November 7, 2005 4:00 AM PST
Open source, open wallet
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Perhaps more significantly, an active community of users helps sell revenue-generating products and services. By giving away entry-level products, potential customers can try out the software without a long, complex sales process. That dynamic can dramatically lower the cost of sales and marketing for a provider.
SugarCRM, for example, does not employ direct sales people, who are typically highly paid. Instead, the users of its open-source product are the primary source of sales leads, CEO John Roberts said. A smaller sales and marketing budget allows it to divert its resources toward engineering, he added.
There is a drawback. By the same token, open-source companies can be slowed if an active group of customers switches to another product, said Winston Damarillo, the CEO of software developer Mergere.
There are questions about other aspects of the open-source business model. For example, if a company relies entirely on services revenue, it will likely need to have a high-volume of customers, analysts said. By contrast, small closed-source providers can get off the ground serving a small number of customers with expensive products.
"There are many open-source business models, and every one of them is an experiment," said Andy Astor, CEO of EnterpriseDB, a database software maker that recently received funding. "A support-only (revenue model) like JBoss has is a risky model."
Instead of charging an annual support service fee on a free product as many companies do, EnterpriseDB uses a "plain old software license," Astor said. The only difference with closed-source providers is that the EnterpriseDB database is based on PostgreSQL, an open-source product.
And exposing source code introduces an "inherently risk in the business model," said Bill Schnoor, partner at law firm Goodwin Procter, which represents technology companies.
Despite these risks, open-source products, notably the Linux operating system, are already mainstays in corporate data centers. Now customers are using other products, including databases, middleware and packaged applications.
Information services company Informa, for example, decided to use an open-source content management system from Alfresco Software, a company founded by document management industry veterans. The software itself uses a number of open-source components, such as the MySQL database and development products Hibernate and Spring.
The Alfresco system serves most of the company's needs, providing the "identical stack" as existing products at a cost that is three orders of magnitude lower, said Bob Hecht, vice president of content strategies at Informa. "It got so that (the choice) was a no-brainer," he said.
Echoing those sentiments, Ron Rose, the chief information officer of Priceline.com, said that the company has become "predisposed" to buying open-source products because they of the "economic benefits." A vibrant community behind a product also ensures a long-term road map, he added.
Goodwin Procter's Schnoor puts the spike in interest in open-source software in the context of big technology shifts that have already occurred, such as the Web. The attractiveness of the open-source model will likely create a surplus of open-source suppliers, Schnoor said, and he expects many more companies to be launched. But that's typical of all major changes in the software industry, he said.
"Are there a lot of spears that will get broken along the way? Absolutely. It happens every time," Schnoor said.
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