Will Red Hat be the only major pure play open source company to go public?
That’s what observers are wondering as more and more open source stars are swallowed up by traditional proprietary giants, with Nokia’s purchase of Trolltech – announced yesterday - and Sun’s buy of MySQL earlier this month being the most recent. IBM, Oracle, Citrix and Novell have also made big open source acquisitions over the past five years.
“There will not be an open source company that goes public for the foreseeable future. Liquidity is too good and too hard to pass up. The players are too big with too much at stake. That's a shame. I wanted to see an ecosystem of independent companies,” predicted JBoss founder Marc Fleury, after the mySQL deal was announced mid this month.
“This second generation of open source software companies while very successful has failed to produce public companies. There are countless software companies that are publicly traded but only one –Red Hat -- is focused on OSS” said Fleury, who sold his JBoss company to Red Hat in 2006 for $350 million. Red Hat went public in September of 1999.
MySQL promised it would go public repeatedly last year but agreed in November to be acquired by Sun. The $1 billion deal, announced in mid January, was the first major open source acquisition of 2008.
MySQL vice president Zack Urlocker said the company was sincere about doing an IPO but needed the deep pockets and resources of a large company like Sun to take on IBM DB2 and Oracle. It would have taken the small company five to 10 years to scale up sufficiently to compete against those rivals, he said.
Zurlocker maintains that the M&A activity does not threaten the integrity of open source. Rather, it simply reflects how disruptive technologies alter the business models of incumbents even as it creates new opportunities for startups. Eventually, traditional proprietary companies will transform into fully open source companies, many predict.
“In a normal technology disruption, you end up a little bit of both: startups who are successful grow into big companies like Red Hat and some that reshape companies like Sun, and some large companies that don’t pay attention to it and they get disrupted,” Urlocker told ZDNet. “Many startups like Alfresco and SugarCRM were rooting for us on an IPO. But from their perspective, this [deal] still means open source is a legitimate technology that is now in larger companies.”
According to a recent 451 Group report on commercial adoption of open source, the number of open source acquisitions by established vendors increased to 30 in 2007, up from 22 in 2006 and 15 in 2005. Yahoo’s $350 million buy of Zimbra and Citrix’s $500 million purchase of XenSource led the pack last year, while Red Hat’s purchase of JBoss and Oracle’s acquisition of Sleepycat dominated in 2006. Novell’s purchase of SUSE Linux in 2003 fulfilled predictions that a large operating system company would buy a Linux distribution.
The 451 report predicts that more deals are coming and names MuleSource, SpringSource and Terracotta as likely targets. Others cite open source content management ISV Alfresco and open source CRM star SugarCRM as other potential targets.
“There are many VC-backed startups that drew in rounds in previous years and have since build significant customer lists; these startups are ready to be harvested,” said the report, which also pointed out that VC funding last year dropped 25 percent to $267 million.
There are other reasons open source ISVs are not doing IPOs. For one, their revenues aren't typically on par with those of proprietary companies.
ISVs are also worried about product quality. Zurlocker said mySQL felt “trepidation” about the pressure Wall Street exerts on companies for quarterly results and the strain of hefty compliance requirements such as Sarbanes Oxley, a burden for many startups.
Fleury summed up the M&A trend as the potential “death of the standalone OSS business model” but he was quick to add that a pure play multi-billion dollar OSS consultancy is not out of the question. Today, SpringSource announced the purchase of Covalent Technologies, an acquisition target cited by the 451 Group.
The M&A wave hasn’t deterred the IPO prospects for other ISVs such as Alfresco.
“We are at the very beginning of the open source revolution, not the end. It is far too soon to worry about the eclipse of the open source movement into the shadows of proprietary software companies,” said Matt Asay, vice president of business development at Alfresco. “ Surely proprietary vendors will continue to acquire open source companies, as they can see the writing on the wall … meanwhile, pure play open source companies like Alfresco will continue to build toward IPOs. Alfresco was founded by a team that has successfully taken several companies public. We see no reason why we and others can’t do this same thing again, but this time with open source software.”
Red Hat itself has made some acquisitions but at least one venture capitalist posed the company should have picked up more visible targets to grow its business – and ensure its survival
“Will Red Hat survive as a standalone tech company? Not sure. They may have left too many open doors for Sun, Oracle, Microsoft and even Citrix,” said the VC. “If you think about how Red Hat could have been the open source Microsoft or Oracle - having the OS, JBoss, MySQL, Xensource, Zimbra and a desktop and server application strategy that could push Microsoft and Oracle to think differently about their business. The issue with Red Hat is they breathe their own exhaust fumes and think they can engineer better than anyone else. Once you hit a certain level of critical mass within a company, you need to keep your antenna up and be on the lookout for competition that makes for good M&A targets. Instead, Red Hat believed it could out engineer the market. So far, that has proven to be a bad idea."
After Novell bought SUSE, IBM bought Gluecode, and Oracle bought Sleepycat, I wondered if the strategy of traditional proprietary publicly traded companies was simply to remove their emerging competition and prevent little open source companies from growing into big ones -- that might go public.
One MySQL customer expressed little concern about the M&A trend, noting that there’s no guarantee that pure play open source companies will protect their interests better than a traditional company. Novell's Miguel de icaza told ZDNet that Sun has a good track record of working with FOSS companies.
“It would be my hope that Sun pursues a path with MySQL that keeps a very strong commitment to the free MySQL tree that lags a bit behind the enterprise version. Despite the grumblings sometimes in the free-version community that we’d love to get MySQL enterprise patches more quickly, the fact is that eventually [MySQL] did move back to the free version and we did get them and both the free and the enterprise customers had the same core set of features minus some management tools,” said Nat Brown, CTO of iLike.com, who is also a Sun customer. “This felt to most people to be equitable. I contrast this to the Red Hat Enterprise Linux path that Red Hat took where they carved off their free/community version (Fedora Core) and left it out in the cold for the community to build & maintain – very few people in OSS thought this was supportive of the many developers who had worked for free to make RHEL possible.”
The 451 report cited Ingres at the "head of the open source IPO queue" after the MySQL deal. But it's not clear which direction that company will take.
"It makes us the only independent open source database company, which will no doubt open up new partnership opportunities for Ingres. The price tag Sun is paying for MySQL has many swivel-chair financial analysts trying to put a valuation on Ingres today," acording to a company blog posted after the deal was announced. "Above all else, I believe that Sun's acquisition of MySQL is a ringing endorsement of the open source model. "