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MySQL, the open-source database maker that Sun Microsystems bought earlier this year, recently closed a $10 million deal, according to Sun CEO Jonathan Schwartz.

Schwartz noted the deal Saturday in a Twitter Q&A related to the Web 2.0 Expo.

A $10 million deal...that's big, even by Oracle standards. It's the sort of deal that big companies do with other big companies. Here's what Schwartz said:

...(T)he MySQL team just closed the single largest deal in the history of MySQL, a $10m deal to a global technology company. I'm pleased as punch with the progress we're making there, and we're deluged with inquiries from traditional enterprises (vs. Web 2.0 companies) wanting to know how to get enterprise support for a product they've used in development, but have, until now, not felt comfortable putting into commercial deployment. Now they feel comfortable deploying it - and we're right there with them to help make it happen.

All I can say is "Wow, wish I'd have got the commission check for that one!" A $1 million deal takes time but is doable. A $10 million deal? That is truly impressive, no matter where you work. (Congratulations to Mark Burton, Kerry Ancheta, and others who were likely involved.)

P.S. I'm guessing the deal was made with Cisco Systems, Google, or Yahoo.

Yes, the open-source database market is still relatively small (roughly $200 million in 2007, according to Gartner). But when The Wall Street Journal starts paying attention (subscription required), it's clear that the opportunity is huge. The Journal doesn't get paid to be sentimental.

Regardless, as Arjen Lentz opines,

...(D)isruptive technology tends to not take over the incumbent's market, but find or develop a completely new market, and indeed take over in that space. The question then is, does the incumbent's market remain intact, or does it change/evolve naturally and perhaps shrink or even completely disappear over time. Generally, the market-dominant incumbent continues to survive in a niche (where they are obviously dominant, but no longer in the market overall). In short, the market changes and with it its rules and demands.

Leading this market transformation is Sun Microsystems. Open-source databases (PostgreSQL and, especially, MySQL) may get a significant boost from Sun's involvement:

The Vikings sailed in small open wooden ships to discover America long before Columbus. Their 21th century counterparts, the Silicon Vikings, prefer business class when they travel the Atlantic.

The $2.6 billion acquisition of the Swedish IP phone company Skype by eBay in 2005 and Sun Microsystems' recent purchase of Swedish-Finnish open-source database company MySQL for $1 billion has raised hopes among Nordic investors that more big deals for VC-backed Nordic companies could be in the pipeline in the U.S.

(Credit: Silicon Vikings)

And the Vikings have a lot of cash. Venture capital firms from Sweden and Finland-- the Norwegians prefer to drill for oil and gas instead--had a record year in funding in 2007.

"The venture capital in Finland is growing very fast--2007 was the best year ever for fundraising," said Krista Rantasaari, secretary general of the Finnish Venture Capital Association (FVCA). She participated in a panel Wednesday of Nordic VC experts organized by the Silicon Vikings business network.

Together, Finnish venture capital firms collected new funds to the tune of $2.44 billion, most of it pension fund money. In Sweden, the sum was much larger, as the country belongs to the top slot for venture capital in Europe--$6.11 billion was raised for new investments. This means a lot of fresh money has to be put to work, despite fears that a downward business curve also will affect Europe.

Says Blomquist: "This recession will not be a solely U.S. phenomena." According to surveys, Swedish and Finnish VC companies are prepared to invest as much as in 2006 and 2007. Their eyes will be set on the horizon for later exits and for companies that might be ready for IPOs or buyouts when the credit crisis has blown over.

The venture firms are putting their bets on entrepreneurs with global ambitions. "We would never invest in a company that only has a Nordic strategy," said Daniel Blomquist, associate at Creandum Advisor in Stockholm, Sweden, during at the meeting at Stanford University.

With deep dark clouds gathering in the financial skies, people in the VC business still believe Silicon Valley is the place to be. There is very little Nordic capital invested directly in the Valley, where at this moment there is no shortage of capital available for start-up funding. The general trend is that Nordic VCs help start-up companies establish themselves in the U.S., preferably by setting up their head office here.

"Our best cases have had an aggressive entrepreneur who took the step and brought family and bags over," says Linus Lindberg of Vision Capital, which is based in Geneva and Burlingame, Calif.

One of the few funds bringing in Viking capital is Nexitventures, with offices in Saratoga, Calif.; Stockholm; and Helsinki, Finland. Nexitventures has a new fund with a first closing of 50 million euros ($76 million) and hopes to bring in as much as 150 million euros ($230 million) in the final closing stage. The capital is earmarked for early-stage companies in mobile and wireless technology.

According to Nexitventures partner David Aslin, economic troubles can actually help start-ups as big layoffs make it easier to hire new people and service providers, such as lawyers, will be cheaper.

"It could get easier to build, easier to start a company," Aslin said.

Generally, when a company wants to open a new market it needs to spend months to years dumping money into it to stoke demand.

MySQL and other open-source companies do market development a little differently. They dump software to seed a market. Lots of software.

Sun executive and former MySQL CEO Marten Mickos discusses this in a recent article with Computer Business Review:

I would say the ratio [between raw downloads and installations] is between one in one hundred and one in one thousand. If you look at averages you get useless information, because we might get 10 million downloads in China and we know almost none of them will pay anything in the near future. In the web 2.0 space, most will pay. In countries with a high GDP, many will pay, and in those with a low economy absolutely nobody will pay today.

The old model would have had MySQL spending money on sales and business development teams in these emerging markets, trying to figure out when and how to scale teams there. In open source, the customers download the software and tell you when they're ready to buy.

More efficient. More productive. More intelligent. And it's not just a matter of emerging markets. It's also a matter of emerging customers. Mickos goes on to say:

Some among us (myself included) once worried that IBM was joining with Oracle to besiege MySQL when it acquired SolidDB, one of MySQL's primary storage engines. It turns out, however, that IBM didn't have such nefarious plans.

In fact, it didn't (or doesn't) have plans for SolidDB at all, announcing this week that it is discontinuing development of SolidDB and migrating the project to Sourceforge.

Is this good or bad for MySQL? Probably neither, though having an orphaned open-source storage engine won't be hugely beneficial to MySQL. Maybe IBM just got bored with the project, or maybe it didn't want to lend any assistance to MySQL's new parent, Sun Microsystems. Anyone have a good read on what this means for MySQL?

Sun formally completed its acquisition of MySQL on Tuesday. I was fortunate to spend 15 minutes on the phone with Jonathan Schwartz, CEO of Sun, after the press conference.

I asked him a range of questions about criticism of Sun over Linux, as well as whether the MySQL integration would be as prickly as Red Hat's acquisition of JBoss was at times.

As usual, Schwartz didn't disappoint.

The Linux Foundation's Amanda McPherson recently called you out over Sun's continued push for Solaris despite Linux's rise. Why aren't you giving up?

MENLO PARK, Calif.--Companies used to give away pens, squishy balls and coffee cups to worm their ways into the hearts of customers. Now, they pass out database software.

That is, in a sense, Sun Microsystems' strategy with its $1 billion purchase of MySQL, said Sun CFO Mike Lehman at Sun's Global Media Summit here today. Very few customers have or will pay for MySQL, he admitted. However, they are installing it in large and growing numbers and that gives Sun an opportunity to visit them and try to sell them servers and storage systems.

In Sun's 2009 fiscal year, which begins in the second half of 2008, MySQL will add 1 percent to revenue, but cause operating income to drop by one percent, Lehman said. But in fiscal 2010, MySQL will increase operating income by one percent.

Sun CEO Jonathan Schwartz noted that more than 11 million customers have installed MySQL. Only about 1,000 of these will sign service contracts. "But almost all of them will buy hardware," Schwartz said.

So there you have it--the world runs on giveaways. History shows it works. too. Dell used to only have a minor share of the Intel-based server market. The company, however, began to give servers to large customers after they bought a certain number of desktops. Dell sales reps would then ask to see how well the servers operated when they visited. The giveaway helped Dell overtake Compaq in this space, both Dell and former Compaq employees have told me.

After a few turbulent years, Sun has been recovering and growing for the past year and a half and has regained its confidence. Overall, Sun as a company will see revenue growth of 5 percent in the second half of the fiscal year 2008, which is basically the first two quarters of calendar 2008.

"We are delivering a very healthy bottom line," said Schwartz. "We have made improvements in operating profitability, which have come as a result of income in business and gross margins and not cost cutting. We are now very orientated toward growth."

Schwartz said it's tough to gauge the impact of any economic slowdown in the U.S., but he was generally upbeat. "We're not immune to any economic trends, but around the world we see more companies spending more time and more money to use technology to expand their business," he said. The U.S. represents 40 percent of Sun's business.

Over the long term, he added, there's nothing out there that seems destined to slow down the pervasiveness of tech into society and business for the next fifty years.

Other notes from this morning's session so far:

•  Sun is seeing a lot of pickup in sales of its Sun MD, which is a data center in a shipping crate, said Schwartz. (It used to be called the Blackbox.) Roughly 80 percent of Sun's customers are asking about it, he said. One of the more interesting customers that has moved ahead with it is MTS, a cellular carrier in the Russian republics. The company needs the mobile data centers because of the wide geographic swath it covers and the lack of top-quality infrastructure across central Russia.

While most customers worry about the cooling systems in these mobile systems, MTS' biggest concern is snow. The system has to move into parts of Siberia that get 15 feet of snow. So Sun installed snow cages.

Other customers will ship these to Beijing for the Olympics to render footage from events.

•  Emerging markets will remain an engine of growth. Sun's revenues are up in single digits in the U.S., but 66 percent in Russia, 20 percent in Mexico, 26 percent in India and 18 percent in Greater China. Social-networking companies and Web 2.0 customers are buying, too. One social-networking customer has 10,000 servers already and is growing its IT spending 5 percent a week. That's on par with a financial services company, said Schwartz.

•  Sun will concentrate, said Schwartz, on three markets: enterprise infrastructure, Web infrastructure, and high performance computing. Expect to see Sun make more acquisitions in these spaces---Cluster File Systems was one of the company's more crucial acquisitions last year--and more emphasis on R&D in these spaces.

•  Schwartz also threw out one of those zany "what if" scenarios he's fond of. Think of Sun as a media company, he asked the crowd. It's intriguing, but ultimately it boils down to Sun will provide back-end hardware, software, and services to help publishers.

Jeff Gould has written an excellent piece on the big question arising from Sun's acquisition of MySQL: how will Sun make enough money on the deal to justify the $1 billion valuation? Gould's analysis is generally solid, but he misses a few key points.

First off:

Only time will tell. But in my humble opinion, MySQL's open source business model will make Sun's road to payback a lot steeper than if it had bought a software company with conventional revenues and profits.

Ah, the good old days! Just one problem: those days are gone. Pining for an acquisition of the old way of selling and distributing software is like pining for Mayberry: you can want it, but those days are never coming back. VCs aren't investing in proprietary Mayberry anymore. Except from the consolidators of 20th-century software (Oracle, IBM, SAP, Microsoft), customers aren't buying into the false Mayberry that left them destitute of innovation and options.

Open source is the way forward. But that doesn't make it an easy road, as Gould suggests. Here's where his analysis becomes relevant.

Over on The Open Road, Matt Asay analyzes the price paid for three open-source companies: MySQL (bought by Sun Microsystems earlier this week), JBoss (Red Hat), and Zimbra (Yahoo). He concludes that depending upon the revenue assumptions, whether you use trailing or forward-looking revenue numbers, and whether one looks at bookings rather than revenue, the valuations for all three were somewhere in the 15 to 20 times annual revenue range.

This is a big multiple. By contrast, Oracle is paying a multiple of about 4 times for BEA Systems--and some analysts are saying that's too high.

So is this just another bubble in which companies that are considered in the forefront of the Web or open source or whatever get snatched up for unjustifiable sums?

It is true that all of these companies could be considered category leaders. It's clearly so in the case of MySQL (open-source database) and JBoss (open-source application server), so some premium might reasonably attach to their post position. Yet, one would think clear leadership would already be reflected in their revenue numbers, so that can't be the whole story. Is there any other explanation--especially one that doesn't require irrational exuberance?

I think so. As I wrote in the context of Sun's acquisition of MySQL a few days ago, it's hard for standalone, narrowly focused open-source companies to profit. A financial analyst on the Sun/MySQL call estimated that MySQL had annual revenues of $60 million to $80 million in 2007 and operated at about breakeven. Not bad, but considering that MySQL is widely regarded as one of the true open-source success stories, it's hard to view those financial results as better than modest. At issue is that even with an enterprise version and value-add services--in addition to basic support--MySQL converts a small proportion of users into paying customers. That might be OK, but even when it does monetize users, it's pretty much limited to selling them a subscription for its enterprise version--which is still a great bargain by historical proprietary database standards.

However, plug MySQL or some other open-source company into a larger organization and the opportunities increase enormously. In the case of Sun, each MySQL customer that is willing to pay for the Enterprise database is now also a potential customer for Sun professional services, servers, and other software. The same logic applies to JBoss and Zimbra with their respective owners although those paths to incremental monetization may be less clear--and, indeed, Red Hat has publicly admitted that, so far, it hasn't leveraged its JBoss acquisition as well as it might have.

Although there are any number of small and profitable independent software vendors (ISV) in the proprietary software world, small software companies get gobbled up by larger vendors all the time of course. There's often more value in integrated offerings than in point products. Enterprise are also more comfortable sourcing some types of products, such as high-level management tools, from large ISVs or system vendors.

But over and above all the reasons why it's hard to make a profit as a standalone ISV, a look at the market suggests that it's even harder in some ways for standalone open-source ISVs. It's not that their product is any less valuable and it's certainly not less desired. But it's hard to monetize in a standalone way.

That could well be a reason for these high valuations. The value is already there but it takes a larger and more diverse organization to supply the leverage that makes money off that value.