On May 7th 2009, SugarCRM (MGI-X:NR; pvt.), a highly visible open source CRM software company announced that its CEO John Roberts was leaving the business effective immediately. Board member and founder of VA Linux, Larry Augustin is assuming the role of CEO. It is unclear if a search for a permanent replacement CEO is underway. As MGI Research discussed in a note published on January 7, 2009, titled, "2009 Outlook for Open Source: Do or Die Time", the halcyon days of easy capital and low near-term profitability expectations for VC-backed open source companies are likely to come to an end this year. MGI Research estimates that SugarCRM's revenues are close to the amount of total capital raised, i.e., $45 million, and it's probable that the company is encountering the same headwinds as others in the SaaS/enterprise software market - lower renewal rates, downward pressure on pricing, and drop in the deferred to realized revenue ratio, a key indicator of soft demand.
The competitive impact of this specific event is minimal - SugarCRM has struggled to compete effectively against Netsuite, Oracle, RightNow, Salesforce.com and SAP. But from an industry perspective, this event highlights the challenges even well capitalized open source software (OSS) vendors like SugarCRM face in building durable businesses, and how OSS companies by and large have failed to be universally disruptive. The success of OSS (and indeed it has been successful in a few niche markts) should be measured company by company and market by market. Ultimately, management execution and not the degree of open source conformance will determine success or failure in specific OSS companies.
Two core business assumptions regarding the OSS business will now come into focus and face a reality test: 1) that the recession will benefit open source companies, and 2) downloads are more important than bottomline profits. CEOs of OSS companies should take note of this event - it could be the first of many replacements this year. Investors should note that the success of Linux, and namely RedHat (MGI-X:840; NYSE:RHT) is not transitive - there are plenty of lackluster OSS results, and the OSS business model has not proven to be more efficient or even as profitable, as evidenced by RHT's and Novell's mediocre MGI-X scores.
recent SAP-Teradata announcement that SAP's BW (Business Warehouse) will be
ported to Teradata (NYSE: TDC; MGI: NR) comes only one week after Oracle's
public bid to acquire Sun Microsystems. The press release was light on details
- e.g., shipment dates, channel issues, scant mention on either company's
website, and in the short term was of greater benefit to Teradata, which
extended its ability to re-sell the SAP/Business Objects BI products.
Given the tactical nature of the announcement, and the practical reality
that it will be at least 6-9 months before customer beta testing of the SAP/Teradata
combo, MGI Research sees minimal short term benefit of the
announcement to SAP, and minor impact to IBM or Oracle. In the
bigger picture, the event highlights the tectonic shift that will occur if
Oracle (Nasdaq: ORCL; MGI-X:2,314) closes the Sun (Nasdaq: JAVA; MGI-X:656)
transaction. We re-iterate our view that HPQ or IBM are likely bidders for SAP
within the next 24-36 months.
from the announcement was any reference to a deal around demand forecasting - a
known weakness for SAP, particularly in retail and in spite of its Khimetrics
acquisition, and a relative strength for Teradata. The lack of any news
means the expected Teradata/SAS (private; MGI-X: NR) partnership may still go
deal underscores the emerging reality that Oracle will effectively distance
itself from SAP, and now compete head to head with HP (NYSE: HPQ; MGI-X:1,822)
and IBM (NYSE:IBM; MGI-X:1,769) if it finalizes the acquisition of Sun.
HP's relationship with Oracle will cool, and the HP/Oracle
Teradata-killer product ("HP/Oracle Database Machine") is likely
relegated to the junk heap of joint development projects. Oracle's strong MGI
scores through 30+ acquisitions large and small points to its ability to
innovate through acquisitive growth combined with operational efficiency.
a company that historically possessed tremendous strategic vision and
world-class execution, SAP increasingly looks tactical and lacking a coherent
strategy. SAP abandoned Cognos as the two companies were working joint
go-to-market efforts when SAP launched its bid for Business Objects, pushing
Cognos into the hands of IBM. Global 2000 CIOs are eager to reduce their
supplier base, and without a broader product set or a clear edge in innovation,
SAP is at risk of losing its seat at the table of industry leaders inside the
Research believes IBM is an innocent bystander in this announcement - neither
benefiting significantly from it, nor feeling any pain from SAP/Teradata
Bottomline: The SAP-Teradata
announcement does little to alter the rapidly changing industry dynamics in
which Oracle is emerging stronger than ever, with impressive MGI-X scores, and
SAP is playing a reactionary game in which it is unclear if it can or will
compete via acquisition or internal development. If Oracle is successful
in integrating Sun (and it maintains ownership of the hardware assets), IBM and
HP will be under pressure to make a run for SAP - a logical combination for
both companies. Teradata may be a tuck-in acquisition for a larger player, or
more likely, simply an industry orphan with a robust installed base and
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
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
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.