The next time you feel tempted to laud the power of the open-source business model, take a look at Novell.
Novell has been struggling for over 10 years, yet it still manages to crank out nearly $1 billion in sales each year, most of which derives from the licensing of proprietary software.
Novell reported its fourth-quarter earnings on Thursday, along with results from its full fiscal year. They're not pretty, but they do suggest a path forward for the erstwhile software leader.
Novell saw its sales slump over 12 percent from its year-ago quarter to $216 million. For the full fiscal year, Novell stumbled to a $257 million net loss, versus a $5 million profit in 2008, on net revenue of $862 million and a net loss from operations of $206 million.
Perhaps not for long.
Much of that annual deficit came in the fourth quarter, which included a $279 million noncash impairment charge that sent Novell's quarter into the red by $259 million.
Not pretty.
Unless you look at Novell's Linux numbers. Linux remains Novell's most appealing business and was up 21 percent year over year to $149 million--and up 14 percent at $39 in in its fourth quarter over the year-ago period. While a far cry from Red Hat's booming Linux business, Novell's results suggest that there's life in its Linux business yet.
Life that Microsoft continues to seem content to grant.
Make no mistake, without Microsoft, Novell's Linux business would struggle, at least in the short term. Microsoft, after all, has been funding Novell's Linux business since 2006, when the two companies entered into an interoperability and Suse Linux subsidy pact.
And without its Linux business, all of the rest of Novell's business would be in jeopardy, as Suse Linux makes Novell's other products a palatable choice. Even so Novell's Identity and Security Management, Systems and Resource Management, and Workgroup businesses all dropped significantly (down 10 percent, 6 percent, and 13 percent, respectively).
Novell's needs
Clearly, Novell needs Linux. Equally clearly, it needs Microsoft to grow that Linux business. Microsoft has already plowed $247.5 million into Suse Linux Enterprise Server (SLES) subscription coupons, and Novell CEO Ron Hovsepian has indicated he's now dipping into the additional $100 million in coupons the companies negotiated.
But how can Novell accelerate its Linux business at a pace that will be comfortable for Microsoft, which has made no secret of its animus to Linux and desire to quash it? Microsoft partners with Novell to show a good interoperability face to its customers who use Linux and to prop up the No. 2 vendor against Red Hat, the dominant Linux vendor.
The day that Novell's Suse Linux business threatens Microsoft, and not merely undermines Red Hat, is the day Microsoft will pull its extensive financial support from Novell's Linux business. That same day Novell's Linux business will crumble, perhaps irreparably.
Unless.
Unless Novell can deliver a coherent strategy centered on Linux rather than merely friendly to Linux. For years Novell has packaged and repackaged a set of mostly stale offerings (e.g., Workgroup), pretending that they were part of a coherent strategy.
They weren't. The company was simply milking maintenance revenues as it sought to find a way forward. (I was in those meetings back in 2002 when the company discussed how to stanch the bleeding from maintenance declines. Those same conversations continue today, I'm sure.)
Then, as now, Novell's various product lines, and particularly Workgroup, offered little synergy, either in sales or engineering (i.e., the buyer of GroupWise is not the same as the buyer of Suse is generally not the same as the buyer of Identity Management).
Ongoing makeover
Novell is now entering a new phase of its repackaging makeover, but this one actually makes some sense. The company is calling it Intelligent Workload Management, arguing that a "new market [exists] for solutions that address the risks and challenges for computing securely across multiple environments."
Not surprisingly, Hovsepian argues that such an Intelligent Workload Management market "plays to the strengths of Novell--identity and security, systems and resource management, and our new Suse Appliance program."
Surprisingly, he may be right.
First of all, its wonderful to see Workgroup dropped from the discussion. Yes, it's Novell's biggest product by revenue, but no, it has almost no relevance for the rest of its business. Sell it off. Move on. The company has already offloaded much of its Workgroup development to India, anyway.
Second, Novell really does have a great deal of expertise in this area, with some assets that could go a long way toward helping it compete with the vendors that compete aggressively in the market: VMware, Microsoft, and increasingly Red Hat.
The key will be for Novell to really put Linux at the heart of its story, rather than simply using it as a conversation starter and loss-leader.
And yet, more is needed. Novell has the burden of a stale brand that it must shed. A few select acquisitions could help it to establish technology and brand leadership in the market. Companies like Reductive Labs (Puppet project for data center infrastructure management), VMOps or Eucalyptus (for building and managing private clouds), and/or Cloudera (for designing and analyzing large-scale data assets) could put Novell in the driver's seat on this market.
For the first time in years, the market seems to have moved in a direction that corresponds with Novell's rich technology assets. If Novell can make Linux the centerpiece of this campaign, bolstered by relevant, innovative technology, it will finally get its Linux business out of Microsoft's shadow and its overall business back on track.
The technology pieces are in place. It's now a question of brand and execution.
One of the hardest parts about launching a new product is knowing what prospective customers want to buy. Sure, some companies like Apple can impose their product visions on the public, but most vendors need to fulfill pre-existing product requirements, not create new ones. For everyone but Apple open source offers a great way to perform product management.
This is the sort of product marketing/management that most software vendors do. Focus groups, interviews, surveys, etc., form the basis of the product requirements documents (PRDs), which are then used to build products.
Open source may provide a better, more efficient way. As Stephen Walli puts it:
Open source software is a key economic driver from an engineering efficiency and software reuse perspective, but it also opens new opportunities and additional tools for product management to engage better with customers and improve both the top line and the bottom line.
By providing free access to one's product, coupled with the ability to modify it to suit one's needs, open source enables users to describe exactly what they'd buy from the original developer of the open-source project.
My employer, Alfresco, provides an example. The company was founded to provide an open-source alternative to incumbent vendors in the enterprise content management (ECM), Web content management (WCM), and records management (RM) markets. For years, our marketing has targeted buyers in these markets, pitching a low-cost, high-value alternative to proprietary ECM/WCM/RM.
Our customers didn't get the memo. While we were talking about ECM, many of the roughly 30,000 people downloading the product every month were using it as a foundation upon which to build their own applications, most of which would never be classified as ECM. They were creating their own category of infrastructure/middleware, using our technology.
The content application server was born, and we almost missed it, despite the fact that it was happening with our code. We were so busy marketing our vision that we almost missed listening to our users' vision(s). This new vision on an old way of using our product will significantly impact everything we do for years to come.
This is a major opportunity for open-source vendors. As Vinnie Mirchandani (@dealarchitect) suggests, "strategic apps are being custom built" by enterprise IT, not IT vendors. Increasingly, as Stan Rose, managing director, technology risk management, Bank of New York Mellon, told me a few years back, open source is the innovation platform upon which such strategic applications are built.
This is great news, because it means open-source companies, if they listen to their users, are well-positioned to build platforms that can become the lifeblood of enterprise IT. ReadWriteWeb rightly concludes that Twitter's "success has been credited to its ability to transform from a basic life streaming service into a platform," with an outsized, $1 billion valuation to match.
Few open-source companies wouldn't salivate to have the same valuation.
Redmonk's James Governor defines this platform opportunity in the context of "tools," but I think we're talking about the same thing. Open-source companies and communities have the potential to deliver an exceptional platform experience, one built on "tools" in Governor's sense of the word, provided they listen to their users to know what sort of "tools" to build.
There are billions to be made. It's just a matter of listening.
Each year InfoWorld sets out to rate the "best open source products" with its Bossie awards. Too bad it has decided to cloud the voting with open-source politics, as well.
The editors write (note: the emphasis is mine):
Although Zenoss clearly has the more developed feature set, our Bossie goes to OpenNMS. The reason boils down to business models. OpenNMS is a purely open source software project, meaning that customers get the complete set of features available for free as open source. There is no "enterprise" version. OpenNMS makes its money strictly by selling support and training services.
Zenoss uses a common business model in the open source world: it provides an open source version of its software with a limited feature set for free, and it sells a more extensive "enterprise" version of the software with support through an annual subscription. So while Zenoss may be a good value compared to HP or IBM or CA, it's not a good value compared to OpenNMS.
If only enterprise IT could cavalierly discard superfluous things like "features" in favor of licensing ideology. But it can't, which is why Agilent, Telstra, Accenture, MySpace, and other companies that need enterprise-grade network management systems have been opting for Zenoss. They seem to need those pesky "features" that InfoWorld glosses over. They're buying a product, not a political platform.
Regardless, if we allow business model to be a valid factor in InfoWorld's decision criteria, how are we to explain its contradictory decision to judge Intalio the winner in the Business Process Management (BPM) category? The editors reason:
Intalio has been criticized regarding its open source claims, most likely because the company does not provide source code on its Web site (where binaries of the free community edition can be downloaded). However, Intalio's enterprise edition customers do get full access to source code, and the source code of community edition components -- which fall under Apache and Eclipse licenses -- are obtainable from their community-based repositories....
However, new beta features reflect enterprise needs, including a business rules engine, Ajax-driven forms for easier editing, and a more streamlined deployment interface. The full enterprise edition also includes BAM (business activity monitoring), a portal interface, ECM (enterprise content management) based on Alfresco, fail-over clustering, and support for application servers beyond Apache Geronimo.
I think Intalio is great, but I can't understand why Zenoss' business model is considered a demerit but for Intalio, which has the same model, it's a non-factor. Zenoss also provides source code to its enterprise customers, so why is Intalio right because it provides an enterprise-class experience with an Open Core model but Zenoss is wrong for doing the exact same thing?
Personally, I think awards should be given based on the merits that will most appeal to IT buyers, and such will have little to nothing to do with business model nuances and everything to do with solving business problems at a compelling price. If Zenoss is the better enterprise IT bet, shouldn't it get the Bossie, regardless of OpenNMS' licensing model?
InfoWorld set out to name the "top open source products." By deciding, instead, to name the top open-source products and business models, it has failed to serve its audience as well as it has in the past. The Bossies are still a good resource, but it's best to read the reasons behind some votes carefully, as they may have nothing to do with the products at all.
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Drupal logo
Baris Wanschers has posted a great review of 10 cool Web sites running Microsoft SharePoint, apparently to prove how good SharePoint is as a Web publishing tool. But I can't help but smile at the irony that Wanschers' site runs Drupal, not SharePoint.
Wanschers writes:
Because so many friends and colleagues of [mine] think of SharePoint as a boring, team-site-only Document Management System I decided to show them some great-looking SharePoint publishing sites and prove them otherwise.
He then provides several examples (Ferrari, Starbucks, and more), but the best counterexample to his post is the "paper" his post is written on: Drupal, an excellent open-source Web content management and publishing system.
To be fair, Wanschers describes himself as both a SharePoint and Drupal developer, so it's natural that he use both (though his blog has exclusively covered SharePoint since its March 2009 launch). But for me it's instructive that however much he may talk about SharePoint as a Web publishing tool, Drupal is what he actually uses to do the job.
Actions speak louder than words.
He's not alone. In fact, with over 1 million downloads each year, it's safe to say that Wanschers is in good company in preferring Drupal for Web publishing. FedEx, Nike, R.E.M., and many others share Wanschers' preference for Drupal for Web publishing.
Disclosure: My company, Alfresco, both partners and competes with Microsoft SharePoint and Drupal.
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Novell was recently rumored to be shopping itself around for a buyer. The new rumors? That it's doing some shopping of its own. In this, Novell isn't alone, with Dell also looking to pick up companies that can expand its product lines, as both look to grow despite CIOs' decreasing willingness to spend. Open source may factor into both companies' M&A strategies.
As reported in Daily News & Analysis, Novell CFO Dana Russell has said the company is "interested in making acquisition in the high-growth businesses like identity security and compliance management software, data centre tools and open source software." With over $1 billion in the bank, Novell is in a prime position to buy companies on the cheap.
However, Novell should avoid its SiteScape error, viz., buying into a trendy but not yet profitable market. Identity security and compliance management are probably safe, because they're precisely the sort of "boring" markets that CIOs will pay money for in a recession.
Open source is much the same, but it depends on which open-source products it picks up. A Zenoss, Reductive Labs (Puppet), or some other company in IT management/configuration might be a smart bet.
Novell isn't alone in its interest in acquisitions to spur growth. Dell has been widely reported to have a $10 billion war chest set aside for acquisitions and, according to The 451 Group, Dell may be looking to make some significant acquisitions in the storage market:
With existing partners such as Cisco and Oracle...now priming themselves to become players in the server hardware market, Dell clearly needs to build up its portfolio to do battle with these new entrants along with its traditional rivals Hewlett-Packard and IBM. One clear way to do this would be to expand its storage software and hardware lineups since these offerings are complementary to its core server and PC business.
One way to get into the market would be to buy EMC, a current partner, but as The 451 Group notes, Dell has rarely ventured into big acquisitions--its $1.4 billion acquisition of iSCSI storage systems vendor EqualLogic in November 2007 the exception to the rule. I'd expect Dell to buy midrange players along the lines of 3PAR, Exanet, and so on rather than NetApp or EMC. Buying big would be distracting to Dell and take too long to digest and commoditize, Dell-style.
It's possible that Dell might even delve into the open-source storage market. An Infoworld reports identifies the best of the bunch, with vendors/projects like Zmanda, FreeNAS, and StorageIM in the mix.
It's doubtful, however, that any of the vendors in the open-source storage space are big enough to move the revenue needle for Dell. So, while it's SMB strategy may involve a healthy dose of open source, I wouldn't expect its storage strategy to do so...at least, not yet.
Open source could be a boon for both Novell and Dell, but each would need to be pragmatic about what to expect from open source. Currently, the most revenue either can expect from an open-source buy would be in the $50 million range, with most open-source vendors offering much less than that.
However, the one thing that open source can offer both right now is a ready supply of leads, plus branding and relevance in markets where Novell and Dell may not yet have much of either.
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Years ago I proclaimed open source would never be relevant in the application market. Now I work for an open-source applications company.
Lesson? It's generally not a good idea to underestimate open source's potency.
To wit, here are three "Who would have thought open source could do that?" announcements that recently hit my RSS reader:
- NovusEdge is demoing open-source energy management for "massive commercial buildings." OpenRemote does open-source home automation, but this suggests the idea can take on a different scale.
- Human resource professionals spend time and money tracking job applicants. Well, now they can save their money by using open-source applicant-tracking applications. People used to say open source could only commodify broad application markets. I don't think this qualifies....
- Or how about applying open-source principles to other markets? I'm an advisor to the Open Source Teaching Project, which lowers barriers to quality education by "open sourcing" course curricula and delivering it online.
- While not new, it's also impressive to see proprietary software vendors investing in open source. Five years ago, would you have expected Citrix to invest in open-source router company Vyatta's $10 million Series C round of financing? Yes, it's an attack on Cisco by Citrix, and so driven by healthy self-interest, as The VAR Guy writes, but that's the point: the world is discovering plenty of self-interest in open source.
I'm sure open source is not good for something. I'm equally sure that deficiency won't last. It never does.
What are some of the more interesting applications you've seen for open source?
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The bad news is that global server revenue is down 25 percent in the last quarter, according to IDC, with Microsoft Windows server revenue down a whopping 29 percent.
The good news? Novell reported Thursday that its Linux Platform revenue climbed 25 percent year over year in the midst of one of the worst recessions in history. Talk about Linux swimming against the economic current.
Well, it's good news for some. Microsoft, of course, won't take any comfort in Novell's numbers, especially as recent Eclipse survey data suggests that Linux is eating into its Windows server and client businesses, with 43 percent of Eclipse developers citing Linux as their preferred deployment platform (versus Microsoft's 41 percent).
It wasn't the best of quarters for Novell, either. Net revenue was down to $216 million from $236 million a year earlier, though cost cutting resulted in $16 million in net income. Novell's problem is that outside its Linux Platform and Identity Management businesses, which both grew, its other lines of business stumbled -- Workgroup was down 14 percent, while Systems and Resource Management dropped 2 percent.
Novell reported $37 million in Linux Platform Products revenue, up 25 percent compared to the same period last year. While not on par with Red Hat's continued growth -- 18 percent last quarter on a higher revenue base, -- Novell's execution on its Linux Platform business, in particular, is impressive.
Workgroup, of course, continues to deliver the biggest chunk of revenue ($79 million in the current quarter), but is also the biggest drag on Novell's brand. Workgroup is a constant reminder of the old Novell: NetWare, GroupWise, etc. I understand the reasons for keeping that revenue, even declining revenue, on the books, but it comes at a high cost to Novell's credibility.
With $1 billion in cash or short-term assets, Novell could conceivably buy relevance in this market, as it has tried in the past with its Sitescape acquisition, but thus far it has failed and throwing more money at this line of business won't likely help. Novell is an enterprise server company. Its desktop-related business is a distraction.
Novell's Linux performance, however, suggests a way forward for the company. It's called open source, and perhaps Novell's own flavor of open source (hybrid source) could be a winning strategy against Red Hat and Microsoft.
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One of the hardest things to create in open-source software is a project that attracts significant outside development contributions. While Mozilla can count on 40 percent of its development deriving from non-Mozilla sources, most open-source projects are lucky to get 4 percent from outside contributors--or 0.04 percent.
This is why I find Jahia's licensing model so intriguing. Jahia is an open-source Web Content Management (WCM) vendor that competes with proprietary solutions like Vignette (OpenText) and Interwoven (Autonomy). Unlike most open-source WCM systems, however, Jahia has set up a rewards program to encourage contributions, with significant discounts on a commercial subscription offered in exchange for significant contributions to the Jahia code base, dubbed a "Contribute or Pay" program, as outlined in Jahia's licensing white paper.
No triple charging: Those who contributed based on the JSEL get the software of the next release and all subsequent releases that contain the contributed feature for free within their standard subscription. This is fair, because it avoids commercial contributors getting charged three times: first for paying Jahia to develop and include the new feature, then for obtaining the new release that includes it and finally for maintaining it. Unfortunately, triple charging is the typical business practice for proprietary alternatives to Jahia. Contributors to Jahia EE only pay when they purchase or renew their support subscription, which already includes Jahia software at no additional cost.
Jahia is trying to reward customers and contributors, ensuring that they only have to pay once--in cash or in kind--for the value they contribute to Jahia. Specifically, those who contribute code to Jahia "save on maintenance costs upon approval by Jahia," or they can pay Jahia to write the suggested contributions and won't be charged for maintenance on those additions.
I reached out to Tristan Renaud, vice president of sales and corporate development at Jahia, for further commentary, and will post it once I receive it. For example, how does Jahia determine the value of contributions? And how much will it discount subscription services in exchange for sponsored "contributions" that a customer pays Jahia to develop?
Even without the details, however, I find the approach refreshing. It seems like Jahia is offering a good "quid pro quo" model, as Stephen Croisier suggests, and one that other open-source companies should consider.
Disclosure: Jahia is a competitor to Alfresco, my employer, as well as a potential partner.
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Cisco has been on a software acquisition spree this past year, acquiring Jabber, PostPath, and now Tidal Software, among others. But as Cisco goes after the data center with its new Unified Computing push, one open-source company should be on Cisco's radar screen: Reductive Labs, creators of the Puppet project, a framework for automating system administration.
(Credit:
Reductive Labs)
Tidal is a performance-monitoring solution for data centers. It's a nice start, and a definite upgrade over Cisco's baseline Unified Computing management tools. But as Forrester senior analyst Glenn O'Donnell suggests, "Cisco is the new kid in town in the data center and will need a solid software strategy to go against HP and IBM."
In other words, Cisco needs a more holistic data-center management strategy, and Puppet could play a key role. Puppet gives Cisco the ability to semantically encode "why" instead of just "what" or "how" into data center solutions, making data center deployments more manageable over time:
I was only seeing the static state of the working system. What if you want to change things? If you have working images, you have to reconstruct "What" by discovery, good luck with "Why." If you are lucky, it was you that set up the systems and it wasn't over six months ago. The "What" and "Why" were apparent to someone, potentially you, when the systems were first set up, but now you just have this bucket of bootable bits that ostensibly does something. If it isn't working, or there is a need to change something significant, the choice is poking around the bucket of bits until the new "What" is in place or starting over with a new "Why" that is lost as soon as the new image is finished.
If Puppet is building your services, "What" and "Why" can be recorded, clarified, recovered, and manipulated. Version control becomes straight forward, manageable, and transparent. Services can have clear definitions and relationships. So obvious...can't believe it took me this long to "get it"...
In other words, describing services in Puppet provides both the ability to configure machines but also the ability to ensure they are configured properly over time. An enterprise data center isn't static. Understanding and configuring its dynamics is what makes Puppet so interesting, and what should make it intriguing to Cisco.
Even virtualization doesn't make this any easier. If anything, it compounds the problem of management. Puppet, however, can facilitate management of virtual servers.
Cisco is entering an established market with strong incumbents like IBM and HP. To win, it needs to innovate in its data center strategy. Puppet, used by Stanford, Google, Sony, and other leading-edge companies, could offer it a way to disrupt the incumbents with an innovative approach to IT management: a way to manage data-center resources over time, and not merely at deployment.
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Open source has seen a flurry of executive appointments in the past few weeks, but no open-source company can top GroundWork for the level of CEO turnover in the past two years. In 2007, Ranga Rangachari helmed GroundWork. By 2008, company co-founder Dave Lilly had replaced Rangachari.
In early 2009, GroundWork slotted Lilly into the COO role, replacing him as CEO with Peter Jackson. Jackson was recently CEO of Intraware, a company he grew to $100 million in sales and eventually sold in January 2009, and seems a competent chief to lead the company.
Even so...three years, three CEOs. Worried a bit by all this change, I reached out to Jackson to get his perspective on GroundWork's business and its open-source opportunity.
GroundWork CEO Peter Jackson
(Credit: Groundwork)You come from a Web 2.0 background. What brought you to GroundWork?
What's nice about Web 2.0 technologies is that they're really focused on creating controlled communities. The original Web development efforts didn't do a good job regulating users on what they can and can't do. Applying that thinking to open source allows producers and users to share in safe and open areas. This includes blogs, entitlement-based distribution, shared testing and QA, questions to groups, uploading training videos, etc.
In GroundWork's case, we need to appeal to both the open-source community and to IT-reliant enterprises. This combination of Web 2.0 community building, while understanding and meeting the demands of enterprise customers, is a great chance for me to bring my experience in both areas to the company.
You took Intraware public. Do you think GroundWork and other open-source companies will have the same opportunity?
... Read moreI see open source radically changing the software market in the next 24 months. Customers of traditional enterprise products and services have way overpaid for years. As companies analyze their capital expenditures more deeply, they suddenly find huge value gaps between their historical IT management purchases and open-source alternatives.
With this in mind, if the stock market recovers in a couple of years, there should be many IPOs in this sector.
