Open-Source Software Companies Face Challenge to Build Business

Opinion: You have to get creative when your product is free for anyone to use, copy or distribute. What will excite people enough to write your company a check?

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.

/zimages/5/28571.gifClick 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.

Next Page: Competing with Microsoft, Oracle and IBM.