Open source won't doom traditional enterprise software

Summary:Last week SandHill.com published a column by Guy Smith of Silicon Strategies Marketing, titled "Is Enterprise Software Doomed?

Last week SandHill.com published a column by Guy Smith of Silicon Strategies Marketing, titled "Is Enterprise Software Doomed?," suggesting that open source will cause traditional enterprise software to become extinct.  Several member of  the "Enterprise Irregulars," a group bloggers (of which I am a member) covering the software industry have written a rebuttal to Smith's argument. Yes, open source is changing the software landscape, but it's not going to extinguish all other business models. Jason Wood counters Smiths' notion that the IT software stack can be completely commoditized:

Application Servers: LAMP is certainly massively popular, but since when have Java server vendors started reeling? Oracle's J2EE app server has become a $1 billion business in just two years, and last time I checked Oracle was still printing money with 40% operating margins. Meanwhile BEA continues to chug along thanks to a refined marketing message around SOA. Ironically, JBoss, the flag bearer for enterprise class open source app servers, is the one struggling. Red Hat (which acquired JBoss recently) just guided to a $0.04 per share negative impact from JBoss in FY07.

Application Development: PHP and Perl are doing quite well, but since when has enterprise software explicitly made money from its scripting languages? Meanwhile the application testing and development tools market (Mercury Interactive being the poster child) continues to grow profitably and is arguably the hottest area for M&A consolidation.

Niel Robertson of  Newmerix said that Smith "treats the open source moniker as if it was de facto a single business model." He outlines three models of open-source vendors and the problems within each of the  models. For example:

Companies who purely provide services around an open source code-base. RedHat and Novell would be the closest example here.

The problem with this model is that in the long run this makes open source companies look like professional services companies. If their margins start to reflect services companies (10-25% type of thing) then their valuations will go the same direction. This will cause a huge problem for the open source market

I am actually going to predict that this will happe I think the market is still infatuated with the growth rate and potential of open source companies from a revenue side but is not considering the profit side (very few are even marginally profitable). Thus service-oriented open source companies are getting valuations that look more like software companies than services companies. Remember all the Internet services companies in the boom: Scient, Viant, March First? Their valuations were way out of line with traditional services companies until the crash.

As the market looses interest in top line growth and rationalizes valuation against the bottom  line, the service-based open source companies will either need to find a more classic enterprise software business model which gets them higher margins or accept their services-related fate and the low revenue-multiple valuations that come with it. Another problem with this sequence of events is that the huge influx of venture capital money into startups with an open source model will evaporate over night.

Jeff Nolan of SAP (during a stint with SAP Ventures, his company invested in Red Hat, MySQL, Sistina, Steeleye, Zend, Socialtext, and other open source companies) said:

If the argument about open source versus traditional enterprise software vendors comes down to economics, then you might as well fold up the tent and go home now. As Bill Gates once famously said, "you don't want to get into a price war with someone that has more money than you." In this case, the large incumbent vendors can simply drive prices down to zero to neutralize the price pressure that open source vendors put on them, such as what Oracle did with 10G Express, a free (albeit heavily constrained) database.

Dennis Howlett agrees with Smith that Open Source/SaaS resonates with the mid-market, but one shouldn't assume the it is true for the large enterprise market.

During a recent  Irregulars discussion around Salesforce.com/AppExchange, there was no consensus that this represents a credible enterprise play - at the moment. Indeed, everything I've seen points to it being a small to mid-market play (despite Salesforce.com crowing about having an SAP adapter...) 

According to S. Sadagopan of  Satyam the open source movement doesn't necessarily help enterprises foster innovation and create differentiated solutions.

The lack of stratified solution/support and the one size fit-all solution offering shall not carry conviction as a dependable approach in the enterprise space.

The business model paradigm of open source players minus the much-touted entry price difference is hardly anything to write about.(In reality, there may not be much difference from a total-cost-of-ownership perspective - the delta, if seen, can be directly attributed to the stratospheric licensing and maintenance fees of commercial enterprise software players.) Software requires so much of associated work to be adopted for effective usage within enterprises adopting them - these can certainly not be coming form a commoditized family let alone coming from a mere standardized family. Enterprises adopt software to cater to support/enablement of differentiated processes and create distinctive value and a mere set of standardized mass developed software amenable for customization would hardly qualify to be called a solution fit for enterprise adoption.
Zoli Erdos attacks Smith's notion that "SaaS is the bastard child of the traditional proprietary software vendor and the Open Source marketing paradigm."

SaaS is NOT an offspring of Open Source, although they often get lumped together, especially in buzzword-heavy startup pitches; however, they are quite different animals.
With a great deal of simplification the single most important difference is in the deployment model, SaaS by definition being on-demand, while most Open Source products are on-premise, traditionally installed systems.

Guy sees the natural evolution of Open Source Enterprise Software vendors "retrofitting" their products to SaaS offerings, but in reality most SaaS offerings are commercial, and most Open Source is on-premise, these two being on decidedly different paths.

David Terrar said that open source, SaaS and the traditional licensing model are three different delivery models.

 

These [models] come together with the new economics of media and marketing provided by today's Internet, as well the availability of low cost development resources from India, Eastern Europe and elsewhere to challenge the current Enterprise software cost and maintenance model, and consequently the old order itself.

Vinnie Mirchandani of  Deal Architect writes about the forthcoming Hurricane Enterprise.

As Forrester recently wrote, it has 4 "horsemen" - Open Source, SaaS, SOA and Offshore Development. Reading Guy's comments and those of my Irregular colleagues I think we are similarly trying to predict the course of this storm. What we do not know is whether it will be a category 1 or 3. Or where it will land. And which of the elements will cause what damage.

The important thing to remember is the conditions are ripe. As Marten Mickos, CEO of MySQL recently said "Oracle created the market [for open source databases] by having a highly priced product..." As did IBM, as did Microsoft, as did SAP in other elements of the stack.

The hurricane is the response to the vacuum. It is the effect, not the cause. And it is a combination of many small sub-systems. Open Source is just one of the elements. The others are just as deadly.

 

See also: Adaptability is the key to survival and providing value  

Topics: Open Source

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