The Open Road

For those new to open source, whether on the business or development side, it's hard to appreciate just how far the movement has come in the past few years.

In 1998, when I had my first taste of open-source software through my company's investment in Cobalt Networks, virtually no one knew what open source was, including now-common projects like Linux. Things were a little better in 2000, when I joined a Linux start-up (Lineo), but I spent much of my time working with prospective customers to ease their concerns over open-source licenses like the GPL.

By 2004, when a group of friends and I founded the Open Source Business Conference, there was significant, growing awareness of open source, but its adoption was still stymied by Fear, Uncertainty, and Doubt, much of it fomented by Microsoft (Steve Ballmer in 2001: "Linux is a cancer") and the SCO Group (lawsuit over the provenance of Linux code in 2003).

Today, SCO Group, once a high-flier, is struggling for existence. Meanwhile, Microsoft has committed another $100,000 to Apache Software Foundation, has started its own open-source foundation, and has embedded significant bits of open-source code within its proprietary programs, among other things.

Linux, for its part, struggled to get noticed in data centers back in 2003. It has since become essential, mission-critical infrastructure across the Global 2000 ranking of public companies

We've come a long way.

This progress reflects itself in the job market, where Linux-related jobs have seen a 6 percent rise in 2009 alone, while Windows-related jobs have plunged by 8 percent, according to data from Dice.com.

But it's also evident in enterprises' willingness--even eagerness--to discuss open-source adoption plans. Virgin America CIO Ravi Simhambhatla tells The Register that his need to do more with less drove the company to adopt open source and suggests that the open-source philosophy is a positive, disruptive force:

Our company doesn't need just another IT team, the more and more we get entrenched in the...way of doing things the less and less room we will make for ourselves to be innovative.

In 2004, when I was trying to find an IT executive to speak at OSBC, it was a lost cause. No one wanted to paint a legal bull's-eye on themselves for SCO or Microsoft. Today, company executives line up to talk up how they're differentiating through open source.

Open source has "arrived," and the signs are everywhere, from the U.S. Defense Department's efforts to boost its open-source adoption further to patent-rich Qualcomm's foray into open source.

Open source is no longer a question of "why" but rather one of "how." It's the way the industry does business, and the way it does development.

No, not everyone in the industry, all of the time. But for those of us who have been involved in open source for even the past five years, it's amazing to see how much things have changed, which suggests they'll evolve even further.

For some within the open-source world, this is unwelcome news. They defined themselves as freedom fighters, battling the forces of proprietary darkness. And as far as good-and-evil metaphors work in technology, they were.

But as that world embraces open source, they're largely left bereft of bogeymen, like old soldiers still struggling against an unseen enemy.

Winning can be a bit disorienting.

All the same, it's time to move on. There are no more vampires to slay, but simply further open-source education to undertake. Enterprises need open source now, more than ever, and they're adopting it now, more than ever.

What a long, strange trip it's been.

Open-source software may have a lot in common with the global soccer (football) business: while it generates a tremendous amount of value for users, very little of that value can be converted into cash. At least, not directly.

That's the thought that struck me while reading the exceptional "Soccernomics: Why England Loses, Why Germany and Brazil Win, and Why the U.S., Japan, Australia, Turkey--and Even Iraq--Are Destined to Become the Kings of the World's Most Popular Sport." Among other things, the book tackles the economics of soccer, and yields some counterintuitive insights:

...[I]f Deloitte ranked [soccer] clubs by their profits, the results would be embarrassing. Not only do most clubs make losses and fail to pay any dividends to their shareholders, but many of the "bigger" clubs [like Real Madrid and Manchester United] would rank near the bottom of the list....[Note: my Arsenal is one of the few profitable football clubs on the planet.]

Whichever way you measure it, no soccer club is big business....This feels like a contradiction. We all know that soccer is huge. Some of the most famous people on earth are soccer players, and the most watched television program in history is generally the most recent World Cup final.

Nonetheless, soccer clubs are puny businesses. This is partly a problem of what economists call appropriability: soccer clubs can't make money out of (can't appropriate) more than a tiny share of our love of soccer....[T]he world earns more from soccer than the soccer industry itself does.

It's the world's biggest game...with some of the world's worst financial returns. We buy the replica shirts. (Um, I buy many.) We pay to attend games. (Er, I pay to watch many.) We try to give the game our money. But it generates very little top-line revenue, and almost never any bottom-line profits for soccer clubs.

Like football, there's no question that open source is exceedingly popular these days. Virtually every company--indeed, every person--on the planet uses it in some way, whether it's the free Firefox browser with which someone reads this blog post or the Linux operating system serving up a wireless carrier's phone system, open source is everywhere and highly useful.

It's just not big business.

Yes, Red Hat is nearing $1 billion in annual sales, but it's the exception. And that's OK.

Open source, like soccer, doesn't have to directly generate mountains of cash to be immensely valuable to the companies in its ecosystem. For every Real Madrid squeezing annual revenues of $475 million out of soccer there are scores of broadcasters, sports apparel companies, etc. making billions on the back of the sport.

In similar manner, Google, IBM, and others like them make billions with the help of open-source software, but they make very little directly from open-source software.

Like the soccer economy, the open-source software economy is best measured by the total value it creates, which will have very little to do with the direct sales the Red Hats of the world report. Open source saves enterprises billions of dollars in license fees, and arguably has the potential to collectively add trillions of dollars in productivity gains.

That's big value, even if it's not big money. Not in the pockets of software entrepreneurs like myself, anyway.

The U.S. military is no laggard when it comes to open-source software adoption, but apparently thinks it can do better. The U.S. Department of Defense on Tuesday issued new guidelines designed to remove roadblocks to open-source adoption, arguing that open source can help the Defense Department "anticipate new threats and respond to continuously changing requirements."

And to think open-source software like Linux used to be considered a threat to secure Defense Department systems.

While Department of Defense CIO David Wennergren's revised guidance (PDF) is not intended to create new policy, it does provide clarity that suggests open source is very welcome at the Defense Department.

Apparently, the Defense Department's guidance on open source, issued in 2003, wasn't resulting in as much uptake as the CIO desired.

Hence, the new guidance specifies that open-source software meets internal purchasing requirements for "commercial computer software," and as such gets statutory preference in purchasing decisions, just like software from Oracle, Microsoft, or others.

But the guidance goes beyond neutrality to suggest reasons that open-source software might be better than such alternatives, including:

1. The continuous and broad peer-review enabled by publicly available source code supports software reliability and security efforts through the identification and elimination of defects that might otherwise go unrecognized by a more limited core development team.
2. The unrestricted ability to modify software source code enables the Department to respond more rapidly to changing situations, missions, and future threats.
3. Reliance on a particular software developer or vendor due to proprietary restrictions may be reduced by the use of OSS, which can be operated and maintained by multiple vendors, thus reducing barriers to entry and exit....
4. Since OSS typically does not have a per-seat licensing cost, it can provide a cost advantage in situations where many copies of the software may be required, and can mitigate risk of cost growth due to licensing in situations where the total number of users may not be known in advance...
5. OSS is particularly suitable for rapid prototyping and experimentation, where the ability to "test drive" the software with minimal costs and administrative delays can be important.

Ultimately, the Defense Department CIO leaves it to individuals to determine which software best meets Defense Department requirements in a given scenario, but the memo hardly reads like neutral guidance. This is consistent with a wise policy of preferences, not mandates, for open source.

It's also an indication of much more Defense Department open-source adoption to come.

(As an aside, special thanks to John Scott for alerting me to this news, and for his work with the Defense Department to help this happen.)

It boggles the mind, but it's apparently true: nearly half of enterprises think a software purchase is successful if the software is installed/deployed, according to a new study. If ever there was reason to believe there's room for improvement in enterprise IT, and billions of dollars to go with it, this is it.

Working software should be the starting point, not an end point.

According to a study recently released by Neochange, Sandhill Group, and the Technology Services Industry Association (TSIA), 45.3 percent of the 353 IT professionals surveyed call a software purchase successful if "the software is deployed/installed."

No, this isn't enterprise IT's only criterion for software success. After all, 75.4 percent pegged their aspirations a bit higher: "Business benefits realization (cost reduction, revenue generation, etc.)." (Note: respondents could choose more than one answer; hence, the results don't add up to 100 percent.)

But it's scary that the software industry has conditioned IT buyers to expect so little. No one should claim victory on the basis of getting software installed, and we should be hitting close to 100 percent actually getting tangible business value for their software investments.

But then, more than half the survey's respondents admitted to not even measuring success criteria. Could this be a sign that IT executives, like the sign greeting Dante on his descent into Hell, have abandoned all hope of getting real value for their software spend?

Things may be getting better. As reported on Tuesday, Google and Red Hat topped CIO Insight's Vendor Value survey. Times are tight, and enterprises apparently can't afford to call software purchases successful just for running as they should.

Red Hat's chief of European operations, Werner Knoblich, says as much in an interview with The Register:

Microsoft was untouchable until recently, but now everything gets considered, which is one of the reasons [Red Hat's] results have been pretty strong. Clearly a downturn is never good generically, it's a bad thing. But our value proposition resonates pretty well all the same.

In the case of both open source and SaaS, enterprises don't pay a dime until they actually see the software working. Working software is the default. It's not cause for special celebration.

The Neochange, et al, survey also asks, "What is the most important factor for realizing value from enterprise software?" The answer "Gaining user buy-in and ensuring effective usage to deliver business impact" garnered a 71.7 percent vote. That's more easily achieved with open-source software, in particular, which allows enterprises to evaluate and use software long before they opt to purchase support or add-on services/software (if, indeed, they ever elect to do so).

In this way, open source improves upon typical IT success. With more than half of those surveyed reporting "less than 49 percent effective software usage," there's clearly room for a better model to optimize software utilization.

We can do better. We must. About 30 percent of those surveyed look to software to enable "business innovation, revenue generation, and market competitiveness."

Such enterprises are increasingly looking to open source to serve as the foundation for innovation. This probably wasn't the "fundamental economic reset" Microsoft CEO Steve Ballmer had in mind, but it will do. And it's about time.

Follow me on Twitter @mjasay.

For years, Red Hat sat unopposed at the top of the CIO Insight Vendor Value study. In 2008, however, Google pushed Red Hat aside with its low-cost, easy-to-use enterprise applications. This year, Red Hat has come roaring back to share the top ranking with Google.

Could this be a sign of CIOs' restive relationships with traditional vendors and an increasingly insatiable appetite for the cost and ease-of-use advantages of open source and software as a service/cloud computing?

The answer is almost certainly "Yes." It is telling that old-school vendors like IBM (ranked 20th overall), Microsoft (25th), Novell (29th), and Oracle (35th) are so far down the CIOs' list.

It is equally telling, however, that it is with these apparently less-preferred vendors that CIOs spend the vast majority of their IT budgets. Or perhaps that's the point? In other words, CIOs spend with such vendors today because they have to, but given their druthers, they're going to invest more money in Red Hat and Google going forward.

Red Hat and Google are still rounding errors in the overall IT spending picture, but CIOs seem to be signaling an appetite for more. It's not about reducing lock-in and other colorful marketing phrases, either: it's about great, easy-to-use software at a compelling price.

You know, the very thing that Microsoft used to win CIO plaudits for delivering.

From the report:

CIOs are more likely to try software as a service (than traditional, packaged software), which is better understood and simpler to use and requires no upfront investment in hardware or software.

This is the heart of the CIO uprising. And it's why low-cost, high-value companies like Intel (ranked first overall), Cisco/WebEx (ranked sixth and 11th, respectively), and Sun (sixth) are climbing the charts.

For now, however, Google and Red Hat rule the roost in the Software category of CIO Insight's annual study:

Both Red Hat and Google essentially offer the same thing: great software on a subscription basis. While this model often offers lower prices than competitors, it's important to note that "free" is not the value proposition here. (If it were, for example, Red Hat customers would be leaving in droves for Red Hat Enterprise Linux clone, CentOS. They aren't.)

No, the value proposition is customer control via the subscription model that enables less costly ways to buy into the software, and to turn off maintenance costs, if desired.

It's a winning formula, one that more vendors should consider adopting. Today IBM, Microsoft, and Oracle command the majority of IT dollars, but this survey suggests a rebellion is underway. Inertia can only support the traditional vendors for so long.

Open-source advocates for years have waved the banners of "freedom" and "no vendor lock-in" to sell the value of open source. It hasn't worked. Chief information officers don't buy vague concepts. They buy high-quality software at a compelling price. To better market open-source software to the world, open-source advocates need to match their message to what CIOs actually want to buy.

This is the heart of my argument about open source winning out over free software. (See Carlo Daffara's excellent response.) I wasn't really talking about licensing, but rather about ideological emphasis: a difference of degree, not direction, in terms of software preferences.

The problem I have with free-software advocates like Richard Stallman is that they think freedom is the primary reason to use open-source software. It's not. Utility is.

After all, we're not talking about essential human rights here. We're talking about getting work done with software.

Over the past 10 years I and the companies with which I've worked have sold hundreds of millions of dollars in open-source software/services. Not once have I been asked about "freedom." For that matter, I've also never heard a customer gush about reduced vendor lock-in.

To the contrary, I've met with CIOs and CTOs who have explicitly told me that this isn't a top consideration for them. Just last week, in fact, I moderated a panel at LinuxCon in which I asked senior IT executives from leading media companies if vendor lock-in is a primary motivation for using open source. Nope.

They have work to do. They want software that helps them get their work done and gets out of the way. That's what open source does.

For those of us who make a living selling services around open-source software, it's not enough to trumpet freedom. No one buys that. A CIO might intuitively know that open source and open standards tend to ensure lower exit costs (i.e., the cost of moving to an alternative vendor/software product), but her primary concern today is the need to squeeze more productivity out of a significantly lower IT budget.

If open-source vendors want to get her attention, they had better be pitching high value for low dollars, not freedom. Freedom is something that gets considered once the CIO has already recognized upfront cost savings in a fully operational IT project.

Even then, CIOs don't think of it as "freedom." They think of open source, as The 451 Group's Matt Aslett suggests, as "flexibility, performance, and reliability." These are the long-term benefits that drive CIOs to invest in open source long term, but they start with short-term cost savings and a successful IT project.

Forrester is now projecting a 9.3 percent drop in U.S. IT spending in 2009, according to ZDNet. Want to help a CIO? Find her a way to avoid the reported $6.2 trillion in IT project failure using open source, so that her more limited budget can still pay for the work she needs to get done.

This is what Novell did by helping The Burton Corporation shave 80 percent of its server costs by moving from Unix to Suse Linux Enterprise Server. That's real money. That's tangible. That's open source.

Don't sell her on "freedom" and open source as "magic pixie dust." Right now, she can't afford it. Freedom is something that she'll appreciate over time, and it will reveal itself in terms of additional development flexibility and lower budget requirements to get things done.

Sell the CIO on open source's value, in terms of cost and quality, as Forrester reports. That's the marketing message she needs to hear right now.

At the recent Red Hat Summit, company CEO Jim Whitehurst quipped that "flat is the new up," but he clearly wasn't referring to Red Hat. On Wednesday Red Hat announced another strong quarter, with revenue of $183.6 million for the company's second fiscal quarter of 2010.

That's a rise of 12 percent compared with the same period last year. Despite the company's against-the-grain performance in a weak market, however, it may need to invest more in its middleware business to ensure future growth.

But first, the good news. Of Red Hat's total revenue, roughly 85 percent, or $156.3 million, came from subscription revenue. That's an increase of 15 percent compared with the year-ago period. Putting this into context, IDC projects Linux subscription revenue to top $1 billion by 2012. Red Hat should claim virtually all of this at its current pace of growth.

Customers seem content to pay Red Hat for free software that they could get more cheaply elsewhere. While recent IDC data hint at hard times to come for commercial Linux vendors, it hasn't hit Red Hat. Not yet. The company is still a darling with CIOs.

And it may not for some time, with Red Hat reporting deferred revenue of $581 million, up 17 percent compared with the same period last year. The company is increasingly profitable, too. It reported net income of $28.9 million, or 15 cents a share, compared with $21.1 million, or 10 cents a share, for the year-ago quarter.

As part of its quarterly earnings call, Red Hat executives revealed a range of reasons to think its business is on track:

• All top-25 customer accounts renewed, and at 120 percent of the prior year's value. Most customers are expanding their adoption of Red Hat, and more and more are upgrading to Advanced Platform.
• Only three of its top-300 customers up for renewal didn't renew in the quarter, and two of those have returned to Red Hat after the quarter closed.
• Two deals were over $5 million, while 10 deals hit $1 million. Red Hat EMEA (Europe, Middle East, Africa) closed its biggest deal ever in the quarter.
• Of the top 30 deals, 23 included Red Hat Enterprise Linux (RHEL) Advanced Platform, and five included a JBoss component. This suggests that Red Hat's big customers are upgrading to Advanced Platform, according to Red Hat CFO Charlie Peters.
• JBoss continues to grow much faster than the core RHEL business.
• Deal length extended to 22 months from 19 months last quarter, reflecting
• One former Red Hat customer, a large financial services company (almost certainly Credit Suisse), dropped Novell's SUSE Linux and returned to Red Hat with a big order in the quarter. Credit Suisse is one of the companies Novell pulled away from Red Hat by using Microsoft-subsidized coupons, but Peters indicated that the customer had returned because of Red Hat's superior value. It appears that Red Hat is a better value than free.
• Red Hat is taking share from its competitors rather than seeing an increase in net new server purchases.

Despite the mostly sunny skies, Red Hat's slowing revenue growth remains a concern. The trend kicked off in 2005 and has continued apace since then despite a brief respite in 2007, as The 451 Group reports.

Of course, as Red Hat gets bigger, and as the economy remains stagnant, it's normal that Red Hat's revenue growth will slow.

But it's also normal that as it slows, companies like Red Hat will look for increased growth beyond their core businesses. Oracle is perhaps the most obvious example of this.

Red Hat doesn't need to get into video game consoles (e.g., Microsoft's Xbox) or hardware (e.g., Oracle's pending acquisition of Sun) or a variety of businesses far afield from its core infrastructure business. After all, Red Hat clearly has a lot of room to grow its JBoss/middleware business, and arguably needn't acquire its way to that growth.

But it does need to significantly change the way it views its channel partners.

Red Hat's traditional Linux partners are absolutely the wrong group to be selling its middleware offerings, a fact that took Red Hat some time to digest. Now, however, Red Hat seems to be getting the picture and has launched its Catalyst Program to sell turnkey open-source solutions through a growing ecosystem of value-added resellers (VARs).

Catalyst, however, is still in its infancy. It remains to be seen whether this program will stick, as Red Hat has moved away from ecosystem efforts like its Red Hat Exchange in the past.

For Red Hat's sake, it should stick with this one. Through Catalyst and other means, Red Hat needs to place more emphasis on the world outside of Linux. The company believes that virtualization and cloud computing are big opportunities, and they are, but these are mostly ways to build upon RHEL, rather than ways to extend its reach into fast-growing, diverse markets.

Red Hat is an execution machine and will undoubtedly be able to continue to grow its Linux business, and possibly to accelerate that growth again through enhanced investments in virtualization and cloud computing. But the real growth for the company is a bit higher up the stack in its middleware business.

Peters said that the company is investing significantly more in JBoss than RHEL, proportionate to the revenue each brings. That's good, but also obvious, given that Red Hat's JBoss business is comparatively small to its RHEL business. It may be time to invest even more in JBoss.

A large percentage of IT projects fail, and one big reason is the nature of the traditional software acquisition process. Buyers typically purchase software based on faith (demoware), with acceptance periods built into contracts to provide escape clauses if the software doesn't work as advertised. Open-source software, however, with its "try-before-you-buy" option, provides a better way to increase the odds of a successful IT project, while simultaneously lowering costs.

Enterprise software is hard, and made doubly so when million-dollar decisions must be made about software that has not been tried beyond a sales engineer's slideshow. It's therefore not surprising that Gartner Research Vice President Tony Bell recently suggested that "more than 50 percent of large Enterprise Content Management (ECM) projects fail if less than six months are spent on vendor choice and planning."

The real surprise is that any such projects succeed. Faith is great in religion, but it's a poor policy for enterprise software projects.

Now consider the open-source alternative. Sales cycles for open-source companies routinely average 60 to 90 days, versus the six to nine months (or longer) that proprietary software sales cycles last.

The process for open-source companies is so fast because the prospects start using the software long before they contacted the vendor. On average, I'd put this pre-evaluation duration at three to six months.

In traditional software sales cycles, you have to invent prospects' interest, nurture it along, and then close the deal, all without the customer really getting to experience the software. This can result in very expensive failures.

In open-source sales cycles, you don't really interact with a prospective customer until she has experienced the software for herself and wants something more, like a support subscription.

This is a tremendously powerful side effect of open source.

No, not all open-source software will be right for a given enterprise's requirements. But given the transparency of open-source software, would-be buyers should know well before they write a check and, worst case, they can stop paying their subscriptions if project priorities change or the software stops fitting their needs.

IT spending may be tight, but chief information officers plan to increase their budget allocation to a select group of virtualization vendors, including VMware, Citrix, and Red Hat, according to a Goldman Sachs CIO survey released Monday.

It's not surprising that virtualization is top of mind and wallet for CIOs, but things look particularly rosy for Red Hat, given its position as the market leader in open source and a strong challenger in virtualization.

While the percentage of CIOs expecting to increase IT spending has grown since Goldman Sachs' last survey in June 2009, a full 69 percent expect to maintain or decrease their IT spending.

Against this backdrop, Goldman Sachs sees Red Hat boosting its share of IT spending as the open-source leader claims the lion's share of a Unix-to-Linux server shift that "remain(s) in the early innings." Equally important, Red Hat is seen as a critical integration and distribution point for other vendors:

Red Hat is positioned well for the emerging cloud-computing ecosystem, given its open-source background and current positioning in data centers, including enterprises as well as cloud providers such as Amazon. In addition, Red Hat's strategic importance to others is also increased by its platform capabilities that provide a beachhead for many other software products into the corporate data center. That being said, cloud computing remains a nascent opportunity with little revenue contribution to date and an increasing competitive landscape.

To date, Red Hat has mostly resisted the temptation to expand its product portfolio beyond the operating system, and directly adjacent opportunities like virtualization and cloud computing. However, as the company further strengthens its balance sheet and grows in confidence, we should finally see Red Hat use its dominant brand to give CIOs more reasons to pay Red Hat money.

Intriguingly, Red Hat may be pushed to this step by the increasingly ambitious VMware, which has far more cash and a strong interest in being the foundation for enterprise's cloud-computing technology. According to the Goldman Sachs report:

VMware is a leader in three important growth themes in IT: server virtualization, desktop virtualization, and cloud infrastructure. We also believe that as virtualization penetration increases, the company has an opportunity to take significant share of the large systems management software market. Microsoft's increasing focus on the space is a risk; however, our latest checks give us greater confidence in VMware's customer loyalty and the company's significant technology lead. We also see room for significant ongoing margin expansion as the company matures.

With the recent acquisition of open-source vendor SpringSource, VMware can deliver on the powerful "Build-Deploy-Manage" mantra that SpringSource championed to its 2 million developers.

Both companies should thrive as IT budgets remain lean. But which will ultimately benefit most is a question of execution and ambition.

Follow me on Twitter @mjasay.