Can open source IT be a money pit?

Last year, Doug Kaye over at IT Conversations recorded an interview with MIT professor and serial entrepreneur Philip Greenspun. Greenspun's most successful venture to date (revenue-wise) was probably ArsDigita -- an open source business that flamed out after he handed the reins over to venture capitalists who, he claims, ran a perfectly good company into the ground. Also under Greenspun's belt is photo.net (a prosumer photograhy site that boasts of 10 million hits of day) and, my personal favorite, a central role back in the 1980s with Symbolics Inc. About the same time he was working for Symbolics, I was working on a Symbolics system trying to learn the ropes of artificial intelligence and the LISP programming language.
With several successful ventures on his resume, Greenspun's business insights are worth listening to. During a recent cross-country flight, I listened to Kaye's interview of Greenspun. In a segment of the discussion that I transcribed (below), Greenspun spoke eloquently about the economics of open source to two different audiences: those looking to make money at it and those thinking about building their IT around it. In the passage, Greenspun explains how an IT shop's leveraging of open source's openness can lead to the same sort of costly maintenance nightmares that customizations of proprietary software have led to. In the same breath, Greenspun adds, that maintenance headache can be the source of millions of dollars in revenue to an open source developer (or IT services company) -- provided that the focus is on Fortune 500 customers who can pay and that a very fine line doesn't get crossed. (Perhaps this is the key to IBM's success with its services group.) The passage gave me a new perspective on open source that I hadn't considered before. Here's what Greenspun said:
Greenspun: Customers don't want to be left as orphans. So, in other words, open source is great for unsolved problems that people don't understand very well. An open source word processor is not very interesting because the word processor was invented in the 60s by IBM and pretty much most people now agree on what a word processor should have. The newer the business problem, the more imperative it is that the solution be open-sourced so that the customer can tweak and extend that system. Open source is good for the customer when you have relatively novel or poorly solved problem.
At the same time, the customer will always have a few differences from your main source code and to the extent that those features aren't rolled back into the main release, they're always going to be orphans. They're always going to have this stuff on the side that they're going to have to own and maintain, which they really don't want to do. Their business isn't software development. They don't want to have ownership. They'd much rather pay you, the software developer of that code, to make the changes and put those features that are not core to their features into the main distribution of the software so that if they ever want to upgrade to a new version, they won't have to undertake the project of recustomizing that for their special needs. So, basically, if you are in control of a piece of software, you really have the ability to charge a lot more than an ordinary IT services business to make modifications. You have the power to roll that into the next release. So that's one thing that is good about open source.
The thing that's bad about open source is its very unforgiving if your costs and your time goes up. For example, in the early days of ArsDigita, we did a lot of things sort of MIT grad school style. We took fairly young people who wanted to build their careers and professional reputations and we'd have two of them to a project. So two programmers were totally responsible for the project and they met directly with the customer to find out what was needed. They wrote the specs. They wrote the docs. They wrote the code. They tested it with the customer. They made the enhancements as requested. They showed the profit when it was done.
One of the things that the venture capital folks did was they noticed, hey, this is very conventional. You don't want to have programmers selling a project, or doing project management or keeping a customer happy. So, they hired a sales person to do the selling, project managers to keep the schedule, client services people (but I never did figure out what they were supposed to do). Keep the customer happy. So you ended up with seven or eight people on a project where formerly you had two. That inevitably means that more things have to be written down.
That you need more meetings and things just go slower, the cost goes up of course. So, basically, in the closed source world, this may not be a problem. You can get your freshman microeconomics student to tell you "well, if your price goes up this much and your delivery time goes up this much, your demand goes down that much, here's where the market will clear." The problem with open source is that the only good customers are the Fortune 500 companies that all have an internal IT department. If you are a dollar cheaper and a day faster than their internal IT department of these various companies, you have a potential market in the billions of dollars. If your costs go up to the customer by $2 so that you're now a dollar more expensive and your delivery time goes up by two days so that you're now a day later than they can get it done internally, your potential market goes to zero. You go from potentially billions of dollars if they can save a little money and a little time -- there's a lot of big companies out there -- to a product that nobody wants.
Kaye: But that's true of whether it's open source or not.
Greenspun: No, because if it's closed source, they can't just download the TAR file and have their IT people make the needed changes. They have to go to you to make the customizations. So that's something that investors in an open source company have to be aware of -- that it's a more brittle business and inefficiencies that cascade and pile up on each other can devastate your business in a question of months. So, where I had been making a profit every month, the venture capitalists managed to go through nearly $50 million in cash in about a year before they flamed out. So, that's a word to the wise. If you're going to be an investor in one of these companies, really watch to make sure they don't put in any costly or slow management structures.
The audio interview, which can you can download as an MP3 (or, if you're already subscribed to our podcast feed will show up in your podcatcher automatically; see our how-to), certainly changed my perspective on open source. How about yours? Let me know using our TalkBack below.
Editors Note: The above transcription as well as the pointer (technically an enclosure) from ZDNet's podcast feed directly to Doug Kaye's interview were published with Doug Kaye's knowledge and permission. The content was originally published under the Creative Commons Sampling 1.0 Deed (Some rights reserved).
with MIT professor and serial entrepreneur . Also under Greenspun's belt is (a prosumer photograhy site that boasts of 10 million hits of day) and, my personal favorite, a central role back in the 1980s with Symbolics Inc. About the same time he was working for Symbolics, I was working on a Symbolics system trying to learn the ropes of artificial intelligence and the LISP programming language. With several successful ventures on his resume, Greenspun's business insights are worth listening to. During a recent cross-country flight, I listened to Kaye's interview of Greenspun. In a segment of the discussion that I transcribed (below), Greenspun spoke eloquently about the economics of open source to two different audiences: those looking to make money at it and those thinking about building their IT around it. In the passage, that maintenance headache can be the source of millions of dollars in revenue to an open source developer (or IT services company) -- provided that the focus is on Fortune 500 customers who can pay and that a very fine line doesn't get crossed. (Perhaps this is the key to IBM's success with its services group.) The passage gave me a new perspective on open source that I hadn't considered before. Here's what Greenspun said: But that's true of whether it's open source or not. The audio interview, which can you can download as an (or, if you're already subscribed to will show up in your podcatcher automatically; see our ), certainly changed my perspective on open source. How about yours? Let me know using our below.The above transcription as well as the pointer (technically an enclosure) from ZDNet's podcast feed directly to Doug Kaye's interview were published with Doug Kaye's knowledge and permission. The content was originally published under the