January 15, 2007 6:00 AM PST

Taking the plunge into open source

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More software companies are finding that the best way to make money with software is to give it away, cherry-picking open-source software practices for commercial gain.

On Monday, a small software company called Aras will release the code of its design application--written entirely with Microsoft technologies--and shift to an open-source business model.

For a small company faced with tepid growth, letting anyone download its application for free was a risk worth taking.

"We've been growing but growing at a slow and steady rate. It was our observation, and the board agreed, that enterprise software is on the verge of a big shift," said Peter Schroer, president of Aras. "In open source, what's left is the application layer, and we wanted to be the first to offer it, not the last."

Aras' decision to go open-source mirrors moves by hundreds of software companies adjusting to the popularity of open source, where a product's underlying code is freely available.

With an open-source business model, companies often charge for services, such as support and product updates, to paying customers while allowing unsupported customers to use the product for free--or the companies offer a free edition in addition to a higher-end, paid version.

The effect of open source has swept through different corners of the software business, most profoundly with the Linux operating system and products that cater to software developers such as development tools and infrastructure software used to run Web sites and business applications. Nearly all of the largest infrastructure software companies--including IBM, Oracle, Sun Microsystems and Novell--have adopted some aspects of open source.

A handful of other companies are trying the open-source model in packaged applications, including SugarCRM, which sells customer relationship management software, as well as enterprise resource planning (ERP) application companies Compiere and OpenMFG.

By going open-source, Aras is trying to grow revenue in a product segment called product lifecycle management (PLM), programs for coordinating the design and service of manufactured products. The software is typically expensive, and the market is dominated by a few large providers, including Parametric Technology, Dassault Systemes and UGS.

With open source, Aras hopes to make its software cheaper than entrenched vendors and easier to roll out to many employees within a company.

The plan is to forgo the license revenue it would have made from licenses and make it up, over time, with two-year support contracts, Schroer said. "It's a very disruptive way to bring a product to market."

Raven Zachary, an analyst at the 451 Group, said that most software companies choose to open-source just a segment of their product lines, rather than a whole-scale business model shift.

Whether these projects, whatever the form, will ultimately be successful financially is still unclear, but the market push toward some form of open source is strong, he said.

"You see some cases where going open allowed a company to get additional venture capital or additional customers. We haven't seen a failure yet," Zachary said. But "the barrier for a proprietary start-up is pretty high."

No quick fix
Adopting an open-source business model is not only a matter of cleaning up code for popular consumption and sponsoring a project to accept outside contributions.

Advocates of open-source businesses say that the loss of license revenue, particularly for pricey business software, has to be offset with lower operating expenses. Generally speaking, that means cutting back on sales and marketing.

Aras, for example, eliminated its sales positions and is replacing them with application engineers who will provide support to customers' nitty-gritty questions. Those are "the people the customers want to talk to anyway. They don't want to talk to a salesperson," Schroer said.

"From the day we announced (the open-source plan), even though we had not made any revenue yet, it gave us more marketing visibility than $10 million would have given us."
--Peter Zotto, CEO, Iona

Another company that decided to jump into the open-source realm is Iona Technologies, which sells integration middleware to large corporate customers.

In 2005, Iona decided to create an open-source project for its Java-based integration middleware. Last month, it began offering support services for those freely available products.

That decision to go open-source had some risk because the company, started in 1991, is a relative neophyte to open-source projects and has yet to prove it can earn money from a support-only business, said company CEO Peter Zotto.

But the move has helped make Iona, which was struggling financially, "relevant" in the marketplace again, Zotto said. By adopting some elements of open source, customers and other vendors see Iona staying on top of industry trends, he said. For example, Iona was invited to participate in important standards groups with other industry players like IBM, BEA Systems and Oracle.

"From the day we announced (the open-source plan), even though we had not made any revenue yet, it gave us more marketing visibility than $10 million would have given us," Zotto said.

Even Wall Street analysts have been enthusiastic with the plan, despite the potential lost revenue, he added.

CONTINUED: Forced hand?…
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