Is Open Source Recession-Proof?
Lofty oil prices. Sub-prime mortgage woes. Financial companies (Citigroup, Etrade) stumbling badly. Ouch. Ouch. And Ouch. Whispers of a potential recession ahead continue. That made The VAR Guy wonder: If the U.S. heads into a recession soon, are open source companies better positioned to weather the storm than their closed source counterparts? Let’s take a look.
At first glance, open source companies have the upper hand against their closed-source counterparts during economic slowdowns. Big businesses already are migrating their Unix-based systems to more cost-effective Linux servers. One could argue those migrations will accelerate if corporate IT budgets get cut. And for new projects, IT departments would likely look at open source first because of its initial (and potential long-term) cost advantages over closed-source alternatives.
In theory, open source companies also win on the employment front during difficult economic times. By leveraging a worldwide community of developers committed to the open source movement, they often don’t suffer from the big salary structures seen within Microsoft, Oracle and other traditional software providers.
While companies like Symantec continue to cut staff heading into 2008, nimble open source providers continue to recruit employees. So far, so good for open source companies.
Now For The Bad News
Still, perhaps things aren’t so cut-and-dry. When stocks tumbled in 2001, Red Hat shares fell far further than those of Microsoft and Oracle.
Take a look at this chart tracking Microsoft, Oracle and Red Hat shares since 2000. Red Hat investors certainly didn’t think the company was recession proof when shares fell from $95.12 in January 2000 to $7.10 in December 2001 (adjusted for splits). Of course, Red Hat shares were also suffering from irrational exuberance ahead of the downturn.
Even so, The VAR Guy believes open source companies like Red Hat, MySQL and SugarCRM are in far better position — during strong and weak economic times — than their legacy software counterparts. After all, it’s hard to bet against a global software movement where thousands of talented developers lend a hand … at little or no financial expense.
One prime example: Marten Mickos, CEO of MySQL, estimates that the open source community has 1.2 million full time equivalent (FTE) employees writing code. In stark contrast, Microsoft has 71,000 employees, Mickos noted at a recent conference. Which group would you bet on over the long haul?Before you answer, consider this: SurgarCRM has experienced record growth in recent months. And MySQL continues to monitor financial markets for an opportune time to launch a potential initial public offering. If MySQL finds the courage to go public during a soft economy — or even a recession — it will be the ultimate vote of confidence in the open source business model.
Oh, and one piece of full disclosure: The VAR Guy owns a few shares in Red Hat, but certainly not enough for him to kick back and relax during good — or bad — economic times.
[…] VAR Guy actually used the word #8220;recession#8221; in a blog post earlier today. Cisco CEO John Chambers said enterprise sales were #8220;lumpy#8221; during a Wall Street […]
No technology market is recession proof. But I would expect $100 invested in Red Hat to deliver more value over the next few years than $100 invested in Microsoft.
Microsoft has a global marketplace that will weather a recession much better than smaller companies. The falling value of the dollar means that they are making more from their rather significant offshore sales.
A full blown recession or (god forbid) depression will be very bad for the open source community. If you have enough time to spend writing code for an open source project, you probably are not giving your company a good value for their money. That means you are expendable.
If becoming open source were a financial advantage, Microsoft would do it. There is no magic to publishing your source code — and in fact Microsoft does publish some of theirs as they feel appropriate for their business. In the end few customers really care — they want their people using the products, not spending time tweaking the operating system.
George,
Great points. Pretty lame that The VAR Guy’s thinking didn’t include key issues like exchange rates and global reach. But on the other hand, that’s why The VAR Guy blogs for a living and never had the guts to compete with MSFT on his own.
George,
If your company uses open source, and if you are doing work on an open source project for the benefit of your company, how does that make you expendable.
Sure … if your job is a programmer at Microsoft and you spend all your time programming Firefox, then you are expendable.
If, on the other hand, you are working on a project like DimDim or MySQL and it is installed on 150 servers inside your company’s infrastructure … and if their business model uses that to make money you are FAR from expendable.
WHAT … people actually use open source to MAKE MONEY?
Wake up George … this is not 1985
Johnny:
Zimbra integrated many open source components and Yahoo thought it was worth USD 350 million; Citrix bought XenSource, the virtualization co, for US 500 million; Xen users open source. MySQL will make money, Asterisk will make money, and so will Ubuntu, Openbravo, Adempiere, Scalix, and all those who will integrate these wonderful products and technologies in the coming years.
And MySQL is not true open source.
Pardon my typo; the last line of my previous post should read “SugarCRM is not true open source”
Another bozo tekkie who thinks he can pick stocks, and be an economist. Stick to writing about video cards.
You’re mixing two stories here. You seem to indicate that Open Source development and progress is recession proof. Then you switch to talking about a few OSS companies who are public and how their stock faired.
The development of Linux and other open source software continues at full speed whether Red Hat makes money next quarter or not. Many unemployed or under employed tech workers will spend time working on OSS projects – thus a recession will actually give a boost to the pace of improvement in the sector. So, open source development is recession proof. Companies and stock prices are not.
I have to agree with Andy. When we have more free time, such as when unemployed or underemployed, us programmers tend to do a lot of coding. We improve what is already out there and come up with new stuff that becomes part of the next upward tech market wave.
That doesn’t always translate into good business. Like anyone, we have to eat and pay our bills. If nobody pays us then we’re less prone to doing the annoying parts of being a programmer such as writing documentation and offering support. Often businesses will want to use our code but they don’t want to pay anything for it. Sure you can save money upfront by being cheap but in the end it’ll cost more than if you start off as a paying customer.
In a recession the bigger open source companies will do well because they do have a lot of their own programmers and support staff. Smaller companies will find it harder because the community will be less willing to give away their time and expertise doing boring stuff. The bigger companies will still spend less than their closed source rivals but they still have to spend money to keep their business running.
I going to say not only is open-source recession proof, but that it thrives in a recession. Red Hat’s stock price (and VA Linux’s) when the dot-com bubble burst were both grossly over-valued at the time (along with many other tech stock). This was a major reason for the crash then, too many companies just couldn’t match the wild expectations of investors. In a recession, not only will the code still survive, but newly unemployed IT workers will spend more time working on the code and not maintaining infrastructure so they could get back to work with someone or form a new start-up. In addition the hobbyist community is not going to go away. What it means is when closed companies layoff employees they have fewer workers for their projects. When open companies lay-off they have more workers (paradoxically enough) as the newly unemployed spend less time maintaining and more time building. Result, the code survives no matter what, and development of new software picks up at the expense of finding and making new service contracts. In the closed competitor though, they not don’t get new service contracts and sales slow, but development slows as well.
Geroge,
M$ can not go open source, no way. Way to much in its own structrure is extra profit.
Great take on the market….. Projity is another company that is growing rapidly with their OpenProj solution. They have over 150,000 downloads in two months. This is a free replacement of Microsoft Project and even opens native Microsoft files on Linux, Unix, Mac or Windows.
It turns out that Project is part of the Office Suite but not bundled into any of the pre-set Suites but is installed on 7% of all Office desktops. Microsoft Project has a list price of $1,000 and is the highest profit margin SKU up in Redmond. They do over $1 billion each year in Project sales. In a tough economic environment people will not pay $1,000 per copy of Project when OpenProj is free and Projity’s SaaS solution (Project-ON-Demand) is only $19.99/month. In good times you can make the argument that an open source solution available on Linux, Unix, Mac or Windows makes sense… in tough times you can make the clear argument for free or low cost SaaS solutions. FYI, Project also requires Project Server, SQL Server, Sharepoint Server and Visio to work properly. The burden cost for companies is far higher than the $1000 list price.
Projity is riding the wave that Marten Mikos noted: they have a strong community that has translated the solution into French, Spanish, German, Portuguese, Swedish, Russian and Chinese in just the two months they have been released. Microsoft has spent 20 years and have a few thousand employees working on Office Project. Projity has a worldwide team including myself who actively support the solution. We see a clear path to 11+ million worldwide users. This can be garnered in good or bad economic conditions.
Great arguments, I agree !!!!
[…] quick summary of Goldman#8217;s views over on Barron#8217;s. The VAR Guy, you#8217;ll recall, is wondering if open source software companies are immune to an economic slowdown #8212; or at least better positioned than their closed-source […]