Software, Interrupted

I'm currently working on pricing models for several new open-source companies, and I keep running into a similar set of challenges. The primary issue is that when you shrink a market, as open source does, you must to find a pricing model that solves the equation, meaning that your costs must substantially lower in order for you to make money.

Customers assume that open source is free and that commercial open source is cheaper, but most companies aren't prepared to deal with the implications of having a lower-cost product. Even when you can clearly demonstrate value, you run into a scale issue sooner or later. (Sarah Lacy harangued me about this in an interview for Yahoo Tech Ticker.)

So, the answer appears to be that you have to provide more value for the dollar, but how do you do it in a way that makes a highly scalable, highly monetizable business? I like this quote from Alfresco's John Newton in the Times Online UK"

Newton sees the development of Japanese car brands in America as a good analogy for open source. "People admitted Japanese cars were cheap, but argued they would cost you more because they would break down more.

Japan, by focusing on quality and cost, was able to demonstrate that a Toyota does actually perform, gets you from A to B, and costs you less. That is how the Japanese became the biggest car makers in the world."

Japanese cars in the U.S. market is a good analogy. Former MySQL CEO Marten Mickos often said he wanted to be the Toyota of the software world--which didn't mean low cost as much as it meant that he wanted MySQL to be highly refined, to have mass-market appeal, and to have room for upgrades.

And while cars are not a great business to be in right now, the Toyota model still makes a great deal of sense. Open-source companies have to become models of efficiency in every area in order to keep costs down and revenues up. Customers expect open-source alternatives to be 10 percent to 20 percent of the cost of the proprietary product, which means that open-source companies need to be 80 percent to 90 percent more capital-efficient.

I wrote previously about Cisco potentially becoming "the great open-source consolidator," and I continue to believe that Cisco has much to gain from open source.

But in looking through its collaboration offerings today, it's clear that Cisco needs to quickly fill a big hole in its product portfolio, open source or not: content management.

Why? Because Cisco is playing the collaboration game against companies that are rich in content management and seem to be getting the communications part down.

On Monday, IBM launched the beta of its "Bluehouse" product, designed to be a Cisco WebEx killer. IBM already has e-mail, instant messaging, content management (internally developed and through its FileNet acquisition), and more.

Oracle recently launched Beehive, an "open-standards based platform which aims to integrate team workspaces, calendar, instant messaging, and e-mail. All these utilities come with tightly tracked date stamped logging."

And then there's Microsoft, which continues to see rampant growth with SharePoint while simultaneously building out (and integrating) its Unified Communications Suite.

Cisco may view it as a competitive advantage to come at collaboration from the communications angle, and this is certainly a way of building from its traditional strength on the networking side. However, even after the relatively recent acquisitions of Jabber, WebEx, IronPort, Securent, and PostPath, Cisco is still missing in action on the core element to all of this collaboration: content.

Ultimately, enterprises collaborate around documents, and Cisco appears to have little to no strategy on managing that content. It has lots of ways to talk about it but seemingly lacks a central repository for storing, managing, auditing, and building workflows around that critical content.

Acquiring a company like Jive Software, while a great strategic move in some respects, would provide another way to chat about content but no clear way to store/manage/audit/etc. Or Cisco could acquire one of the last few remaining independent ECM vendors like OpenText, but its architecture and code are old, making integration painful.

Perhaps the most interesting play would be a move for Alfresco. Alfresco will do less than $100 million in sales this year, so it's not going to give Cisco a sales bounce. But at $39 billion in sales in 2008, very few companies are going to move the needle on Cisco's sales. What Alfresco brings to the table is leadership on emerging standards as well as a track record of being an OEM's choice for ECM.

Regardless of whether Cisco partners with Alfresco, buys OpenText, or takes a different road, it needs to plug the hole in its collaboration strategy. By buying PostPath, a Microsoft Exchange clone, Cisco has sent a signal that it intends to play hard with Microsoft et al. But without a central ECM strategy, its bigger strategy is a bit hollow.

Cisco Systems has always been a highly aggressive acquisition machine, and today's announcement that the company has acquired Jabber makes sense in light of the push toward enterprise collaboration that started with the acquisition of WebEx.

While Cisco made no mention of the fact that Jabber was largely open source, I would assume that's because open source is "accepted" at Cisco. A number of products contain open-source components, and despite some GPL issues in the past, Cisco has contributed to open-source projects.

So, is Cisco the company to consolidate open source, or to just consolidate software in general? I would be willing to wager yes, provided it can generate even slightly more revenue from the assets it acquires.

Typically, Cisco looks for acquisitions that would bring in $300 million or more of revenue (anything less isn't very material to the bottom line) and open-source companies are nowhere near that. However, with Cisco's massive brand power and ability to put pretty much anything into a box, they could easily monetize all kinds of open-source projects.

Several of the leading open-source companies fit right into the Cisco business: Hyperic (systems management, including virtualization), Funambol (mobile) and don't forget the world of SOA and system infrastructure, including XML acceleration.

Minus a few product like databases and CRM there are few open-source products that Cisco couldn't make money from. At the moment there isn't much appetite for open-source acquisitions at the obvious places (Sun, Red Hat, IBM, Oracle). Maybe Cisco will jump ahead of the traditional software players and consolidate the open-source ecosystem.

Alfresco has been on a roll lately. Word on the street is that Alfresco just nailed another quarter (That's eight straight quarters of growth and hitting its plan). This week Alfresco came out with some other cool news that I was forced pry out of of Matt Asay, as we both try to not shill for our own companies.

First, Alfresco and Adobe announced an extension of their previously announced partnership around Adobe Livecycle, with Alfresco now at the heart of Adobe's Acrobat.com document service. Acrobat.com combines the ability to create PDFs, share documents, host files, integrate web conferencing, and work with Adobe's web-based word processing system, Buzzword. It's a pretty cool service, and great that Alfresco is the core repository for it all.

Second, Alfresco got tipped by The 451 Group as the primary (I would say the only) competitor to Microsoft's ubiquitous SharePoint product:

Alfresco is ahead of the ECM pack with its SharePoint integration, says Kathleen Reidy, senior analyst at research firm The 451 Group. The most compelling short-term news is that they have that Office-level integration, Reidy says. That makes it a lot more viable for IT management to say, 'We're going to pull out the SharePoint Server or complement the SharePoint Server with Alfresco.'

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Being that my first "real" job was at a web design shop as a code monkey, it warmed my heart to see Khoi Vinh, Design Director for the NY Times state that they still write HTML code by hand. Of course, I have to believe that he was referring to templating and such, as there is no way they could maintain or deliver that amount of content without some kind of CMS.

It's our preference to use a text editor, like HomeSite, TextPad or TextMate, to "hand code" everything, rather than to use a wysiwyg (what you see is what you get) HTML and CSS authoring program, like Dreamweaver. We just find it yields better and faster results.

At my company we've been through this ordeal several times, finally settling in on PHP templates for the corporate site and Atlassian's Confluence for our developer sites. The corporate site still requires manual code intervention but we're modularized enough where the risk vs. reward is still OK. I'm waiting for Matt Asay to give me the green light on the Alfresco web product before we move to a full blown CMS. He knows that I am a difficult customer.

In the meantime I continue to enjoy/loathe our blog system here at CNET that requires us to format HTML. I like the control versus other blog tools, but it gets a little onerous.

When Gartner analyst Robert Desisto wrote this week on the idea that SaaS companies are going to adopt tons of open source I was thrilled. And yet some of the blogosphere seemed to think that meant they wouldn't pay for support and services offered by open source vendors.

Nine out of ten software-as-a-service providers will rely on open source software by 2010 to save money, but the cost savings likely won't be passed onto customers, Gartner says in a new research note.

From an open source vendor perspective, I can tell you that the interest we are seeing from SaaS companies is tremendous. In my case Mule offers the integration/abstraction layer for SaaS to bridge internal applications and data structures (and really if a SaaS architecture is not service-oriented the vendors are going to have serious problems) and Galaxy provides the governance and lifecycle to manage the services. (Disclosure: I am CEO of MuleSource)

But that's just one example--If you consider that Adobe is using Alfresco as part of its online PDF product or that MySQL powers a great many SaaS applications and that both of these companies make money as open source providers I think it shows there is a great opportunity.

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The newly revamped Adobe Share (beta) 1.3.5 is out today and is based on Alfresco, everyone's favorite open source ECM (enterprise content management) platform.

The latest version of Share offers PDF creation, updated Flash previews (supports full screen mode) and improved performance. The various rendition generations are based on Adobe LiveCycle, Creative Suite and other core technologies. Share also offers Web Services that developers could use to create desktop or online applications.

Why is this interesting?
- The fact that a bigCo like Adobe is publicly stating that they are using open source at the core of their products is fantastic (and we need alot more companies to step up publicly)
- Alfresco is proving that they (like other open source products) can go beyond an enterprise sale by doing embedded deals

Via: Note 19

The second part of my interview with Sarah Lacy over on Yahoo Tech Ticker is now live.

This time I explain what MuleSource (my company) does and discuss some of the other open source companies that I like, including Alfresco and Digium.

Next time I go on I plan to discuss why SaaS and open source are the only ways to build software companies going forward.

Today Alfresco announced a $9 million strategic funding round from SAP Ventures while Zenoss announced an $11 million round from Grotech Capital.

While I don't expect 2008 to have the volume of open source related fundings that we saw in 2006 and 2007, it's because the majority of the companies who raised money are not strapped for cash.

Now I'll just sit back and wait for these guys to send me my stock options and/or sign over 15% of all future earnings.