By Mark Hinkle
I have been trying to digest two unrelated stories from last week. The first was the report by the Standish Group on the $60 Billion dollars open source is purported to be costing the proprietary software industry. The second was Steve Reubel’s, “The Web 2.0 World is Skunk Drunk on Its Own Kool-Aid.” As I looked introspectively into these stories I wondered how relevant they were. I came to a realization that while the one of the most commonly espoused virtues of open source is more eyeballs generating better code that perhaps one of the least mentioned strengths is their marketing ability. Bear with me as try to explain why.
Open Source Success Stories
Last week I was astounded to see the success of my friends at MIndTouch in an announcement detailing their progress over the last two years. I must admit that every time I hear the word wiki I think of the 80’s song by Newcleus, “Jam On It.” I know that dates me but I keep hearing the final chorus in my head, “Wikki-wikki-wikki-wikki.”
Well, now every time I think of massively successful open source companies I will probably hear the words, “wiki,wiki,wiki,wiki.” MindTouch had a huge year with a lot to be proud of:
- Resellers in Germany, Spain, Sweden, Poland, and Japan,–400 percent increase
- Over 200,000 active installs–100 percent increase (200,000 active users in 2 years that’s unbelievable)
- Installs on all major Linux distributions–600 percent increase
- More than 3,000 registered members at the developer community–30 percent increase
- Translated into 16 languages–500 percent increase (this is huge)
MindTouch users include FedEx, Fujitsu, Siemens, Microsoft Corporation, Gannette, U.S. Army, Department of Defense, U.S. Environmental Protection Agency, City Of Los Angeles, and EMC. Plus, this quarter was MindTouch’s largest ever with respect to sales, revenue, and enterprise deployments–and is the fifth consecutive quarter of increasing sales. See the pattern increased installations, broader adoption, and finally increased sales.
I don’t speak about Zenoss on this blog often but allow me to blow my own horn. Today Zenoss announced some stellar numbers too (In case it’s not clear I am the VP of Community at Zenoss). We have recently added our 100th enterprise customer which includes over 25 public companies and three in the Fortune 100. Our recent customers include Disney, Georgia Tech, CleverSafe, Montavista and Instinet. We are opening an Austin, TX development center today to help address growth.
Beyond that we grew our open source community to over 30,000 members and 3,500 active deployments (actually that number is a very conservative I estimate it to be a bit higher). These folks don’t pay us a dime. Sounds counter-intuitive doesn’t it? 100 customers and 4,000 free users and we call it a win?
How does a software company make money, if all software is free?
Brand expert Hugh Mcleod asked the same question earlier this month. There is a huge difference between the approach of the open source software company and that of a proprietary software maker. Selling proprietary software is probably one of the most profitable businesses of any kind just ask Bill Gates or Larry Ellison and one of the most competitive.
The model of write once sell a million times is being challenged by buyers. Which makes me think there’s something to the Standish report I mentioned earlier:
Open Source software is raising havoc throughout the software market. It is the ultimate in disruptive technology, and while to it is only 6% of estimated trillion dollars IT budgeted annually, it represents a real loss of $60 billion in annual revenues to software companies,” said Jim Johnson, Chairman, The Standish Group International.
Here’s why. Open source vendors start by attracting users who instead of forking over their cash for proprietary software are adopting open source. In cases where there is a commercial company backing the company some portion of those customers end up paying them for a commercial license or services. Often at a price that is more value oriented versus the premium commanded by proprietary vendors.
This creates two kinds of competition. The first, free software which doesn’t result in revenues to anyone but does cost the proprietary companies potential sales. Second, those users that pay for support and service from open source vendors are taking real sales away from the proprietary technology companies.
To a classically trained marketing professional they might think open source software developers are pretty bad at marketing their software. They usually lack product slicks, they don’t run extensive advertising campaigns punctuated by flashy artwork from the artist du jour, and they often obsess about the number of free downloads they generate.
Most open source companies understand downloads are important. Downloads are means to an end, users and eventually customers. The formula include D (downloads) which generate U (users) which generate C(customers). We also suffer from the A (attrition) those who don’t choose to use the software. Here’s my new math on the subject:
X(downloads)–A(attrition) = Y(users)
Y(users) * (some percentage) = C(Customers)
Open source vendors benefit from the users. In the proprietary software there is no Y group to participate in activities to benefit the community of paid users and reduce the cost of development, support, and marketing.
At the end of the day open source software can afford deliver this software because of abundance. They can distribute that software cheaply using free tools like hosting from SourceForge.net, code-tracking systems like CVS and Subversion, GNU mailing lists like mailman all delivered cheaply over the Internet. That enables an investment in open source software communities. Using this abundance and understanding the value of this investment needed to grow an open source community work is critical.
Once you understand this formula and know it isn’t about making a quick profit. As Steve notes in his Koolaid piece there are plenty of companies reliving the sins of the DotCom bubble but successful companies are in it for the long haul:
They really were about changing the web, not making a quick buck (they did so only because they added value). There are companies still out there like them. Twitter is one I believe takes this approach. Automattic (the company behind WordPress) appears to be another. Dave Winer also shares this spirt. He creates services like NYTimes River because it’s fun and he thinks it will add value to our lives (and he is right).
I like his reference to Automattic a company that has a huge community of loyal users that they have yet to, as far as I know generate huge profits.
What’s ironic is that while open source companies are busy cultivating an active community of users they end up accomplishing some very classical marketing activities. First, they build brand by putting their software out in the open for everyone to see. They typically use wiki’s, mailing lists and other methods to talk with users.These users end up becoming a leveraged marketing organization that evangelizes (and in some cases criticize) their products. This is an advantage compared to a proprietary software company who doesn’t make their product available to everyone. They have limited user resources (limited by those willing to buy software). That’s the differentiator as many of the proprietary software companies use the same open source collaboration tools just among a relatively smaller user base.
[Note: Relative as in relative to the size of the investment to acquire the user base.]
In addition, smart organizations create feedback loops and siphon that feedback into their products, which gives them highly leveraged product management and quality assurance functions. Once again using a relatively large user base. Finally, they offer a product and/or service that is attractive to some portion of those users and that’s how they make their revenue.
Good Developers and Marketers, How about Capitalists?
So any critic will be quick to point out that there are few profitable open source companies, a fair and valid point. I doubt their will ever be another software company that challenges Microsoft or Oracle. What I think will happen is a redistribution in a more competitive market made possible only by leveraging distributed software development and open source distribution. I believe that many of these companies will be profitable but that requires a slow and steady path to profitability. I think many of the biggest software companies today are in that position because they got to the table first. Fifty years from now I would be curious to see how that landscape has evolved.
For more Mark Hinkle, visit his Socialized Software blog.