The day open source became big business is the day that open-source development exploded. Yes, open source predates the moneyed interests hankering to use it to competitive advantage, but it really wasn't until IBM dropped $1 billion on Linux that companies began paying employees to write free software that the movement saw broad adoption.
That's when open source became more than an efficient way to develop software, and also became a great way to build a business.
However, adding open source to one's business is not magical pixie dust that guarantees its viability. As IBM's Bob Sutor explains:
The basic principles around revenue, profit, loss, taxes, payroll, overhead, accounting, sales, incorporation, health care, and human resources all apply. You can be a starving open source software entrepreneur as easily as a starving proprietary software entrepreneur. No one will excuse basic business failures and screw-ups just because you use open source. Make sure that you will produce a product that people want and in some way will pay for, no matter how indirectly.
Sutor's counsel applies to any company or individual that wants to build a business around open-source software, but arguably some of the industry's best projects are not the product of any one company, but rather of several. Linux, Mozilla, Apache Software Foundation, Eclipse, and other collaborative communities represent an interesting way to use open source to competitive advantage.
In many ways, open source has become a critical component of the software industry because the market has largely moved from vertical businesses (i.e., companies controlling all aspects of production, distribution, etc.) to horizontal markets (i.e., companies focusing on their core competencies and depending on others for complementary functions).
Linux: Peace, love, & squeezing Microsoft
But this business control system has a inherent risk. Should an organization monopolize a specific segment of a value chain system they can extract a higher percentage of its total proceeds. If the product, or service, in question is price elastic than those additional proceeds will come from other participants in the value chain system.
Case in point? Windows. By owning the operating system, Microsoft threw a wrench into the collective cogs of horizontally oriented software firms like Intel, IBM, and others.
The industry's response--Linux--is a classic example of the open-source approach to mitigating individual choke holds within an industry, as Prentice goes on to write:
What then does a CEO do when facing a squeeze on their profits because a direct, or downstream, supplier is dominating a segment of the value chain system? Besides negotiating a better deal - if they can - they've been left with little choice but to get directly into that segment of the value chain system themselves. But by doing so their organization is distracted from focusing on its own core competency.
The risk of such an undertaking can be mitigated if there is a collective response by similarly affected members of the value chain system. After all, it is usually a shared problem. But collective responses have always had an inherent, and often fatal, flaw. Who owns the resulting assets? Either organizations enter into complex joint venture agreements to sort this out or run the risk of shifting the distortion in the value chain system to another organization.
Again, Linux offers the perfect example. IBM, Intel, Red Hat, and others aren't investing in Linux because they're all chums at the country club together, but rather because they're looking for ways to reduce Microsoft's hold on their own businesses through its control of personal computer and server operating systems.
As an added benefit, it's a great way for companies to collaborate without running afoul of antitrust laws. It's collusion without the collusion.
Intriguingly, even Microsoft is getting into this game. Microsoft's partnership with open-source ad serving company OpenX indicates that Microsoft, too, is figuring out how to use open-source complements to loosen strangleholds competitors like Google may be hoping to throw in its way.
This is why open source is growing so much faster than the rest of the industry, as IDC finds. It's not because we love each other more. Quite the opposite. It's because proprietary vendors have figured out that open-sourcing key complements to their core businesses can be strategically decisive in hurting competitors while helping themselves.
Occasionally I get brilliant ideas about who should merge with whom in open source. OK, so it's very occasionally, but I think I'll start sharing them under a "mix and match" headline.
Forget fantasy football. It's time for "fantasy open source."
The first is OpenX, an open-source ad-server company that I've written about several times, and which I continue to believe offers a disruptive way to shake up the online advertising business, especially for smaller Web publishers. While Drupal is used by plenty of marquee brands like Intel and FedEx, it has a strong base of support within these smaller Web publishers.
While we're at it, why not also provide the e-commerce engine to turn ad-related interest into paying customers? Magento, which I've also covered several times, is a natural fit.
Yes, Magento, like Drupal and OpenX, has its share of big customers, including Germany's equivalent of REI, Globetrotter. But Magento already has a lot of traction within the mid-market segment that Drupal and OpenX also serve.
Disagree? Which companies (at least one of which must be open source) do you think should get together?
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I've written before about one of my favorite open-source companies, ad-server company OpenX. However, since I first covered the company, a lot has happened, all seemingly positive.
For one thing, OpenX now tops 300 billion ad impressions per month, 150,000 publishers, and 2,500 paid customers using its hosted offering. This impressive growth, however, belies a big challenge for OpenX:
Next comes the more difficult process of converting the free products and services into revenue-generating operations. The vast majority of the ads served by the installed software were from freely downloaded versions, and few of those using the hosted service are premium customers.
In effort to better understand how OpenX plans to address this opportunity (or problem), I called company founder Scott Switzer on Thursday to get the scoop.
Much of what OpenX is planning is currently not yet public information, so we'll have to wait until January to give a more detailed explanation. Let's just say that a fair amount involves the nascent OpenX Market, currently in alpha, as well as an e-commerce play, which probably counts as pre-alpha. TechCrunch has hinted at the importance of OpenX Market, essentially a place for advertisers and publishers to congregate and do business.
OpenX Market is the latest service from OpenX. The Market is a place where publishers can easily make their advertising space available to large numbers of buyers (including ad networks and agencies). Those buyers get the opportunity to bid for each impression, with the highest bidder displaying their ad, if their bid beats a floor price set by the publisher.
It's not hard to connect the dots and see OpenX taking some percentage of the business generated on its Market. But for the Market to be interesting, OpenX needs to continue to drive adoption of its platform, something Switzer pointed out that its open application programming interface and six months of efforts to make it highly extensible, Mozilla Firefox-style, could help do:
We've spent a lot of time over the last six months, developing two major things. One is a full-blown API to give "developers a way to control the ad server so they can automate common tasks, and integrate with other applications in a stable and reliable way."
The more interesting thing is a full-blown plug-in framework. Almost a year ago, our road map was pages and pages long, but we decided that instead of being the only company to develop new OpenX features, we'd spend the majority of our time building infrastructure to open up the OpenX framework to let others build it out.
OpenX traditionally has been the "light" version of a "real" ad server. But what this does is that it helps us to leapfrog bigger, better-financed competitors, in terms of features and functionality that we can offer, similar to how Firefox competes with Internet Explorer. Within a year, Firefox was able to eclipse IE in terms of functionality, much of that due to its community.
This move puts control of the OpenX road map back in the hands of our publisher community. This means no lock-in, but lots of network effects that drive benefit for us and for our customers. We want to ensure we have a platform that manages the needs of all publishers, not simply the big (or little) publishers. We want "our" platform to be a true community platform.
This might sound like wishful thinking, but OpenX is already well down this road, as its developer wiki demonstrates. Over 100 plug-ins have already been built for OpenX. Historically, developers have hacked together extensions to OpenX, but in the new version of OpenX the company has rebuilt these plug-ins to make them easily installed and upgraded.
OpenX got to 300 billion ad impressions per month through open source and a low price tag (i.e., "free"). But it's going to get to 3 trillion ad impressions by enabling publishers to claim control of the OpenX ad-serving platform, then monetizing all that interest with a marketplace that brings together high-quality publishers with high-quality advertisers (or buyers).
OpenX is taking on big incumbents like Google with a model that looks like it just might work. Why? Because OpenX isn't trying to do it alone. It's enlisting the publishers on the OpenX team, treating them as partners to help augment value rather than as customers from which to extract value.
That sounds like a winning strategy to me.
OpenX announced Wednesday that it has hired Tim Cadogan, Yahoo's former global ad marketplaces senior vice president. The company also announced that it's making the long move from London to Los Angeles to set up headquarters.
As D: All Things Digital's Kara Swisher reports:
Cadogan, who was with Yahoo for five years, in its search unit and later as SVP for ad products, including playing an important role in the launch of its Panama ad search product. Previously, he was an early member of the GoTo.com team and went to Yahoo just before it acquired Overture.
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Sometimes disruption can be taken too far. Unfortunately, it often is as a company grows and looks to adjacent markets to grow further. Such is the case with Google and its recent entry into the ad-management market. TechCrunch rightly opines:
It's yet another example of Google knowing no bounds in its quest to know everything about every person and site.
This is good and provides customer value...to a point. But it's starting to sound an awful lot like Microsoft's voracious appetite on the desktop.
Why should publishers care? Because it makes Google their biggest competitor and stifles competition, as open-source ad-serving company OpenX notes:
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OpenX, one the industry's largest ad networks and the dominant open-source ad server company, just got a little bigger. OpenX announced that Jonathan Miller, former CEO of AOL, has joined the company as its chairman. Writes Scott Switzer of the announcement:
Jon has much experience working with major advertisers, as well as large and small publishers. He understands how difficult it is to provide software, service, and media to medium to small publishers, which is the core user base of OpenX. He can help us grow from a small company to a larger one. He understands our need to continue to focus on making OpenX simple, scalable, and extendable.
This is huge news for the OpenX team. OpenX continues to prove itself to be one of the top open-source companies to watch.
Openads just changed its name to OpenX. OpenadsX is one of my top open-source software picks, given its potential to roil the ad server business. With its competitors (like DoubleClick/Google) taking 40 percent to 50 percent of a Web site's advertising revenue, the company's model of charging peanuts to advertisers to source publishers is a big boon to content publishers, 30,000 of which have signed up to use OpenX.
But after talking with publishers, Openads decided that it could provide more value than advertising revenue:
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