Red Hat’s Success, Open Source’s Failure
Sure the headline is a little harsh. But let The VAR Guy explain. Red Hat is celebrating its 10th anniversary as a publicly held company. Kudos to the Linux and JBoss middleware provider. Now, the problem: Red Hat’s status as the only pure-play publicly held open source company is a troubling fact for the open source industry. The big question: Can other open source companies repeat Red Hat’s profitable, successful business model?
So far the answer is a definitive “Maybe.”
- Sure, Novell’s quarterly profits often push into the black — but SUSE Linux is only a portion of the company’s overall revenues.
- Small, fast-growing open source companies like Alfresco, Digium, SugarCRM and Vyatta seem to be generating more and more business. But are they positioned to deliver ongoing profits?
- Open source seems to be gaining some traction in the IT channel — thanks to promising efforts like the Open Source Channel Alliance and the Novell-Tech Data software appliance effort.
Decade of Waiting
But let’s rewind to 1999, when Red Hat launched its wildly successful IPO. Shares initially tripled during Red Hat’s August 1998 debut on Wall Street.
Would anyone have predicted that no additional open source companies would launch IPOs over the next decade? Ten years without an open source IPO … amazing and somewhat depressing for open source business advocates.
Sure, MySQL seemed to be on the road to an IPO before Sun Microsystems stepped in and acquired the company. And the recession certainly put many high-tech IPOs on ice over the past few years.
But the open source industry needs more examples of sustainable financial success, particularly in pubic markets.
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Since when was Wall Street the true barometer of innovation? Companies only need to go public to acquire large amounts of capital. It can cost millions or billions to develop proprietary software, but Open Source can leverage off the work of others. In short, there is little or no need for open-source companies to be large, highly-visible, and publicly-held. Lots of developers working with Open Source can operate out of small businesses. They will never make headlines
Lawrence: Fair points. You are correct to say that not all open-source companies need to be publicly held.
But some open-source providers have the following problem: They’ve accepted investments from venture capitalists and other vendors. At some point, the investors want to cash out — typically through an IPO.
So take a close look at many of the best-known open source companies. Do they have venture backing? In many cases, The VAR Guy bets they do.
You make an important point about Sun and MySQL. This seems to be the coming trend with commercial open source products: they will be bought up by larger companies before they get to the IPO. It looks like Red Hat’s success is somewhat of an anomaly within the open source world. Instead, many companies are integrating open source as a part of their overall business strategy rather than adopting it as their sole business strategy.
There have been six open source IPOs since Red Hat.
http://blogs.the451group.com/opensource/2009/08/13/a-decade-of-open-source-ipos/
Open Source is a great way to sustain software. Many future digital infrastructure projects will be run by foundations. Virtually open source projects with criticial mass run forever. Borland didn’t open source Delphi. BaaN didn’t go open source. This is why these products are (almost) gone. Honestly, at the crossroads there is few software left which is not open source. Think of Microsoft IE, pretty stupid, hein? While most competitors crowdsource the development of their browser Microsoft sinks their money and capacity to make a FREE product but hides the source. Every line is secret,…
Matt@4: Thank you for sharing more facts. Clearly The VAR Guy should have recalled those IPOs… the few successes, and the failures you highlight.
The Var Guy:
If you want to talk anomalies…you should also talk about Mozilla. A non-profit with a for-profit subsidiary. It’s not a traditional arrangement for an incorporated entity..but the non-profit status of the parent Mozilla Foundation does provide financial transparency into the Mozilla Corporation. Mozilla can’t IPO..but it is profitable and its definitely making a huge impact.
-jef
Jef: Thanks for the Mozilla perspective. Definitely worth a look from The VAR Guy. Our resident blogger will try to find some time for follow-up on that.
I know ‘The Var Guy’ is focusing on Publicly traded IPO (therefore Wall Street style ecomonics) but see how well that has worked out? With the Financial Crisis and all?
Not saying IPO’s the Dow and all that is ‘evil’ and not innovative.
Open Source / Linux powers Google, Amazon, Facebook, twitter, digg, large parts of IBM and Oracle ( with the Sun buy out ). I myself am self employed and make a handsome income, sole proprietor owner. I run all open source and code Cloud ‘SaaS’ software.
The shear number of companies (internet) that run linux and open source GNU tools is staggering. Think about ISPs, WebHosting Sites, Web Design, Consultants, AD sites, Email Marketing, Home Network Marketers, Bloggers, I mean these are all ‘home grown’ VERY small businesses run either by family or individuals. (Like myself)
The economy is NOT in the lime light, as most of them probably do not WANT to be, if they are successful enough. You do not need tons of overhead at all to run for example, ‘Internet Candy Shop’ all the way to ‘Clothing and Shoes’.
Just about EVERYthing you can think of to sell IS being sold on the Internet, with most of it powered by Open Source running Linux.
Why? Because only Linux ( and really there is NO competition ) is completely configurable. Not to mention all the Mail servers (postfix), Web servers and the Kernel itself.
For example, I can configure the Linux Kernel to ONLY run what I need, as well as the mail server, dns, web, php, database (mysql) and all the GNU tools. Because, I have access to the source code and the convience built into it, to allow me to recompile and configure using ./configure and the ‘make’ tool set.
There is NO OTHER proprietary company out there that can match this innovation in configuation.
There are business models out there we have never heard of and individuals and small ‘niches’ of people making A LOT of money with the Internet and Free Open Source ‘configure how you like’ software.
If you have the aptitute, it is possible to run a hugh through put mail service, hosting service, AD community service (apache) all on a SINGLE 2U (or 1U) sized Dual CPU or Dual Core server, running 2-4 gigs of RAM, scsi raid 1 and co-located at a major ISP. My server RENT is only $125 a month for co-locating my server there.
Closing… the software costs nothing, is 100% configurable, which leads to innovation on a massive scale run by ‘micro-businesses).
It would be interesting to know just how much revenues Open Source Software actually allows to happen.
No closed source company can ever match this, because for one I do not have to rely on any company to make my Server run how I want. It’s Open Source leverage of your dreams.
Also, think of ‘the long tail’. Open Source economy is much like that concept. Also, software sales in itself is hard to do. It is what YOU DO with the software, to run a service that is more profitable and wide spread. (ie. Amazon, Google, etc)
In fact, You can not SELL the software, as this is illegal! It’s open source!
Matt: The VAR Guy really appreciates you taking the time to share the points above. The VAR Guy is a big fan of The Long Tail and some other points you raise.
But our resident blogger also thinks it’s important for commercial companies (Digium, Vyatta, etc.) to prove you can take a small business and scale it and sustain it around an open source model.
Think of this irony: Microsoft’s closed-source model is under intense margin pressure, yet many open source companies are struggling to make a buck. So, who has the better model in terms of building a sustainable business?
I think the most important company, when it comes to Open Source and how businesses use it to successfully employ thousands of people, is Google.
Google, does not sell software, rather it uses software. Google is seeing profits, not losses. So, the shift in how software, on a massive scale, can create a huge thriving, long term business is changing.
It is moving from Software as a product to SELL, to Software as a Service. This shift has been going on for over 2 decades now. But, it is showing no signs of changing, only growing more and more obvious that Software itself is becoming a Commodity and the service it can provide as a platform to run businesses that have nothing to do with software at all, will be the ending result.
It just so happens, that Microsoft is so good at business and is willing to do whatever it takes to keep the software sales model they have.
But, in time as open source becomes more main stream and easier to use, it will make most software a commodity.
As an example, beside the Operating System. Let’s look at 3d rendering software.
The leaders are 3dsmax, Maya, Softimage and others. But, the sales of that software pales in comparison to what that software produces, which are multi-million dollar animation films, like Toy Story, Saving Nemo and Wall-e.
You can apply this same scenerio to just about all other software programs out there… like Photoship, Flash, Audio Editors. etc
It will take perhaps another 2-5 decades for the shift to occur, but that is where the momentum is building and leading to.
Software as a Service vs Software Sales
Pooling the ideas of programmers, is a much better way to create excellent software that is secure and stable. Open Source does this.
What Close Proprietary software has over the Open ‘pooled’ Source is one leadership (corp) that can add value to the software by focusing on features (bells and whistles) and delivering just that. Traditional Software houses seem to excellerate this process, in some ways over Linux/Open method.
But, in the end, eventually, the features are done and the only way to sustain a Software company that ‘sells’ software is to add features that are not needed, just for the sake of features. THis is known as feature creep.
As an example, Microsoft Office has a new OPEN IDEAs Office, where any one, can submit ideas on how best to make the NEXT version of Windows Office (word, excel, power point) so that Microsoft can sell it as something a paying customer NEEDS to have.
This is Microsoft’s last ditch ( or near so ) effort in trying to find ways to create the NEXT version of Office, and be able to sell it, and not a product that is full of features that are there for features sake. It only pisses customers off, to make the software so bloated with features and try to market this software. Customers begin to feel as though they are being ‘sold’ rather than meeting the customers requirements for software that does what the customer needs.
In otherwords, eventually, you can only make ‘X’ number of versions until the product is ‘done’, and nothing more can be done with it.
The problem with this type of business model, when a company ONLY sells software, is that eventually the features dry up and the software is developed and done.
Services will always be needed, no one is going to run out of Ideas for the next big Computer Animation film, made by software, but the software will saturate with features, and no longer a new version can be sold.
Just as Google has and will have a never ending revenue stream. There will ALWAYS need to be Advertising, so long as there are other products that people want to sell and be sold.
To finalize the point I am trying to make. And your question being…’Why are we not seeing Open Source companies making big bucks, selling software?’
Selling software is becoming old school thought. The software is not the point. The point of ALL software, is to do a task and provide a service.
So, what you are seeing, is not the sale of Amazon or Ebay or Google software, what you are seeing is the SERVICES these companies are profiting on. Just so happens they all run Open Source as their platform!
The software is there… I assure you. It is evolving to the point that software is transparent. No one wants to KNOW about the software, they just want it to ‘just work’ and do what it is suppose to do.
You are kind of missing the point, when you look past the fact that most of the profitable Open Source companies are profitable by running Open Source ‘under the hood’.
The reason why there is not another Red hat, is because there is no need for one. If one does spring up, it will only be delivering the same or similar software as it’s competitors. That is Linux and Open Source. So, Red Hat jumped on the wagon earlier and took the prize.
Ubuntu is trying to do on the Desktop with Linux/Open Source, what Red Hat done with the server. Ubuntu is growing, but it is really only a matter of time before Microsoft’s versions ‘dry up’ and the shift from software is moved to ‘services’.
Service subscriptions is what Red Hat and Ubuntu (Canonical) is trying to sell. They are giving the software away for free and trying to sell service subscriptions. Maintainers of the software and fixing problems that crop up. Doing custom installs, and clustering work. Virtualization and more…
I hope this clears things up for you… it seems complicated, but when you’ve seen both sides of the coin as I have. I started as a developer and still am, but I also used that software to create a service which I sell. Only then is it easier to see both ends of the problem.
when you look at companies like Wind River and SUN, you get the feeling open sourcing your product is a kiss of death.
Even when you talk up Red Hat as some kind of FOSS success story you have to keep in mind Red Hat does not make it’s money from providing software, it is primarily a IT/and Software support company. But an Open source company it is not.
Someone said it’s the very large number of people and companies that use FOSS /Linux for thier business, they are not open source companies, they are service providers, WEB providers, and normal business that use a product, just like many business use MS products in their business, does not make them Microsoft.
SUN peak’ed at $295 stock price, and when it sold that was for about $9.50 per share, SUN was huge and a great company their only failing was to go down the FOSS black hole.
Darryl: On the other hand, open sourcing sometimes is an attempt to lift a product out of a nose dive.
In the case of Sun, open sourcing Solaris wasn’t the core issue. The real issue was Solaris losing market share long before the open source option was considered.
This is an old article but, WTH.
Look what happened to Sun Microsystems. Linux and IBM put em out of business. Linux Servers with the help of IBM’s massive sales force gave a more economical and technologically advanced Server and software system. Cheap, fast, better than SPARC and Solaris could deal with.
SUN open sourcing everything was a reaction. They had no choice!
A similar think is going to happen on the Desktop market as well. Ubuntu, SuSE and the shure momentum Open Source is generating is going to force Microsoft to react. Google OS is another one to put on the pile of Desktop Linux uprising.
Microsoft is probably NOT going to simply Open Source everything and try to compete with Open Source toe to toe. That would be suicide!
Instead, Microsoft is definietly going to ( or already have ) going to look at what happened to Sun (this massive Server hardware and software company) and avoid it’s mistakes. Microsoft is going to do business as it always has until there isn’t anymore business!
Maybe a fiew MS technologies will be Open Sourced in the ‘after math’. Which technologies? Maybe .NET or Visual Studio, but certainly Windows OS is not worth anything due to it’s single user design, allowing viruses to proliferate.
The point I’m trying to make, is this.
Open Source and all the businesses that are springing up to either support and/or develop will force every closed source outfit to do one of two things.
1) Stay closed (or partcially open) but keeping the key things that differinntial whatever product is successful enough to survive in the new Open Source method of software development.
2) Close up shop, Open Source everything and individuals moving on to companies that are surviving in the Open Source World. (e.g. An example is Blender, Solaris, Open Office, and god knows how many more…)
Open Source is a perfect way to keep software in the loop and recyclable, otherwise deleted or tucked away in someones closet. The crappy software will simply be deleted.
What I find interesting with the ‘Vista disaster’ is that it is pure IRONY that this happened at all to Microsoft. I will explain.
The ‘Vista disaster’ was actually a BLESSING to Microsoft. It made WIndows 7 seem viable and therefore saved Microsoft’s ass. People were only comparing a VERY fail and crappy Microsoft product (Vista) to a Vista that just fixed the major problems and added a few changes to the UI, and called it Windows 7.
When in fact, Windows 7 was really just a slightly modified Vista!!!
So, what this tells you about the future of Microsoft is the following.
The ONLY way for Microsoft to continue to be precieved as a worth while Operating System to Upgrade with… is to first create a CRAPPY version of your own product…and then promise to fix all the problems in the NEXT version.
Now, if people actually fall for this bullshit a second time, will only confirm to Microsoft that this is a way to continue to sell more and more versions of an already bloated Operating System to those that will require more powerful hardware to run it! (yes, making Intel rich in the process… you know the Wintel thing.)
So, it will be VERY interesting to see what Windows 8 and windows 9 holds for the future.
Microsoft can not simply keep bloating their Operating system… in fact… when they do this, will allow them to come back with a ‘better version’ only fooling people into thinking they are getting a ‘good deal’ when really it is about perception.
It amazes me on how short sighted people are when it comes to complex issues.
Matt: Your point is similar to year-over-year earnings. It’s easier to look good if your current quarter is compared to a weak quarter last year… so The VAR Guy understands your point.
Still, The VAR Guy disagrees with a couple of your points.
1. First, you allege that the Vista disaster was a blessing for Microsoft. The VAR Guy disagrees. Microsoft lost some credibility with consumers and some CIOs during the Vista disaster. Some of those disgruntled customers switched to Apple Macs or opened their minds to SaaS-based approaches like Google Apps. Now that Windows 7 is here it’s not an “automatic” upgrade because plenty of customers are evaluating third-party options now.
2. Second, you allege Windows 7 is a slightly modified version of Windows Vista. The VAR Guy isn’t quite so sure that’s the case. Sounds like Windows 7 involved substantial code changes. And for the most part, readers tell The VAR Guy that they really like Windows 7.
Still, The VAR Guy really appreciates your insights and views. And ultimately he agrees: Sometime customers are pretty short-sighted.
Terrific post and question! I loved the way you answered it!
I use open source software when I have more time than money, but I won’t contribute, and I won’t waste my time on open source when a cheaper (time = money) commercial product is available. 120k+ unanswered questions on the community support forums of one popular open source project sent me screaming to pay for a product that is supported by company that makes, not just their community.
Only a fool gives up his time and/or work for free. Fortunately for Open Source, there’s a sucker born every minute. Go now. Shout FUD at the top of your lungs and recruite more suckers.
Open Leech: The VAR Guy tends to see good and bad in both (a) closed source and (B) open source. Plenty of open source products have forced closed source companies to improve their offerings. And look at how far Red Hat has come since the blog above was originally published in 2009.
Red Hat is now an operating system, virtualization, middleware, cloud and storage company. They’re doing a lot right with open source.