The open source volume myth

There's a belief rampant in the industry that open source only works (as a business) in volume. That is, as Simon Phipps has pithily stated of Sun,

What matters to us is to create volume, and when we create volume, we'll create revenue.

This is true, so far as it goes, but it turns out that it doesn't necessarily go as far as we sometimes think.

The thinking goes that open source = cheap and lots of it. I prefer to think of it as higher value at lower cost, and generally more of it. But you don't have to have millions of downloads to churn out millions (or hundreds of millions) of dollars of sales.

Much depends on the application you're selling. Much depends on the kind of customer to which you're selling. All depends on the particular business behind the project: the people, the experience, the ambition.

My company sells to the Global 2000 with a fairly high ASP. MuleSource is much the same. Some of our open-source peers have built excellent businesses with lower ASPs focused on the SMB market. In fact, I'm aware of companies in the same markets, that started at roughly the same time, with very different customer and deal size profiles. Open source clearly is not one revenue model/business model. It supports many.

Even companies that have built open-source businesses on the high volume/low cost model, like JBoss, have not remained the same over time. JBoss, as I've shown elsewhere, didn't have linearly increasing downloads (volume) leading to linearly increasing revenues. Rather, the downloads tapered off but revenues accelerated against them (based on a superior brand, product mix, and company maturity).

In sum, you don't have to have tens of millions of downloads to build a viable, vibrant open-source business. You need an excellent product and clear value to sell to a customer. How you do that will determine your customer demographics and deal profile, not open source by itself.

[douglasdooley]

Re: rebuking the volume myth

I don't know, Matt, it would seem that volume is a pretty subjective word, but assuming that we have some common understandings in enterprise software that volume is approximately a barometer of at least 1,000 downloads/month, and executing is converting those downloads long-term at a 1% rate (just estimating here), I would think that ASP is the least attractive measure of a successful middleware company, and I include Alfresco in that market...

You need many customers and a diversity of customers for a multitude of reasons, not least among them for best practices and building up a scaling model, that attracts new members in to your community...what made JBoss successful is not just a revenue model, but a ubiquity model, who cares if you make $25M out of a $1B market, if you don't have growth projections...in fact, I would think that the primary competitive reason they sold out was that they were getting challenged by Glassfish and Geronimo on downloads, not because their conversion rate had fallen...

For start-up OSS companies, when competitors come from angles that are well-established such as Microsoft, Oracle, and IBM, volume is the pre-dominant determining factor for planned success...I won't even mention the problem when big customers move away from your platform, for this only proliferates proprietary architectures...in short, i disagree with your assertion and if I was your VC, I would seriously question your theory, to the extent that volume trumps ASP every last day software is sold...

[Matt Asay]

Good points, but...

...consider the following: Documentum has roughly 1500 customers (or thereabouts). That's not very many. Adobe, in the consumer space, has hundreds of millions (at least, of users of Acrobat technology). Yet the both make the same amount of money (or in the same ballpark). Different businesses, different price points, at different volumes.

I don't think I'll ever have the same volume as MySQL. But I don't need to to make $1 billion in sales. Do I need volume? Yes? I'm just arguing that all open source companies don't need to plan on 1 million downloads before they break even. Some of us are getting much better conversion rates than that.

That's all I'm saying.

[mrhinkle]

It's not total downloads but Relative Users

I agree you don't need tons of volume to have a successful open source business. You absolutely need an excellent product that offers value. However, I think that you gain a huge competitive advantage by having a much larger user base than the alternatives even if the majority of that user base are not paying you a dime. That relatively large user base gives you leverage in building your brand, your product, and allows you to become more efficient in many ways compared to proprietary solutions.

Take your example, by having 10,000+ users (per your Open Source Barometer) versus a Documentum user base that's a huge advantage for Alfresco. Of course in some businesses volume is key, I think for Sun and Java it made sense.