Open source won't doom traditional enterprise software

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?

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TOPICS: Open Source
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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  

Topic: Open Source

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22 comments
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  • The Irregulars en masse...

    Dan,

    Thanks for the mention. As you know, many of us have posted more elaborate responses (the piece at Sandhill was a condensed version of all 10 viewpoints) on our own blogs.

    Best,

    Jason
    Jason Wood
  • Red Hat a service company?

    Company management recognizes that service companies are a losing proposition. They say that Red Hat is a software company, and the stock market believes them.

    Quoting the article:

    "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."


    This comment appears to be saying that the market might come to believe Red Hat is a service company, and that would be a disaster.

    So, yes, Red Hat fools the market that it's a software company. Andf yes, it fools open source enthusiasts into believing that it's a services company.

    And yes, it's likely that if the company were ever honest it would disappear. But what's that statement about fooling all of the people some of the time?
    Anton Philidor
    • Open source services companies are unique ...

      There is simply no way they can be compared with other professional software services companies. They are unique in many ways. Other software services companies are forced to employ expensive proprietary software as part of their busisness. Open source services companies are much less dependent on that element. Other software services companies are generally forced to outsource the production of custom software and face stiff royalty payments to third parties in the process. Open source services companies have a network of volunteer and paid developers at their service who can produce needed software quickly and efficiently without incurring royalty expense issues like their counterparts working in the proprietary sector. In addition, traditional software services companies must constantly work the sales end to 'drum up' business, but open source services companies have a long line of long term customer/benefactors such as IBM, HP, Oracle, and the list could go on forever with companies who have open source agendas that require the assistance of open source service companies. So in fact, this is indeed a whole different ball game from traditional software services. It is a totally new niche that is little understood but is in fact succeeding on its own dynamics and merits.
      George Mitchell
      • Commercial use of open source

        Fedora became part of Red Hat's open source strategy. Hobbyists can be attracted to the free version and RHEL can take advantage of any innovations to save on expenses. A sort of farm team for the real software product.

        But the time when professional software companies can rely on the work of volunteers is past. Now salaried programmers do most of the essential work.

        It's a misfortune that volunteer efforts have any impact on the number of employees, but the movement towards the proprietary model among open source companies is a benefit to the field.

        Perhaps at some time the "open source" designation will become an anachronism and disappear. The proprietary model certianly proved more resilient than its challenger.
        Anton Philidor
        • Anton, will you ever look at the big picture?

          You appear to remain stuck on the "open source must die because it's harmful to people who want to get paid for their work (in the software field)" mantra. This is not only pure BS, but an extremely myopic and simpleton point of view. On the count of three: one, two, three - big breath in.... hold it..... exhale slowly... Repeat.... Look at the big picture for once. I assume by your "open source strategy" and "proprietary model" that you are specifically referring to BUSINESS models. Expand this microscopic view to the more macroscopic view of "capitalism" or even better "Maslow's Hierarchy of Needs" and you will see that this "open source strategy" fits quite nicely in either......

          btw, I was just watching a TV show the other nite about house flipping and the "flippers" had an extremely low budget ($0) for a photographer. Can you believe that they actually found a photographer (and a good one at that) to do the photo shoots for FREE! (sarcasm on) How dare that low life photographer do that work for FREE. Does he not know that he just stole money from another photographer that would have got paid. What a loser!! (sarcasm off) The reality is that while the photographer did the job for NO MONEY, he did not do the job for FREE. He had other personal motives that in the microscopic view had nothing to do with money, but in the big picture had plenty to do with money. Get it? If not, I'd be happy to explain further.
          thelemite
          • Sadly

            the rest of us do and have tried hundreds of times to point this out... to no avail. But I will say your post was pretty good on getting the point out! ]:)
            Linux User 147560
          • The big picture...

            ... is of course the ability of people in the software industry to support their families using money earned. Eliminating jobs or reducing salaries is harmful.

            You're right that some people have other views, such as a belief that the primary concern is a purity of software which should not be sullied by mercenary considerations. But that will, I expect, always be a minority view. Even among people who contribute directly to reductions in jobs and salaries in the software industry.

            Generosity is a local virtue.
            People should be conscious of the potential for harm in their actions, even when their motives appear altruistic. The "invisible hand" that produces prosperity relies on people being dedicated to their self-interest.
            Anton Philidor
          • Sorry, but you're "big picture" is a little one.

            >>... is of course the ability of people in the software industry to support their families using money earned.

            The "shrink wrapped" software programming workforce represents only a small fraction of the total programming workforce. Open source software has zero negative impact (one could even argue that there is actually a positve impact) on the vast majority of programmers.

            >>Eliminating jobs or reducing salaries is harmful.

            Again, this is taking a microscopic view. The emergence of the automobile put a lot of blacksmith out of business - so this must be a bad thing according to you. Or the emergence of the auto/airplane caused many to lose their jobs in the railroad business.... Clearly the big picture in both cases is positive even though at the time there were a lot of angry, ignorant people (kinda like you right now) who failed to see the overall benefits. As Spock once said, "the needs of the many outweigh the needs of the few."

            >>You're right that some people have other views, such as a belief that the primary concern is a purity of software which should not be sullied by mercenary considerations. But that will, I expect, always be a minority view. Even among people who contribute directly to reductions in jobs and salaries in the software industry.

            You mean like Stallman? Yes, I agree he is a minority. The fact of the matter is that the vast majority of people using or creating open source software could care less about his view. User's of open source are most concerened with if it works and how much it costs. Creators have various views on why they chose the license they use and there's really no need to discuss this because as creator's of the software they should be able to choose as they see fit. Nobody has any business whining or bitching about this unless of course they want to profit in some way at the creators expense.

            >>Generosity is a local virtue.
            People should be conscious of the potential for harm in their actions, even when their motives appear altruistic. The "invisible hand" that produces prosperity relies on people being dedicated to their self-interest.

            Pure BS Anton. Let's say I'm a well off software architect living in a nice, waterfront house and own nice cars and a large boat etc.... Furthermore, let's assume that I decide to donate my spare time to architecting an open source alternative to the current system at our local school district. Who the hell are you to tell me that I can't or shouldn't donate my time (or money) to such a cause as clearly I am "eliminating jobs or reducing salaries" of those in the shrink wrapped industry!!??

            Anton, the big picture is this:

            The emergence of open source software provides an alternative to using shrink wrapped software. Therefore, certain open source software will compete directly with proprietary software companines. Because of this some jobs will indeed be eliminated from the proprietary workforce. (This is where you stop the cause/effect process btw) These lost jobs will eventually be TRANSFERRED to smaller consulting/services firms or working directly for non-software businesses. Overall the number of jobs should remain approximately the same and if there are any reduction in salaries it has nothing to do with anything we're talking about. (complaing about offshoring if you want to whine about salary reductions).
            thelemite
          • You are being increadibly dense Anton ...

            People have been helping each other for eons and that has in no way prevented folks from 'making a living'. There will always be people giving their labor away for a myriad of personal reasons, but that free labor will never satisfy the need for laborers. There will, thus, always be a need for paid labor. The two formats have coexisted side by side since the beginning of humanity and to suggest that the software industry is somehow damaged by that phenomenon is just stupid. It reminds me of the efforts made by the painters unions years ago to try to force people from getting together as neighbors in an effort to paint their own homes. I distinctly remember those incidents back in the late 50's and early 60's when mean spirited painters accused home owners and friends of taking bread off of their tables by having the audacity to paint their own houses rather than hiring a union painter. Your position here on this forum lines up with that concept exactly and will just as surely end up in the trash heap of history. And just as there remains plenty of work for professional painters in spite of the 'do it yourselfer' phenomenon, there will always be plenty of PAID work for professional programmers no matter how great the success of open source. So relax, chill out, the sky is not falling, and open source is not on the verge of collapse.
            George Mitchell
    • Who believes RedHat s a software company?

      Any idiot knows that they acquire a collection of software developed by other parties (Sendmail, Exim, OpenLDAP, etc.) and sells a prepackaged solution that is easy for people to install (and maybe use, depending on skill). They do some Python stuff (the Jumpstart clone called Kickstart, maybe) and have people who are involved with various projects. They are not the develpers of the packages that they release in their respective distribs.

      All the packages you get with RedHat or Novell/SUSE or Gentoo, etc. come from other seperate parties. You really need to get a clue! Perhaps you should find real technical news sources to read.
      B.O.F.H.
      • Red Hat does

        Here's a quote from the company's self-description:

        Red Hat provides operating system software along with middleware, applications and management solutions. Red Hat also offers support, training and consulting services to its customers worldwide and through top-tier partnerships.

        The software is in the first sentence. Services are in the second sentence. The word "provides" works well. It could be replaced by the word "sells" without changing the meaning, but that nuance is important.
        Anton Philidor
        • Nice ty but you failed again!

          Redhat collects software from various sources and bundles them in a convenient manner for people interested in using Linux. Their products consist of RHEL (Enterprise Linux) and Fedora (developer). Both of these are distribs, collections of open source software that they collected from various sources (and you could also, if you had the inclination). They deal in software, but theyare not really developers and more than Gentoo is.

          RedHat collects software, they don't develop it! Microsoft is a software company (they write most of their own stuff, sans that which the get through aquisitions). Do you understand the difference? SunPS (Professional Services) provides consulting services (as do many other companies), does this make Sun Microsystems a software developer?

          Since RedHat is bound by the licenses of the packages that they provide in their distribs, they are selling the packaging and (if the actually come with any) manuals with a convenient distrib.

          Stop playing stupid here! Go out and get a copy of RHEL or Fedora and see for youself rather than spewing marketing copy!
          B.O.F.H.
          • No wonder services are needed.

            So Red Hat sells the work of others, cobbled together from parts like Frankenstein's creation.

            Among the company's 1,150 employees are only a few workers in software. Their job is to sit at their computers, waiting to be notified of updates, and hoping that those software changes answer Red Hat's needs and can easily be fit with the other products they gather.

            And when the company is honored by a contribution to Fedora, the software is moved into RHEL by a near automated process. I had thought that Fedora was started to allow hobbyits their chance while preserving the company's real product for Red Hat's own work, transferring what was useful, but I stand corrected.

            Red Hat is in a fragile situation. Having no product of its own, the company must know that any other outfit able to design a few icons and download with a broadband connection could replace them tomorrow.
            Sounds like a company to sell short.
            Anton Philidor
  • Hardly. Traditional companies are hijacking it.

    Apple and Novell are only two that have taken open source products, made slight changes to them, and then sell it for quite a cozy sum; particularly Apple.

    Ditto for any thin client manufacturing company, which uses Linux as its core.

    The open source model, as we know it to be, will not work. I just wish the big corporations would make or properly license instead of taking work others made, who hadn't the slightest idea this sort of thing would happen.
    HypnoToad
  • Meanwhile SCO is losing in the courts ...

    which will likely doom THEIR enterprise software. At the rate they are going, it is highly unlikely that they will emerge from this battle intact. So, while it is true that open source will not doom the traditional proprietary model, it will indeed force the traditional proprietary model to undergo a long overdue update, in which it will be forced to relinquish its traditional hold on the underlying platform which is rapidly being commoditized and focus on the niches which will forever offer opportunities. The whole flow is being driven from the bottom with open source (Linux) putting heat on MS (Windows), low end Unix, and consumer app vendors from the very bottom, and MS, in turn, moving up on the likes of Apple, Sun, and high end Unix in general, with Apple suddenly looking up toward the high end server area as well. So the push is from the bottom upward and the message for traditional proprietary vendors is to innovate their way away from encroaching commodity software. MS is doing just that by literally pouring money into diversification that will take them out of the path of open source. So the fact that open source is not the end of the world for proprietary vendors does not mean that it is not generating a huge sea change in the marketplace.
    George Mitchell
  • Important point missed

    Many points were missed in this discussion. The most interesting one is that "we are today seeing the emergence of sustainable large-scale production projects that don't rely on either the pricing system or management structure". This is from Nicholas Carr's blog at http://www.roughtype.com/archives/2006/08/open_source_as.php

    How are enterprise software companies going to cope when one of these production systems get going in their space? It is only a matter of time.

    I also have to wonder as to how many of the participants in the original discussion have ever actually written software. I suspect we might be watching the equivalent of a software developers conclave debating the future of international tax law...
    Martin down under
    • Some of us have been developers

      Hi Martin,
      I'd be interested to know the many other points we missed. The Irregulars are a divers bunch but several of us have been developers in our background, been responsible for product development, or are currently involved in running a software company.
      david_terrar
      • Point 1: Where are the developers heads in this debate?

        Why? Well, enterprise applications are complex. The source code is generally poorly documented. The body of knowledge really exists in the developers heads. Even with good guides and well documented code it takes a great deal of time for new developers to get up to speed. To understand the applications limitations and abilities. And to understand the clients needs.

        This is why in the open source world there are very few examples of one product being successfully taken over by another company. And when it does happen it is generally lead by a developer revolt.

        This is why the outsourcing of existing enterprise applications is a rather dodgy idea.

        It is also why cutting costs by replacing those expensive Java developers with cheaper Oracle Forms developers is a bad idea. Don't laugh: this actually happened at a company I worked for. The product is now dead :-(

        This is why when buying or investing in a software company I would leave the balance sheet till last: I would look first at the history of the developers and their relationships to the products they work on.

        As pointed out, "Open Source" is simply a label that covers many business models. But a model in which it doesn't matter if you download and use the code free of charge. A model in which it doesn't matter if competitors have access to the source code*. And why? because these companies have their developer heads well and truly captured...

        *If this isn't a scary thought for incumbents in the enterprise application space, I don't want to know what keeps them up at night!
        Martin down under
      • Point 2: But the customer already has the software they need...

        I worked on a legal practice management system for quite while. And whilst I was there sales slowed. Towards the end of the last century they eventually almost stopped. Why? Because we ran out of people to sell to. All the law firms now had the software that they needed. The market had changed beneath our feet.

        The only new customers were ones that became disaffected with their existing vendors.

        Our sales and marketing team became a dead weight. One that drained funding from the products development. But it was a dead weight that conventional wisdom dictated we need.

        Our sales team couldn't be there when someone else's customer slammed down the phone with a "Damn that vendor! Time to find another..." But Google can. One short search, one quick download or trial run, and the customer is gone.

        And similarly for new firms: our sales team couldn't find all the new lawyers hanging out their shingle for the first time. But Google can. One short search, one quick download or trial run, and the customer is signed up.

        So really, the enterprise market has become one in which the only new customers left are ones that are new to the market (small) or disaffected.

        This point is discussed much better than I can here:
        http://onstartups.com/Home/tabid/3339/articleType/ArticleView/articleId/768/Default.aspx
        Martin down under
      • Point 3: The existing vendors are captive to their customers

        Anyone interested in the future of software must read the "Innovator's Dilemma". The most important lesson in the book, to me, was that incumbent companies receive most of their value from their existing customers.

        They are thus locked into their customers requirements and models. It sounds obvious, but this also seems to be so often overlooked.

        This is why the existing vendors, who should have all the running, will struggle in the "coming storm". They will find it very hard to make the required changes.
        Martin down under