Open-source companies chase steady money

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company Gartner. "If you can get someone to pay you 15 or 20 percent a year after they've bought the software, it's a really good gig if you can get it."

The commercial open-source business model turns the traditional software purchasing equation around. Customers may pay some up-front fees, but the bulk of costs are in the form of ongoing services.

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With proprietary software products, usually only the software purveyor provides maintenance services. With open-source software, many more service providers can offer support.

For example, JBoss offers support services for its line of Java-based infrastructure software components--the market area that is seeing perhaps the most activity. But SpikeSource, an open-source services start-up headed by Kim Polese, intends to offer subscription-based maintenance services for bundles of products that include the JBoss application server.

Analysts say that open-source software requires an industry of services companies for its adoption to spread. Some open-source products have been created by a relatively small group of programmers and do not have round-the-clock support organizations. Corporate customers require some sort of vendor to rely upon.

Also, a shift in buying habits is fueling interest in annuity-style contracts between providers and corporate customers. Increasingly savvy customers are shying away from committing to large-scale projects that consume millions of dollars and take years to complete.

"Enterprise customers, in particular, continue to be willing to pay fair and reasonable prices for software. The difference with the old days is that they don't want to pay for it all up front," Mitchell Kertzman, partner at venture capital firm Hummer Winblad and former CEO of Sybase, said at a conference in February. "They want to pay for it as they realize the value and get return on investment."

Billion-dollar open-source company?
Of course, regular payment schedules for software are also available outside the services-intensive realm of open source.

Established companies such as Sun Microsystems and Computer Associates International charge for products on regular billing schedules. Sun, for example, charges $140 per employee per year for its Java software bundles. Similarly, software-as-a-service companies, such as Salesforce.com, charge per user per month.

Using the recurring contract model, which has been around for decades on mainframe systems, works better than relying on large license deals, proponents argue.

"From a management point of view, if you do it correctly you can build a better forecast into expenses and revenue flow," said Matthew Szulik, CEO of Linux distributor Red Hat, which relies on subscriptions. Instead of spending the end of every quarter trying to land big deals, the subscription approach "allows you to focus on strategic issues," he said.

Like other open-source companies, Red Hat is regularly questioned about whether it can rapidly grow its business without incurring substantial up-front costs.

Support and maintenance contracts require that trained technical personnel are available to handle glitches that may occur at any time of the day. Increasing that support infrastructure can be difficult without hiring many people and incurring great costs.

Szulik's response is that the company offers services efficiently online and that its gross margins are about twice as large as that of traditional services companies.

Similarly, SpikeSource has developed a "process automation" application that will send out regular updates of software over the Internet to corporate customers. JBoss, meanwhile, has chosen to focus all of its services work on support, dropping other services, such as up-front installation and training.

But even as open-source and other software companies target the substantial amount of money spent on ongoing services, some questions remain over how sustainable and big a maintenance-dependent business can be.

"It's one thing to be a 5, 10, 20 million-dollar company--it's another to grow that to be a billion-dollar services company," said Gartner's Driver. "It can be done, but it's difficult to do and maintain quality."

[TheMidnightCoder]

Neat spins...

It sure sounds like "Pay Me instead of Them!"

[Richard G.]

If it's cheaper...

Well, if paying "Me" is a fraction of the cost of paying "Them" for the same type of service, who do you think companies will reward the contracts to?

[David Arbogast]

Summary with no support

The article summary suggests that it remains unclear whether smaller open-source outfits will be able to grow their businesses effectively. Yet the entire article seems to be based around the quote:

"Open source creates a competitive market for support and maintenance contracts," Sebastian said. "For the first time, you can build a successful business by being great at that, rather than just being mediocre."

To me, this seems like an extremely skewed perspective. Open source did NOT create the market for support and maintenance contracts. This is NOT the first time business are being built based on support services.

The support business has been alive and well for many years and those companies have grown, but not nearly as fast as traditional software companies. Why? Simple. If you *sell* software, AND obtain maintenance contracts, you have multiple revenue streams.

What open-source has effectively done, is remove one of the two primary revenue streams from the software business. This is not good for the industry, or for workers who need jobs, and is a detriment to open-source support companies competing with more traditional "sell and support" software companies. With open-source still trailing far behind proprietary software in total installations, how is it possible for open-source software companies to do any better than traditional "sell and support" companies? It simply does not make sense, unless A) open-source dramatically passes proprietary software in popularity, B) All those open-source users are willing to pay for support, AND C) support costs equal or exceed the alternative total cost of "sell and support."

Selling at a reduced price (or giving software away) is a decent way to grow market share. But if the question is about support companies being able to do as well as other companies, then ultimately support revenues will have to match total revenues from more traditional companies. Otherwise, the shift merely decreases the size of the overall market and reduces the amount of money available for good employees.

Open source founders never had the intent to create a new market that was more financially competitive than what already exists. Why should we be surprised when support companies start realizing the limits to their growth potential? The focus, was to propel technology at the expense of business.

Think it again my friend

Selling software is a "decent" way to make a living you say?, so you think that is "indecent" to profit from adapting Opens Source solutions to business organizations or communities where the commercial software companies have no interest?. I totally disagree with you.

I live in Mexico, there are communities in Michoacan State that talk purhépecha language, no commercial software company will EVER do a versions of office or an operating system in that language.. but I can organice the community teachers that can speak spanish and purhépecha and make a purhépecha version of Open Office or Linux.

I could sell the PCs and charge the local goberment or the state's goberment for doing that and for mantaining small computing labs on the small towns of the sierrra purhepecha. I dont see the indecent part of this.. and I only see benefits for everybody.. People could mantain their cultural identity while entering into the digital era....

Small business in Mexico have a lot of pirated software.. they would like to be on the right way but the costs are just to hig.. they preffer to have pirated software than to dedicate they entire revenue to pay licencees and anual feeds for software. Bussiness with Open source can offer a solution.. there are many small Open Source systems that can be "good enough" for small bussiness and if I charge for an integral service of accounting, software mantaining and general managment that could be akiller service that Microsoft Oracle of SAP will never be interested in providing.. so asu you see there are a lot fo DECENT wasy to profit from Open source and services.

Greetings from Mexico