The Open Road

Cloud computing is still more attractive to venture capitalists than it is to enterprise IT buyers, and that's unlikely to change in 2010. As IT buyers warm to the idea and implementation of cloud computing, 2010 is going to prove to be a very big year for cloud-computing M&A as big-fish vendors like VMWare, Microsoft, IBM, and Oracle round out their cloud product portfolios with little-fish innovators.

Computing (and M&A) heads for the cloud

Some, like Oracle CEO Larry Ellison, suggest that cloud computing is simply a fad, one that attempts to solve many of the same problems that SOA, EDI, etc. already attempted to fix.

Tell that to the buyers. Gartner expects the cloud-related SaaS market to top $8 billion in 2009, which suggests that real customers paying real money.

They may not be paying enough, however, to support the mushrooming cloud vendor marketplace. Not yet.

Industry insiders are predicting a shakeout as pre-recession venture funding runs out for many of the early cloud vendors, forcing them into the arms of buyers or bankruptcy courts.

This is the inevitable separation of wheat from chaff, and it's a very good thing for an industry that has been long on hype and short on delivery to date.

But don't confuse the hype with vaporware. And don't for a minute think that any of the big (or small) vendors has a complete offering yet. As IDC research director Dan Yachi posits:

Cloud computing is more than just buzz. It is here to stay and is expected to take increasing shares of total IT spending worldwide. From a VC perspective, the even better news is that cloud computing is still far from maturity. There are many technology gaps that are not yet filled, especially in the areas of cloud enablement, management, monitoring, and security. In particular, VCs can find investment opportunities in start-up companies that develop solutions for hybrid cloud, which is expected to experience increased demand over the coming years.

Cloud computing offers real advantages, and has attracted a significant array of pent-up demand. Start-up vendors like Cloudera, VMOps, Rightscale, and others are inundated with requests for pilot projects as enterprise IT dips some very big toes into the cloud-computing water.

Indeed, it is start-ups like these that will help bridge the gulf between cloud hype and cloud practice in 2010, as the big vendors round out their offerings with the start-ups' technology.

Who will be bought? Those that solve real-world IT problems, not simply those that offer enterprises the ability to build private clouds or give them an on-ramp to public clouds.

Take VMOps, for example. The company's product suite enables service providers and others to build out private clouds. Where it becomes particularly interesting, however, is in the details.

While it sounds great to build a private cloud within an enterprise, the reality is that its resources will be funded by a number of different groups. There's no such thing as a common pool of funding in big enterprises. Among other things, VMOps has management tools for handling billing/resource allocation within private cloud deployments.

This sort of real-world understanding makes its cloud tools much more practical and, hence, much more interesting than those from competing vendors that may solve the technical difficulty of building a cloud but overlook the practical problems of managing it on a day-to-day basis.

Or, as Appiro predicts for 2010, "The real innovation will be in the business of cloud computing, not the technology."

This is why 2010 will be the year when the big vendors buy up innovative start-ups, in terms of both technology and business acumen, that help to make cloud computing reality, not theory, as cloud computing leaves the labs and becomes accepted practice in forward-looking enterprises.

It's a trend that should make enterprise IT very happy...and venture capitalists even happier.

2010 is promising to be a big year for technology IPOs, but will open source join the party? Probably not. Not yet, anyway.

Noted finance blogger Paul Kedrosky speculates that "it may start with Twitter, or Facebook, or Zynga (or even Yelp), but an IPO wave is coming and all it requires is a Netscape moment."

While I (along with Tom Foremski) believe there's more IPO smoke than fire, it does feel like we're due for a big year of technology IPOs. "Big" as in "more than the last few years."

I guess that would require just one. Or so.

But what about open source? It seems clear to me that we're entering a phase in commercial open source when the best businesses will grow, rather than explode into $300 million to $400 million acquisitions. (Yes, I'm weeping as I write this.)

Ingres CEO Roger Burkhardt disagrees. As he writes in Dr. Dobb's Journal, 2010 should see the IPO of a non-Linux open-source company:

The growth rates of certain open source companies has been impressive (50%+). We also believe a few have crossed the Wall Street friendly $50 million in run rate Billings barrier. The investment community is itching for new ideas and open source has been a theme (along with cloud computing) that resonates well with investors due to its highly visible model. The open source Enterprise Content Management (ECM) space has been hot and we would not be surprised to see an IPO candidate emerge from that area in 2010.

I don't think so. I don't believe we'll see an open source IPO until a company crosses the $100 million threshold, and we're simply not there yet. Growth rates are great. SugarCRM, a company I advise, is promising 100 percent growth in 2010. But profitability and long-term proof of company viability, as measured by revenue, is what will sell to institutional investors.

Hence, I can't see a still-skittish Wall Street buying into an open-source IPO in the absence of the psychologically pleasing $100 million revenue figure.

Once we get an open-source company in that frame, I think we'll see a real boom of open-source IPOs. With the cost of IT project failure estimated at $6.2 billion, and open source serving up a great remedy, the conditions are right for the market to embrace open source.

Once that embrace translates into $100 million in revenue, we'll see Wall Street embrace open source again, too.

Open source is now mainstream and routinely used in mission-critical applications. For 99.999 percent of the people reading that statement, it's so obvious as to induce global yawning. But for Peter Gyorgy, chief information officer of GE's Consumer and Industrial division in Europe, it's apparently heresy.

Gyorgy is quoted by eWeek as follows:

I think open source is great for own internal playground type of things, but if it's running vital mission critical applications--networks running on open source for example--then that is a huge, huge risk to the organisation....

We are not here to be an IT shop, we are here to be the partner of a business and we shouldn't put businesses operations into risk by running very low cost solutions.

So much factual error, so little time.

First, it's ridiculous to suggest that because something is "low cost" it is inherently risky. Gyorgy seems to believe that the more he spends, the safer he is. Last time I checked, Google et al. were running their networks at more significant scale than GE, and all on open source.

Maybe Gyorgy simply doesn't like equal or better performance for less money. In this, he's apparently alone. The 451 Group's survey data has roughly 90 percent of the 1,700 IT executives surveyed declaring that they have realized cost savings with open source. These are IT executives that a few years ago might have shared Gyorgy's views on open source.

No more.

But Gyorgy needn't trust strangers. He could just talk with his colleague, Laurent Rotival, senior vice president and general manager of Enterprise Solutions, GE Healthcare who, in conjunction with one of the leading health care providers in the United States (Intermountain Health Care) and Red Hat, put together a Linux-based health care system that he describes as "state-of-the-art" and that "presents less risk for our customers, protects their total costs of ownership, and ultimately takes them from a legacy architecture to a state-of-the-art architecture."

Left hand, meet right hand.

Second, Gyorgy's assertions are ironic given GE's widespread use of JBoss, Linux (in GE Healthcare and elsewhere), Alfresco, MySQL, and other open-source projects, in Europe and globally. Contrary to Gyorgy's assertion, these aren't "internal playground type" applications. Some of them are mission critical by anyone's standards.

I am personally familiar with several of these.

So is Gyorgy's boss, GE's global CIO Gary Reiner. Reiner not so long ago purchased an enterprise subscription for MySQL when he discovered that GE was running MySQL all over the place, and not solely for internal "playground" sort of applications.

Apparently, no one sent Gyorgy the memo that spells out areas in which GE is actually sponsoring open-source projects (like VTK), in addition to its broad adoption of open source. I suspect Gyorgy isn't the only one to have missed the memo. After all, the CIO is the last one to know.

A recent survey suggests that CIOs are loosening the purse strings on IT spending. IT vendors may want to hold off their celebrations, though, because much of the spending appears to be headed for deflationary forces like cloud computing, virtualization, and their kissing cousin, open source.

An economic rebound never looked so dire.

That's unless you're an IT buyer, of course, suggests a new report from Goldman Sachs. In this week's report, titled "A Paradigm Shift for IT: The Cloud," Goldman Sachs said it expects that pent-up IT dollars will flow in the short term to building out next-generation data centers (e.g., cloud computing). But in the long term, less money is expected to find its way into fewer wallets:

After the initial build-out, Cloud Computing could drive some headwinds for the IT industry, as a result of two factors. First, we see virtualization as a deflationary technology. Second, we see IT spending consolidating in the hands of fewer buyers--the Cloud providers, hosting vendors, and large enterprises. These factors will likely dampen IT spending growth due to greater utilization and buyer pricing power.

Even short-term build-outs may prove disappointing, however, as Goldman Sachs expects large enterprises to grow existing virtualization and automation technology adoption in the rollout of private clouds, shifting slowly to an embrace of public clouds over time. The chart below gives some idea as to when cloud computing will hit its stride:

Who wins in this scenario?

According to the report, Red Hat stands to benefit from the cloud-computing craze. ("Red Hat is well positioned for the emerging Cloud Computing ecosystem, largely due to its open source background and current ubiquitous deployments in data centers, including enterprises, as well as in Cloud providers such as Amazon," the report states.)

But the real beneficiaries will be...the same old crew. "[K]ey suppliers for internal Clouds are likely to be those that have the most complete portfolio of hardware, software, and services," including IBM, Hewlett-Packard, Cisco Systems, EMC, and Oracle.

New boss...same as the old boss.

The other beneficiaries are the start-ups that provide critical components of cloud computing, with an emphasis on management tools. Here we may see open-source companies benefit, including Reductive Labs (Puppet project), Cloudera, and the two rising private cloud companies, VMOps and Eucalyptus, among others.

While open source doesn't factor heavily into this particular Goldman Sachs analysis, the firm has before called out open source's role in wringing more value out of fewer IT dollars. Open source is a primary driver of the global reset in IT spending expectations.

With less money flowing into the pockets of fewer vendors, we can expect to see both increased consolidation and fierce competition for the IT spending that remains. Those vendors that can help CIOs do more with less stand to benefit from this shift to low-cost, high-value computing.

And those that can't? Well, let's just say they may pine for the good old days of the global recession.

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.

The world is open source's oyster.

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.

(Credit: Amazon.com)

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:

Top 11 ISVs for Value in Software Category

(Credit: CIO Insight)

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.