The Open Road

Canonical, creator of the Ubuntu Linux distribution, has taken its share of criticism for not being innovative enough for some in the Linux community. In 2010, however, Canonical's focus on design and packaging will come to be seen as a seriously shrewd strategy as it helps to take Linux to the masses.

The reason? The innovation that pays is changing, and UI matters more and more.

When we think of innovation, we normally think of traditional research and development (R&D), complete with a white-coated scientist or pizza-gobbling engineer.

As Apple, Google, and other highly successful software companies demonstrate, however, today's innovation opportunities may lie more in user interface than traditional R&D. Google's emissary to the start-up world, Don Dodge, hints at this in a discussion of the various email systems he has used:

[O]ver my career, my first email thing was Vax Mail, which was awesome at the time, it was revolutionary. I went from Vax Mail, to Outlook, to Lotus Notes when I was working for Ray Ozzie, then back to Outlook again, and now Gmail. Email is a pretty straightforward application. They have basically the same features, it's all a question of user interface.

Sure, there are differences under the hood between Google's Gmail and Microsoft's Outlook, but the innovation that matters most today may well be the "superficial" e-mail experience that these different systems offer.

Back to Canonical and Ubuntu.

Canonical's founder, Mark Shuttleworth, understands that innovation is shifting from core research to the user experience, as he's opined on his blog. He has set his sights high, not content to replicate the Windows PC or Mac experience, for example, but has instead insisted on surpassing it.

The money for Canonical is in packaging open-source technology, not necessarily in creating the technology in the first place. The Linux world should be grateful, given Red Hat's and Novell's focus on the data center.

Linux benefits when mainstream users buy into it. Or, rather, when they use it without thinking about "it."

No one cares that their TiVo devices runs Linux. It just does. No one cares that the Kindle runs Linux, either. They care about the functionality these devices deliver. That's the way it should be.

Canonical's opportunity is to make Linux so easy that it becomes completely invisible to the end user. And Canonical may well be the best positioned to do this, among its open-source peers.

Neither Red Hat nor Novell employs an executive to focus on consumer products. Canonical does. No other open-source company has had its CEO discard the executive mantle to "focus [his] Canonical energy on product design," as Canonical recently did.

Hence, perhaps no other open-source vendor is better positioned to capitalize on the rising (and changing) Netbook market or other open-source friendly consumer markets.

Red Hat dominates the enterprise Linux market. Let it.

Canonical could well be set to dominate the consumer Linux market, a potentially massive market that demands a single-minded focus on design. It's a big bet, but one that Shuttleworth is committed to making.

Someone needs to let the folks in Raleigh know we're in a down economy still. While much of the tech market lingers in the doldrums, Red Hat announced another strong earnings report for its fiscal third quarter 2010.

Here are some of the headline numbers:

1. Revenue of $194 million, an 18 percent increase year-over-year.
2. Subscription revenue topped $164 million, up 21 percent year-over-year (and 85 percent of the company's revenue).
3. Deferred revenue climbed 23 percent year-over-year to hit $619 million.
4. All 25 accounts up for renewal in the quarter renewed, and at 120 percent of value.

Small wonder, then, that the company elected to repurchase 1.9 million shares of common stock for $52.3 million.

While Red Hat's revenue growth rate has been sliding for some time, as The 451 Group has detailed, Red Hat's prospects remain bright. Piper Jaffray, for example, recently highlighted a range of factors contributing to its "Overweight" rating on Red Hat's stock:

Recent conversations with 40 Red Hat industry contacts point to an improved operating environment, an ongoing acceleration in the pace of Unix-to-Linux migrations, and Q3 results essentially inline with plan. We continue to see longer term catalysts for outperformance based upon the recently introduced virtualization products (RHEV), upsell to the premium priced Advanced Platform, adoption of cloud computing, and broadening awareness of open source offerings

In my own conversations with Red Hat executives, it's clear that the company has plenty of headroom in both its JBoss business (8 of the top 25 deals in the quarter included a JBoss component, and Red Hat CFO Charlie Peters said that it continues to grow faster than Red Hat's core RHEL business), but particularly in its virtualization strategy. Virtualization is effectively a way for Red Hat to sell much more deeply into existing accounts. Much deeper.

But Red Hat is also seeing traction in its nascent cloud-computing initiative. In the third quarter, Red Hat saw a major movie studio building a private cloud with its technology in addition to NTT choosing Red Hat for its cloud infrastructure, plus the signing of a six-figure Red Hat Enterprise Linux-based cloud deal.

Clearly, there is gold in the Linux hills for Red Hat, gold that doesn't seem to be running out, especially as Red Hat improves its ability to get free-riders (CentOS and unpaid RHEL users) to pay, as it did this quarter with two sizable "free-to-paid" deals. The only negative in Red Hat's quarter seems to be a back-loading of revenue, meaning that more deals closed at the end of the quarter than normal.

But Peters said that cash flow for the year would come in at the high end of his former guidance, so things remain on track.

In light of Red Hat's strong performance in its core Linux business, it's somewhat strange to see Novell reorganizing to emphasize its proprietary products instead of hitting hard on its still-solid Linux business.

But perhaps there's only room for one Linux vendor in the data center. Based on the last several years of Red Hat performance, that vendor appears to be Red Hat.

BUENOS AIRES--Open source has successfully navigated its first two phases of development and adoption. We're now entering the third, and possibly final, phase: the time when consumers of open-source software also become producers.

Can enterprise IT make the leap?

Billions of dollars in IT investment are at stake. Perhaps even more importantly, billions of lines of code could be, too. While significant software products are written for sale, arguably much more software is written by enterprise IT to run businesses as diverse as Safeway stores and Barclays banks.

Unlocking and distributing the value of that enterprise IT, developed to run behind the firewall, is the next big step for open source.

As Red Hat's general manager for Latin America, Julian Somodi, and Red Hat's Latin America marketing director, Martin D'Elia, speculated on Thursday at a lunch meeting here in Buenos Aires, open source's greatest value is unlocked when one moves from being a mere consumer of open-source software to also being a co-producer of such software.

It's a message Red Hat CEO Jim Whitehurst has been sounding for the past two years, and it may finally be catching on.

Today, enterprise IT is adopting and using open source on a grand scale. Gartner finds that 85 percent of enterprises are using open source today. (My hunch? The other 15 percent are, too, but the CIOs surveyed simply didn't know.)

The percentage contributing back? I've seen no data on this, but my personal, anecdotal evidence suggests that few enterprises contribute back to open-source projects, for a variety of reasons. Legal is probably the biggest, as enterprise IT weighs the risk of exposing itself to potential lawsuits from faulty or IP-infringing code.

This concern would appear more intractable had the vendor community not already navigated it in the second phase of open-source development. Vendors had the same concerns that plague enterprise IT today, and ultimately discovered that the value of open-source participation trumps its risk.

As a sign that we're coming to the close of this second phase, even laggards like SAP have announced significant progress in their open-source development efforts.

The same benefits that attracted SAP et al. will propel enterprise IT into this third and final phase of open-source participation, too.

Which benefits?

For starters, open-source software development offers a quicker path to resolution of bugs, a recent analysis finds.

It also enables finer-grained control and customization, as the French army has discovered with Mozilla Thunderbird, the customizations of which can be shared so as to offload the burden of supporting the code.

It might well be, as Gartner's Brian Prentice argues, that ultimately only vendors care about open source. But I think this view only rings true if enterprise IT remains blinded to the big benefits that derive from open-source participation, rather than mere consumption.

While not every company will have a great experience all of the time (witness, for example, the problems Farelogix had developing community around its open-source travel management point-of-sale tool), enough enterprises are experimenting that to suggest the third-phase train is leaving the station for good:

JP Morgan Chase led the way by open-sourcing its AMQP project. The Chicago Mercantile Exchange has also jumped into the fray with Linux. Reuters has its OpenCalais project, a project that is even being used here at CNET.

And so on. It's happening. It's real. And for those enterprises that jump into this third phase of open-source participation, the benefits promise to be palpable.

Whether you're an enterprise or a consumer, ultimately your big concern in buying technology is "Will it do what I want it to do?" Sometimes components matter, but most people most of the time just want something that works.

Gartner's consistently engaging Brian Prentice suggests this is already happening with open-source software. Vendors care about it because open source gives them high-quality, low-cost components with which to build solutions for customers. Customers may notice the lower price tag, but they don't invest much thought into why the price is lower.

I'm going to assume that at some point over the last 20 years you bought a car. So, how important was the car maker's use of just-in-time manufacturing to your purchase decision? I'm going to go out on a limb here and say it was of no consideration at all.

Well, I think we're fast approaching the point where open source to software will be like JIT to automotive manufacturing. While it will critical to the producers of software, woven into the fabric of its operations, it will be of no importance at the point of consumption.

As hard as this might be to accept, open source is not a value proposition in its own right.

As hinted above, this is mostly true. Customers do care about the things that open source offers (lower cost, higher quality, etc.). But they probably don't recognize (or care) that these benefits stem from open source, per se.

Consider the Web. Open-source software provides the fundamental building blocks for nearly all Web services like Facebook, Amazon, etc., not to mention the infrastructure for public and private clouds.

End customers aren't asking for open source on the Web or in the cloud. They're asking for well-managed services that solve their problems. It's the vendors who care, because it allows them to grow highly scalable businesses at a modest cost.

Indeed, many of the customer benefits of open source (i.e., the ability to view, modify, and redistribute code) disappear or get muted on the Web and in the cloud. This hasn't stopped customers from buying into the Web/cloud.

Red Hat may disagree. It's apparently betting that customers care about components in the cloud. Why else would Red Hat Enterprise Linux pricing be much more expensive than Windows on Amazon EC2, despite being much cheaper for on-premises deployments, as IBM's Savio Rodrigues finds?

But I suspect Red Hat will need to change its pricing, as the OS is even more commoditized in the cloud than it has been for on-premises deployments. Both Red Hat and Microsoft will race to the bottom in pricing, with the emphasis being on the applications that run on them.

After all, this is the thing that drives customers' purchasing decisions. Red Hat knows this, which is why it (rightly) makes a big deal of the huge ecosystem of applications that run on RHEL.

In the cloud, even more attention is focused on service that customers use. Open source, in such a world, is essential infrastructure, but it's infrastructure that every vendor shares or will soon share, making the battle all about end-user facing applications, and not about developer-facing open-source components.

This is a very good thing. It means we can get back to focusing on solving customer problems, rather than fetishing and battling over open-source licenses. It's about time.

Initially, it appeared that every successful open-source company would be swallowed up through acquisition. That may still happen, but as the mergers and acquisitions route dries up, it's increasingly likely that the best open-source companies could find themselves growing toward an initial public offering.

After all, they may not have any other choice.

JBoss, Zimbra, XenSource, and other companies rode an initial surge in interest in open source as a business and development strategy, each selling for hundreds of millions of dollars. Since that time the pace of acquisitions has slowed as would-be buyers hunker down and ride out the recession.

At the same time, open-source companies are reporting record revenue. My own company, Alfresco, has recorded 17 straight growth quarters since the company was founded in 2005, and we're joined by Funambol, Jaspersoft, and others that are reporting upward of 100 percent growth quarter over quarter.

Where does such sales momentum lead? Probably not to acquisitions. Not for many of these companies.

It's likely that within the next few years, the M&A market will open up again. But by that time many of these open-source companies will likely have attained a size that makes it easier for them to go public than to be acquired.

MySQL, which was topping $94 million in sales at the time of its $1 billion acquisition by Sun, is the exception to this rule. There simply aren't very many companies that can afford to spend $1 billion on an acquisition, which means that open-source companies will need to focus on being built to last, not built to flip.

Perhaps this won't sound appealing to the employees of Reductive Labs, Funambol, Pentaho, and other open-source companies. Like their Web 2.0 peers, they almost certainly would love to see a quick exit so that they can buy a cabin up in Tahoe.

But though it may not be ideal for such employees, it's arguably a very good thing for the industry, and for IT buyers. The industry could use another Red Hat. IT buyers, for their parts, would probably love to be able to buy from someone other than Oracle, IBM, and Microsoft.

So settle in for the mid-term march to profitable $100 million open-source companies. At current growth rates, we should start to see IPO action as early as 2012, and perhaps sooner.

Activists worry about the environmental cost of discarded mobile phones, personal computers, and other technology. Perhaps they should also worry about the swelling graveyard of start-ups and tech titans gone bad.

As Le Monde points out (in French), though businesses fail in all areas of the economy, technology ventures, and especially Web start-ups, prove particularly short-lived.

It's Joseph Schumpeter's creative destruction...in overdrive.

Le Monde suggests three reasons: the speed of innovation/evolution (AOL's walled-garden approach meets Yahoo's open-portal approach), the ability of incumbents to crush nascent competitors (Netscape meets Internet Explorer), and the shortcomings of business models (Skype: only $500 million out of more than 520 million subscribers).

These are good points, but perhaps there's another: technology companies are increasingly disposable because they're so darn cheap to create.

This affects start-ups and incumbents alike. For the latter, perhaps the negligible cost of starting a new company fosters the comparative disposability of such start-ups. As Bernard Dalle, a general partner with Index Ventures in London, notes, start-ups need only rent essential infrastructure like hardware and software, and that rent is dirt cheap.

Ideas that couldn't survive a $5 million to $10 million capital-raising process might well weather a friends-and-family round of $50,000...and expire shortly thereafter when the idea proves barren.

But it's also true of the incumbents: Gulliver-esque Microsofts can fight off most of the Lilliputians, but an increasing array of the pesky imps sprout into adulthood (e.g., Google, Salesforce, Facebook).

Unfortunately (or fortunately, depending on your market position), this process of creative destruction may well be accelerating, and open source is one of the primary fuels.

The Linux Foundation's Jim Zemlin insists that the pace and price of innovation today requires open source, a communal effort that isn't bogged down by the bureaucracy or cash constraints of any one company. He may be right.

That certainly seems to be one lesson to take from the success of Linux, Firefox, and other open-source projects, particularly those that are community-led, as opposed to company-led. It's hard to compete with a group of self-selected, highly focused developers who can focus on good code, not good financial quarters.

Now that virtually every technology company depends upon and contributes to open-source software, we may well be laying the foundation for even more industry innovation...and corporate bankruptcies.

Guess what? There's nothing we can do about it. Nor is there anything we should do about it, except focus on building long-term customer value rather than short-term start-up goofiness. That's the way to thrive in the fast-evolving world of technology, because it's the one thing that never changes:

Customers pay for value, and companies that consistently deliver real value acquire the most customers.

Tim O'Reilly points toward this in his call for developers to "work on stuff that matters." It's a reminder but also a warning.

Microsoft is still with us because it has delivered an amazing amount of customer value in its 30-plus years. The same is true of IBM, Oracle, SAP, and other industry incumbents.

But it's equally true of relatively new companies like Salesforce, Red Hat, and Google, which have eschewed gimmicky software and flimsy business strategies to give customers tangible, ongoing value. None of these companies sought an early exit through acquisition. None of them were content to build for the quick flip.

So, yes, technology may be a veritable boneyard of failed companies, and essential ingredients like open source may accelerate the demise of start-ups and incumbents alike. But those companies that use such ingredients to deliver above-average customer value are going to endure...and thrive.

Follow me on Twitter @mjasay.

Open source, like digital media, doesn't suck money out of hitherto profitable industries. Instead, the opening up of software and information simply changes where the money gets made.

This is obvious to the Googles of the world. It's probably equally obvious to the Microsofts of the world. The difference is that the latter can see the train coming but is powerless to stop it, and the former is driving the train.

The evidence for this is increasingly clear and is driven by a shift in how content is sold and consumed. The problem is neatly summarized by Google CEO Eric Schmidt in a Wall Street Journal op-ed piece directed at the newspaper industry:

[T]he Internet has broken down the entire news package with articles read individually, reached from a blog or search engine, and abandoned if there is no good reason to hang around once the story is finished. It's what we have come to call internally the atomic unit of consumption.

That newspaper was "the package," but is increasingly too slow and out-of-sync with how people prefer to discover news content. New packaging is rising, including Google News, that will shift who makes money on news content.

Reporters will still get paid. They'll just have a new employer on their payroll check. Maybe it will be Google.

News isn't dead. Paper is.

Think about what is happening in music. I could download New Order's "Regret" for free using LimeWire, but I bought it on iTunes because of the "packaging" which makes my experience easy, high-quality, and legal.

Still, the primary drivers are ease and quality.

Such packaging is worth a lot of money--and to an entirely new breed of vendor--as a quick look at Google's latest income statement suggests.

It's happening in software, too, particularly in open-source software. Red Hat is an example of a company that does a great job of turning software license into an ongoing service contract that enterprises buy. It does this by packaging the power of others' development in the form of a subscription, as Red Hat CEO Jim Whitehurst recently highlighted.

But Red Hat is just Open Source 1.5. Open Source 2.0 looks more like Google or IBM. For every dollar Red Hat makes selling subscriptions to use open-source software like Linux and JBoss, both Google and IBM make multiples of that dollar using open-source software to sell something else, something they've packaged in hardware or Web-based services.

The hardware is running open source. The services are based on open source. The money is made in the packaging of open source.

... Read More

President Obama is gathering 100 leaders from across the U.S. for his jobs summit in Washington on Thursday to brainstorm how to create new jobs.

While the list of invitees is heavy on academics, labor unions, and business, it appears only two people from technology made an early invitation list: Eric Schmidt, CEO of Google, and Jim Whitehurst, CEO of Red Hat.

FedEx. Yes. Nucor. Yes. But no Microsoft. No Oracle. No Salesforce.com. What gives?

Yes, Schmidt is a key advisor to Obama. But his invitation, along with Whitehurst's, could have a lot to do with the fact that Google and Red Hat, unlike many of their peers, are actively hiring.

Red Hat and Google have thrived through the recession, perhaps suggesting that they have a clue as to what it will take to create new jobs in a tough economy, one that has seen 23 straight months of job losses.

Intriguingly, Google's hiring may be crimped more by a desire not to aggregate all of the best and brightest than an inability to do so, as evinced by Google Vice President Bradley Horowitz's comments at Supernova this week.

When I asked Whitehurst on Wednesday what he thought the two companies had in common, he was quick to respond: "open source."

It's an interesting observation. While the two companies use open source in different ways, their business models are actually more similar than different, and both depend on open source.

As I've written, both Google and Red Hat (along with Facebook and other new-school "software" companies) depend upon and help to create abundance--of code, of Web sites, of information--and then make money by filtering that abundance.

It's a model that works, and it's a model that heavily depends upon and contributes to open-source software.

It would be going too far to suggest that open source is the critical component of any successful technology business today, especially as just about every company now includes it in their offerings in some way. Plus, CIOs have discovered other ways to stretch IT budgets and keep their workers on the payroll, as Gartner advises.

But the mentality of open source--more with less, sharing code and expertise--does seem to be a hallmark of successful technology companies, and particularly at Google and Red Hat.

In the past week, the open-source business community appears to have reached consensus: making money from open-source software is a bad model, but making money with open source is golden.

This can't be good for Microsoft.

Microsoft has long maintained that as the open-source industry has matured, it has become more and more like the commercial world it sought to leave behind. Fundamental freedoms of open source, like the right to modify source code, are signed away to secure a support contract with Red Hat or another vendor.

In many ways, Microsoft was right. Unfortunately for the Redmond giant, however, the new consensus should lead to less commercialization of open source, and more commercialization around open source. There's a big difference, and it's one that threatens to seriously undermine Microsoft and every other traditional software vendor.

That is, unless Microsoft responds in kind.

The new consensus

This consensus has been articulated by TechDirt, Redmonk's Stephen O'Grady, GigaOm, and here on The Open Road.

In fact, it's a drum I've been beating for over a year as Tim O'Reilly's wisdom on the topic finally caught up with my 33MHz brain.

There are fundamental, strategic benefits to open source: ease of distribution, friction-less adoption, costs, etc. There are also serious downsides when it comes to selling it: people chafe at paying for something if they can get it, or something similar to it, for free.

Such problems don't plague companies like Google, which distributes open-source software to drive more adoption of its proprietary advertising or SaaS services. Even Red Hat isn't really in the software business: not with its Linux distribution, anyway. It's in the business of providing certification and update services; of managing the complexity of an operating system.

It's a great business, but if you had to choose between Google's sales or Red Hat's, it's a no-brainer.

Microsoft's response

As this lightbulb goes on across the industry, companies like Microsoft, which insist on direct monetization of software, with little in the way of open-source complements to fuel adoption (or simply undermine competitors), are going to struggle. More and more companies will give away Microsoft's core business as open-source complements to their own.

So, here's a suggestion for Microsoft as just one good way to respond: open-source Internet Explorer.

Forget Office. Forget Windows. Forget all those other billion-dollar cash cows. Microsoft has no revenue directly tied to Internet Explorer, but IE is the gateway to the next phase of Microsoft's growth. Open-source it.

Cut Google's Chrome and Chrome OS off at the knees. Undermine Mozilla Firefox's raison d'etre. Give the European Commission a reason to love you.

More importantly, give developers something to embrace and extend. Microsoft has been steadily losing browser market share as Firefox eats into it. In some countries, like Germany, Firefox has even surpassed IE's market share.

Fight fire with fire. IE is still the world's most popular browser. Make it the world's most open browser, too.

Every Microsoft business could benefit from this move. Even if one assumes that Microsoft isn't ready to take the plunge and fully open up the development process around IE, here's some comfort: neither has Google around Chrome. Microsoft can still steer the IE ship, even if it were open source.

Microsoft needs a proactive open-source strategy, rather than the reactive policy it has had to date. Open source is a threat, yes, but it's a threat to everyone, especially as the industry collectively comes to grips with open source as a business enabler, rather than as a product to sell.

If Microsoft wants to win big in the new world of Web-based software, it needs a bold strategy. Open-sourcing IE is the starting point.

Follow me on Twitter @mjasay.