Open source firms claim business model benefits

LinuxWorld: Several open source companies have criticised proprietary vendors for spending too much on sales rather than R&D

Proprietary companies waste too much money on promoting their wares rather than focusing their resources on developing better products, a group of open source companies agreed on Wednesday.

Larry Augustin, the chairman of VA Software, cited CRM vendor, which he claimed spent around $100m (£60m) on sales and marketing in 2005 and only $10m on research and development in the same year.

"Their licence fee is mainly spent on sales and marketing, so they are charging customers to sell to them. That seems an inefficient model to me," Augustin said, during a panel called The Death of the Enterprise Software Business Model, at LinuxWorld in Boston on Wednesday.

SugarCRM chief executive John Roberts agreed that this model seems inefficient, and claimed that open source companies do not need to spend as much on marketing as they already have a large user base who may become customers in the future.

"Open source is fundamentally a more efficient model that costs less. The product itself is powering sales," said Roberts. "The sales model of enterprise software involves sales people visiting a company and saying the software is going to do what it says it will. But you don't get to play with the software prior to purchase."

"We allow organisations to download the software to do their own tests — they can look at the source code, prior to getting into a dialogue with a sales person. We don't have much of a sales force," Roberts said.

Executives from XenSource and MySQL also agreed that the sales part of an open source business can be streamlined. Peter Levine, the chief executive of XenSource, said that his firm has built a "visible brand" with only one person in sales.

Levine later told ZDNet UK that it spends around 90 percent of its money on research and development. "Our sales and marketing is wafer-thin because of Xen's open source model and our channel distribution capabilities," he said.

Although open source companies often have a large user base, the rate of user-to-customer conversion is relatively low, admitted Marten Mickos, the chief executive of MySQL, during the panel debate. Mickos claimed that MySQL doesn't sell too hard, and tries to focus on the customers that already want the product.

"We have 50,000 new downloads per day, but might close five customers per day," he said. "We have learnt that we need to be careful with lead qualification. We don't go out to those who are reluctant — we go out to those who already love it."

But Mark Fleury, chief executive of JBoss, claimed that software developers need to be careful about which licences they use, as some can allow other companies to use their innovation and give nothing back.

"The BSD licence lets companies rip the software and package it. I call BSD the 'eff me' licence and GPL the 'eff you' licence," he said. "When I talk to [FreeBSD developers], I say, 'What's the benefit to you?' 'They're using my software,' [they reply]. But it doesn't put food on their table."

Although some open source companies may spend a low proportion of their revenues on sales and marketing, this is not true for all open source companies. Red Hat spent $61.8m on sales and marketing in the financial year ending February 2005, and only $32.1m on research and development.

In contrast, Microsoft's spent $8.7bn on sales and marketing, and $6.2bn on R&D in the financial year ending June 2005.