Open for Business

Saturday, April 16, 2005

The metamorphosis of the software industry

One of the obvious changes after the crazy dotcom bubble-burst is that IT buyers are much more educated and demanding. They are done signing mega contracts. Instead, they would like to pay as they realize the value of what they are buying and as they see a clear return on investment. This has created a significant move away from monolithic multimillion-dollar software contracts and increased the popularity of pay-as-you-use licensing. Some fast movers like have capitalized on these new business models with great success cannibalizing the business of giants like Siebel.

The consequence of these aggressive business models and the rising success of open source is that traditional software vendors (such as SAP and Oracle) started applying steep discounts to their software licenses to get new business. During the antitrust trial in 2004, an Oracle executive admitted that they were prepared to cut prices by 70%. The way I read this personally is that those giants realized that the real money is in the recurrent revenue produced by maintenance after the customer is locked in. CIOs often report publicly as much as 70 to 80 percent of their IT budgets are consumed by maintenance. During an earnings call in 2004, Oracle CEO Larry Ellison touted the company's maintenance (which includes fees derived from product updates and support) as an "extremely high-margin business." An article published by CNET shows how maintenance revenue manifestly exceeds (and keeps growing) license revenue for large software vendors.

By now I think I have made the point that the dynamics of the software business have changed and that maintenance, once a boring and unexciting, is where the money is coming from. What does this mean for open source? I think it’s very exciting news!

This simply means that many companies that provide high quality services around open source projects or bundles could potentially become billion dollar companies. Recently, we’ve seen several of those companies getting serious venture money. I was getting bored with Linux (Novell and Red Hat) being isolated open source successes. Seeing VCs inject money into those companies is very encouraging for open-source supporters who put their careers on the line to get their companies to adopt open source platforms. What businesses want is one neck to choke, one vendor to go to for its support needs so that they can focus on what they do best instead of wasting resources maintaining code they never wrote.

Do you think that one of the effects of open source is that software will never be sold the same way again? How many multi billion open source service providers will we see in the next decade? Do you think Orbeon, Optaros, SourceLabs or Spikesource have a shot at being as successful as Red Hat?


  • I am not sure your logic is quite sound. Take the Oracle example and extend it to its logical conclusion namely that they will offer 100% discount and make their money on services.
    Then they will not be different from a Redhat with the caveat that the sourcecode is not available to other potential service providers. This will give them a short term advantage, longer term somewhat debatable.

    Almost all Disruptive Technologies in the Clayton Christensen sense comes from below with a “good enough” solution but with a higher improvement trajectory than the incumbent.

    With that in mind it is probably a mistake to go for the Rolls Royce service and support solution but rather think through how this can be provided using the superior development model that is at the heart of FOSS. Without that leverage it is difficult to see what real competitive advantage is brought to bear.

    One suggestion would be to establish formal Software Federations. Interlocking agreements that allows the providers of one solution to reliably draw on the expertise that is present in the other areas of the stack upon which their offering depends. The other areas should probably be horizontal as well as vertical.

    With 'payment” centering around bug fixes and development help the steeper improvement trajectory for the FOSS offerings could be maintained.

    The customer will see a unified focal point for service and support and in reality have access to the expertise existent in a diffuse network.

    By Blogger Bjorn Stadil, at 7:37 PM  

  • Not sure which logic you are talking about when you say: " I am not sure your logic is quite sound"? Please clarify.

    By Blogger Omar Tazi, at 3:17 PM  

  • Sorry for not being clear. You seem to indicate that a support / service business model for FOSS is validated by Oracle simultaneously reducing their SW licensing at their core DB offering and profitably expanding their support business.

    I don't think that follows. Oracle is well entrenched in a critical business area, moving up the stack incl. licensing and can command near monopoly type premiums on support as the source-code is closed.

    I tried to argue that some additional competitive advantage needs to be part of the equation for the Service / Support model to work for FOSS.

    By Blogger Bjorn Stadil, at 7:48 PM  

  • Thanks Bjorn for shedding some light on what you meant by your first comment.

    Oracle's customer penetration is very powerful, no doubt. No FOSS company can claim (today) the leverage that Oracle has with their DB install base.

    Open source (not talking about companies or businesses) is rapidly getting there (in terms of penetration and growth). If you think about the success LAMP and LAMJ stacks are having in every other IT organization, it's just amazing. The question becomes, who is going to benefit from this success from a business perspective? Giants like IBM certainly doing pretty good. And you're right for smaller companies like Optaros, Orbeon or Sourcelabs, we definitely need additional competitive advantages and strong alliances to make it. JBoss is showing some promissing signs...

    By Blogger Omar Tazi, at 9:56 PM  

  • I am sure hoping that Orbeon finds and stays on a profitable path. My motivation is selfish and based on my fondness for the software available as open source. It would be a shame if the core group that created and still serves up most of the support is not able to find a viable business model (no implication on current state of affairs at all). I do think that the software industry is in the midst of a metamorphosis whose conclusion is far from over and far from clear.

    I listened to a podcast that I found interesting on this topic from by Geoffrey Moore titled "Orchestrating the Stack". Within this presentation he talked about identifying the gorillas and chimps for various layers of the stack. His point was that as you look at each layer and the players using this metaphor, you can glean some strategic insight that is useful.

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