increase the customer base by more than enough to increase
total market spend. Except for luxury goods, elasticity has
been demonstrated in every good and service market invented
by humans. Therefore, asserting that the potential sales opportunity
for an open source company is limited to $100 million seems,
to me, to be flat wrong.
Second, the assertion that a 3% close rate for direct sales
is too low to run a successful business – again, where
is that written? At a minimum, one has to understand what
a viable lead is. I think the open source industry puts the
bar for qualified pretty low – it can be someone who
registers during download or signs up for a webinar. So, asserting
that a 3% close rate reflects failure of the open source business
model is, at best, unsupported. It may be that the lead base
is a mix of real prospects and many “I have to register
for the webinar, so I’ll register” users. Segmenting
the lead base might find a far richer vein of prospects, of
whom a much larger percentage of leads can be closed.
More troubling about this assertion is the estimation that
3% is an inadequate response rate (response in the sense of
ultimately becoming a purchaser). Generating a lead list by
offering a webinar is analogous to creating a direct mail
list – and in the direct mail business a 3% response
rate is definitely high enough to build a successful business.
Land’s End, to cite one example, sells about $1 billion
through its mail catalogs. I think most open source companies
would be delighted to achieve Land’s End results.
With regard to Red Hat’s approach, one might think
that Fedora is not their community edition, but that CentOS
is. CentOS offers the same functionality of RHEL but lacks
commercial support.
What is important to recognize about all of these open source
businesses is that they follow a publishing model and sell
subscriptions. And, like all subscription-based businesses,
they scale slowly, but are, nevertheless, able to grow to
very large scale and can be phenomenally profitable. In their
heyday, newspapers achieved 20% net profit margins, very close
to what the most successful proprietary software companies
achieve. By contrast, licensed software companies can grow
much faster, but tend to have problems later on when it becomes
difficult to find new customers to fork over large upfront
signing fees.
I think Rodrigues’ plaint is more that open source
companies seem to be puny compared to the most successful
proprietary companies – from the perspective of the
companies. If you evaluate open source companies by the same
criteria traditionally used to judge proprietary companies,
of course they seem like laggards. To my mind, however, this
is somewhat akin to Charles I declaring democracy a poor replacement
for divine right; from his perspective, democracy sucked,
but for the vast majority of English, it was a far better
governing system (bringing to mind Churchill’s quote:
“It has been said that democracy is the worst form of
government except all the others that have been tried.”)
The key to successfully scaling a software business (and
this is true for both open source and proprietary software
businesses) is to generate sufficient leads and to efficiently
manage them well enough to create a viable business, defined
a sufficiently profitable on a sufficient revenue base. An
efficient sales process, applied to the very large lead base
made possible by price elasticity, can certainly achieve success
on even a 3% close rate. The question to my mind is “do
open source companies have sufficiently inexpensive ways to
sort through a torrent of leads to realize sufficient return
on capital?”
By the way, if you’re noting Rodrigues’ argument
explores the same territory as my recent “second chasm”
newsletters, you’re right. The key issue is not whether
a 3% close rate is too small. The key issue is how open source
companies can offer enough value to motivate users to become
buyers or motivate buyers to spend more – in fact, addressing
the latter issue could be far more productive in making commercial
open source economics better.
Open source companies themselves may be wearing proprietary
blinders; as I remarked before, they’re selling insurance,
so following the traditional per processor/per user model
of proprietary software may be throttling their potential
revenue streams.
We haven’t even begun to see the potential for commercial
open source (or for that matter, community open source). It
will so transform the IT landscape that, in the not-too-distant
future, we’ll look back on the bit coercive proprietary
software world and marvel that it existed at all – and
that it was so small.
Navica News
You can hear me speak at these upcoming events:
December 11, 3rd DoD Open Conference, Tysons Corner, VA:"Creating
an Open Source Policy for Your Organization" session.
More information here.
If you are interested in having me speak at your
organization:
Contact me directly via email.
New Book Availability
I am pleased to share the news that I have completed my latest
book, Virtualization for Dummies (you thought that
virtualization stuff in this newsletter was off-topic, eh?).
It will be published by Dummies Press next week!
I will have some interesting news about it in next month's
newsletter.
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