May 20, 2011 © 2011 MGI RESEARCH, LLC
Earlier this week we attended the OSBC 2011 (Open Source Business Conference) in San Francisco. Like the open source movement, this event has ebbed and flowed, and managed to stay relevant. Here is our summary.
Open source software (OSS) is entering the mainstream – but to the chagrin of most VCs and early OSS companies, it has not played out as expected. OSS is now widely adopted among the developer community, and if a company that develops software (either for internal consumption or as a business) has not incorporated OSS into the lifecycle of their development processes, they are behind. OSS has emerged as a core enabler of cloud computing. Without it, much of the benefits of cloud computing would not be possible. Successful software companies that are the commercial version of an open source project (Acquia/Drupal, Revolution Analytics/R, et al) have figured out that there is little advantage uniquely promoting their “open source identity. Rather, the successful ones (e.g., RedHat) push more traditional marketing messages of being better, faster, cheaper, more innovative than their competition.
The greatest barrier to more widespread adoption of commercial efforts associated with open source projects is skills – or the lack thereof. Corporate IT shops are reluctant to invest the time, money, and human resources necessary to ramp up in a new technology that may or may not be incrementally better than what they currently use. This is particularly true in core areas like database, where companies have major resource investments in Oracle, IBM (DB2) and Microsoft skills.
The open source threat to established product franchises, - and their associated revenue and profit streams, centers around a couple of key areas. First, organizations (e.g., companies and government IT departments) that rely on open source rather than a “proprietary” solution from a “proprietary” vendor like IBM or Microsoft, often highlight the benefits of 1) better support, and 2) technical innovation received from the open source software vs the competition. Beyond the communal nature of the support environment that is fostered within the open source community, there is little that is a truly unique differentiator. In fact, companies like SolarWinds have proven that a “proprietary” vendor can provide the same community-based benefits for customer support of an open source solution, without going the open source route, i.e., “customer-sourcing” of support and training. Similarly, so-called proprietary vendors that continue to push the innovation envelope are less likely to encounter market-share competition or margin erosion from OSS vendors.
For a software vendor or user, the risks associated with open source now center on IP ownership. It’s not an issue of licensing and the threat of legal action. Rather, it is an issue of being able to clearly identify ownership of all internally developed IP. Users and vendors alike would be well-served to get their arms around this before it becomes a show-stopper to a merger or acquisition. Companies like Black Duck, Protecode, and Palamida are carving a niche market for source code identification and management. Two years from now these tools will likely be part of every development shop, and eventually be integrated into broader application lifecycle management (ALM) suites, like IBM Rational and Hewlett Packard’s BTO, as well as assorted agile-focused ALM tools from vendors like Rally, ThoughtWorks Studios, Collabnet, Atlassian, and Version One. This broader space is poised for consolidation – if and when IBM, HP, and even perhaps Compuware, recognize the growing market demand for such tools.
For the biggest success in open source – Red Hat and its Linux operating system, there appears to be a clear path to greater market share growth. The combination of growth in cloud computing and the clear shift from Unix to Linux as the server OS of choice give RHT a one-two punch that should boost expanded growth above the industry trend lines.
Bottomline: We remain bullish on RHT and believe it will continue to out-perform given its market leading status and continued strong execution. Open source companies will have their share of market success and failure, and the gating factor will not be whether or not the company is open source, but more simply how well they execute a profit-driven business with a differentiated offering.