Open-Source Software Companies Face Challenge to Build Business

By Charles Garry  |  Posted 2005-08-10

Open-Source Software Companies Face Challenge to Build Business

When I think of companies that are emerging around the open-source software phenomenon, I cant help but think of an old Saturday Night Live sketch.

You remember how they use to show fake commercials? The one Im thinking of was for The Change Bank. It had people telling personal stories of how they needed to break a $20 and The Change Bank was able to accommodate them with two $5s and a $10. The tag line was "How do we make money? Volume."

So we see a great deal of activity and excitement around open source, never more so than the week of the LinuxWorld conference, where all manner of players large and small gather to tout their latest ventures.

Open-source software is touted as being a disruptive technology, and therefore one may postulate that open-source software companies also offer disruptive business models.

Certainly you have to get creative when your product is free for anyone to use, copy or distribute.

As a business man its got to get you thinking about the value your company brings to bear that would excite people enough to write your company a check.

Click here to read more about Oracle unleashing Database 10g R2.

This whole subject got me thinking about some of the open-source software companies I have dealt with, to some extent, over the past five years, as well as the conversations I have had with end users during that period.

What is it that would dictate the success of one company and the demise of another? Are the rules of what makes a successful business (or at least a successful software business) somehow changed by the open-source software model?

The database market is an interesting one to look at because any market in which Oracle, Microsoft and IBM compete is compelling.

Its like watching NASCAR, we are all secretly hoping to see the sensational crash.

That fall of a once-great company (fill in name here) that was not able to adapt to the fast changing nature of its environment.

This notion also scares us to death as to what the ramifications might be to the economy, to our companys investment, and, most importantly, to our own careers. So we have all the elements of a good drama.

The prevailing thought is that companies, all companies are designed to do one thing, move up market.

This is so because companies develop within a specific market that caters to a certain class of customer.

As the company matures, so do its customer base and the company changes to keep up with its customers increasing demands.

Ultimately the company takes on an economic character of its own. By that I mean they set levels for sales, marketing, R&D, and most importantly, for gross margins.

Established companies need to continually seek to grow within the confines of its established economic character. So the only two ways to grow profitability is to either slash costs or sell increasingly more expensive, more feature-rich products.

It is thought that once a company moves up market, it can never move down market. It is locked in by its own economic model whose expense structure and margin requirements preclude it from pursuing lower-end customers. This is where the open-source software company hopes to make in-roads.

They hope to attack the low end of the market that cannot be adequately addressed by the larger players, so the theory goes anyway.

Of course, even these small companies hope to become big companies someday. In other words, they also want to move up market.

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Competing with Microsoft, Oracle

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For the real low-end customer, the one that would never pay for software regardless of the features it offers, open source is great.

Unfortunately, no new venture hoping to make a living can devote much energy on those customers.

The only hope is that the very low-end customer someday matures to a point where they require some feature or service they cant get for free.

Predominantly, however, open-source software companies, at least the ones hoping to make money, are forced to compete for many of the same customers that Microsoft, Oracle and IBM currently compete for.

It is this fact that leads me to believe that we can predict why some open-source companies will be successful and others will not.

Click here to read more about EnterpriseDB and PostgreSQL.

Take the supposed battle of open-source relational databases, PostgreSQL vs. MySQL.

I say "supposed" because ultimately the two are a false comparison.

PostgreSQL has been around much longer, is much more "mature" than MySQL, and yet the compelling difference in my mind is that one is a software project (PostgreSQL) while the other is a software company.

Now, its true that successful companies have been built around software projects before.

Red Hat and Linux are perhaps the best example. Does that signal a trend or simply indicate that no other alternative existed at the time?

In the database market, MySQL AB provided the market with an alternative.

It is a traditional software company that controls all development, support, marketing, partnerships and, most importantly, trademarks for its software.

It just happens to believe it can offer a strong product at a much lower price point by utilizing the strengths of the open-source model, low-cost distribution and an active community that helps to improve code quality while providing accountability to its higher-end prospective customers.

This enables MySQL to balance its perceived social obligation to lower software costs while maintaining a value proposition to customers who want a definitive version of the code and will pay both for the right to get support from a developer of the code and to influence the direction of the product.

Contrast that with the various companies that have tried to make a commercial company using PostgreSQL as the flagship offering.

Many have tried, such as Great Bridge and Red Hat, while others are still trying, such as Pervasive and EnterpriseDB. None have yet proven successful.

It begs the question: Can you build a business around a product you dont make or have control over?

Offering support services is certainly one model, but support without development is like kissing your sister; there is no hope of any future.

EnterpriseDB wants PostgreSQL to look and act like Oracle. That fact alone probably doesnt endear itself to the PostgreSQL community.

Indeed, EnterpriseDB does not even open-source its code changes to PostgreSQL, it sells the binary only.

So here we have an example of a company that could be seen as profiteering off the free labor of others without giving back to the community. Probably not the marketing message that EnterpriseDB would want to promote.

So if you are looking for winners and losers in emerging open-source software business models, my money is on the company that can achieve the right balance between the social responsibility of the open-source software movement and the desire for higher-end buyers to receive value worth paying for.

That, I believe, will be a very rare commodity indeed.

Charles Garry is an independent industry analyst based in Simsbury, Conn. He is a former vice president with META Groups Technology Research Services. He can be reached at

Check out eWEEK.coms for the latest open-source news, reviews and analysis.

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