Mikko Puhakka: Open Source Business Models

Open Source Business Models Oslo 17.04 Mikko Puhakka

Short Bio -Management Consultant 1993-, currently via Cone Advisor -Venture Capitalist (investment into MySQL in 2001) 1999- -Researcher 2004- -advisory Board member (xx companies such as TargetSource)

Agenda -State of Open Source Business -OS Business models -Some ideas about the Future

LINUX HYPE CYCLE HAS BEEN GUIDED, AMONG OTHERS, BY PERCEPTION OF PROs AND CONs Visibility Peak of inflated expectations Plateau of productivity Slope of enlightenment Trough of disillusionment Technology trigger 1991-1996 1997-2000 2000-2001 2001-2002 2003-now Time PROs & CONs in the press ? PROs CONs PROs CONs PROs CONs PROs CONs Source: Gartner ; Novell ; Press clippings ; SaS analysis 4

Governing Model Technology Adoption Life Cycle by Geoffrey Moore Pragmatists: Conservatives: Stick with the herd! Hold on! Visionaries: Skeptics: Get ahead of the herd! No way! Techies: Try it! Innovators Early Early Majority Late Majority Laggards Adopters Pragmatists create the dynamics of high-tech market development

OSS is Mainstream

Business Evolution (Puhakka) 1. Free Software 1985- 2. Open Source 1998- 3. Commercial (Professional) Open Source 2005-

Open Source evolution - from process innovation to value creation! (walli) • In its early days open source was rather improving existing than innovating new – Value creation and preservation are the key. The software value is preserved by sharing it. The more people using it, the more value it creates. People should not mix the value of quot;IP protectionquot; (i.e. a legal tool to protect intellectual assets) to the business, with the value of the asset itself. • Today there are clear evidences of business innovations – Proprietary software world talked about subscription models for years, but it was companies with open source related products that developed real innovation here. Likewise,with SaaS vendors that are invariably hosted on infrastructures of open source software and able to be more inventive in their business models because their margin calculations scale differently.

Businessmodels 1/6 1) Open Source + Service What it means: Companies sell support and services around open-source software. Who’s doing it: Compiere (ERP), JBoss (middleware), Red Hat (Linux) Advantages for CIOs: You pay only for support, not software. The cost to switch providers is relatively low because the source code is available to anyone. Startup challenges: Difficult to build businesses because switching costs are low, as are barriers to entry. CIOs will always favor large, established vendors over startups unless the startups also control code development. Hard to get venture funding because venture capitalists are looking for sustainable competitive advantage in their investments. Unless the software is complex or mission-critical, CIOs may choose to support it themselves.

Businessmodels 2/6 2) Mixed What it means: An open-source code base with proprietary add-ons. Who’s doing it: Sourcefire (security), SugarCRM Advantages for CIOs: CIOs may not need the proprietary stuff, but if they do they’ll already have acquired deep experience with the open-source product before buying the add-ons. Startup challenges: There’s ample motivation to make the open-source product inferior to the proprietary package, transforming the open source into trial software. If that happens, there may be a backlash among open-source developers and users wanting to see all the code.

Businessmodels 3/6 3) Open Source + Buy Off (Dual License) What it means: Companies offer a proprietary license for their open-source software so that users can modify the software and redistribute it without having to make the code changes available to the public. Who’s doing it: MySQL (database), Sleepycat (database) Advantages for CIOs: The open-source software has all the features of the proprietary version. Startup challenges: Sales of the proprietary version are limited mostly to those companies that want to redistribute it as part of their own hardware or software packages, companies also need to own all the rights to the product. Think MySQL vs PostgreSQL.

Businessmodels 4/6 4) Open Source + Aggregation What it means: Companies assemble various open-source software packages into integrated units that are easier for CIOs to consume. Who’s doing it: Exadel, Navica, SourceLabs, SpikeSource Advantages for CIOs: Simplifies open-source integration and support. Startup challenges: Barriers to entry are low, brand differentiation is difficult, lack of ownership of open-source projects limits the influence of the company in the development of the code.

Businessmodels 5/6 5) Open Source + Hardware What it means: Hardware makers use open source as the foundation for the software that runs their machines. Who’s doing it: Cisco, Digium, Netezza, Nokia (Maemo with 900million Euro savings) Advantages for CIOs: Lower prices on hardware. Startup challenges: It’s difficult to differentiate on hardware alone, especially when CIOs are looking to standardize their infrastructure

Businessmodels 6/6 These companies illustrate some of the OSS strategies being used to create product value. (riseforth)

Value - Industry seems to know more than Investors (Private or Public) Zimbra - $350 million (on ~$3 million of trailing revenues) - September 2007 XenSource - $500 million (on $1 million in trailing revenues) - August 2007 JBoss - $350 million (on $27 million in 2006 revenues) - June 2006 Sleepycat - $35-50 million (on ~$7 million in trailing revenues, is my best guess) - February 2006 Gluecode - $10 million (on very little in trailing revenues, less than $1 million, I believe) - May 2005 SUSE - $210 million (can't remember revenues - I think $30-40 million) - November 2003 Ximian - ~$50 million (I can't remember - on $1 million or so in trailing revenues) - August 2003 + Trolltech & Sourcefire IPOs Source: Matt Asay + MySQL

Maybe we should change terminology? Maybe we should start talking about software driven businesses instead of Open Source businesses. After all Open Source is way of producing and distributing software, not a businessmodel. ...and the biggest successes in 2000’s have been software (OSS) driven businesses such as Google, Amazon, Ebay, Sulake Labs.

Conclusions and Implications • In building an OS software business you need the same basic elements of business • OS to be part of company’s business model, it should emphasis elements 1. competitive position, 2. source of competence and 3. faster route to the international markets • OS does provide a way to challenge incumbents, even giant ones, but it has to be something more than just opening up the code, that does not provide enough of disruption. • Open Source is not evidently a business model

Mikko Puhakka: Open Source Business Models

by Friprogsenteret on May 19, 2009

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Mikko Puhakka: Open Source Business Models — Presentation Transcript