April 1, 2009 (c) 2009 MGI RESEARCH, LLC
We recently attended InfoWorld’s 6th annual OSBC event in San Francisco – where the open source community convenes in a business setting. The major theme was the attraction of open source products' low cost during a period of IT budget contractions. Our major interest was to measure the relative success of open source companies in reaching the enterprise market and their ability to threaten the established vendors. The short conclusion is that open source projects continue to make inroads into Silicon Valley development efforts, but as a business, open source companies have yet to prove their long-term viability with a business model capable of delivering attractive returns to investors.
Open Source = Cheaper Alternative to Established Vendor Offerings
A key theme from most open source companies was “our product is the low-cost alternative to the expensive ‘proprietary’ solution from major vendor X”. Interestingly, only Ingres was able to produce numbers remotely close to a true TCO analysis comparing the cost of adopting Ingres versus the competition. Most open source vendors have not made the marketing transition from targeting their developer communities to delivering durable marketing messages to the enterprise buyer.
Show Me The Money!
Linux has clearly established itself in the datacenter, and is increasingly gaining traction on a certain percentage of netbook shipments. Multiple data points, examples and anecdotes were provided, and this is corroborated by what we are hearing elsewhere in the industry. Nonetheless, as a venture capitalist heavily invested in open source highlighted during a keynote panel, even RedHat, which is viewed as the poster child of open source success with its Linux products, has only managed to win less than 5% market share. In the database sector, we estimate mySQL’s revenues to be in the $80 million range, and when combined with the revenues of Ingres (FY’08 revs of $68 million, profitable), they are insignificant to a $15 billion+ database market. Our takeaway from this is that open source companies are impacting the margins of established companies, but have not gained sufficient credibility within the enterprise to cause long-term damage to the core business model of companies like Microsoft, Oracle, SAP, Salesforce.com, and others. As previous MGI Research has detailed (see Research Note - "2009 Outlook for Open Source - Do or Die Time?"), the total revenues of companies like Alfresco, Jaspersoft, SugarCRM, Talend, and others are not nearly as impressive as the venture dollars these companies have attracted, and most of the leading venture-backed open source companies are on their Series C, D, or even E rounds of capital. Surely the pressure is on them to start delivering profits in advance of a desired investor exit.
Will Recession Push Corporate Buyers to Consider Open Source Products?
It’s unclear if the pressure on IT budgets will drive CIOs to replace installed products with open source alternatives. One of the major hurdles to enterprise adoption of open source was the lack of internal skills necessary to implement and manage an open source product. Headcount is typically the largest cost line-item in an IT budget, and an obvious target for savings. It’s unlikely that CIOs can manage a headcount reduction (and the loss of skills), and then expect to adopt an open source product that demands a new set of skills the remaining IT department employees are unlikely to have.
Database Market Update
In the database world, Ingres may do better than mySQL, given its legacy as a proven enterprise-class product and the $30 million of R&D investment pumped into improving the product over the last three years. In addition, even Sun folks mentioned the impact of losing mySQL founder Martin Mickos, who leaves Sun at the end of this week. Mickos was treated like a rock star at this event, and there are rumors that he is planning on buying mySQL back from IBM, in the event that IBM is able to acquire Sun. It’s clear that mySQL market momentum suffered just after it was bought by Sun, and Oracle’s strategic move of buying InnoDB, the leading transaction storage engine of mySQL, also slowed the growth of mySQL. Microsoft appears to be a beneficiary of the cost pressures on database spending, as SQLServer is perceived as a lower-cost, low risk alternative to Oracle and IBM. The core Sybase database business appears to be under pressure, as mySQL and Ingres both make inroads into the installed base that is growing tired of paying maintenance and perceives Sybase to be an absentee owner of the product.
Overall Conference Mood
Not surprisingly, conference attendance was off – organizers claimed 600 registrations, but the kick-off keynote session had about 200 in a ballroom that was reduced in size by one-third. Our non-empirical estimate is 60-70% of attendees were vendors, 20-30% were industry service providers (lawyers, VCs, press), and 10-20% were user organizations. A noticeable difference from other recent events was the energy emanating from the open source community. It was ever so faintly reminiscent of the buzz of years past in the tech industry.