Death of billion dollar opensource company.

For those coming in late - IBM intends to buy sun for 6.5 Billion.

I read the news as the death of opensource as a revenue model, and validation of opensource as an important tool for running a software related business.

First of all let me start this blog piece on my definition of “what is an opensource company?” It is a company where you can associate the revenue of the company directly to the opensource product/service. While this statement sounds quite straightforward, it is in-fact not that clearly established viewpoint in the industry. People tend to bundle companies that exploit opensource technologies into the category of opensource companies. As per this metric companies like HP,Google IBM and even Microsoft all fit it as opensource companies because all are successful exploiters of open source technologies. I disagree. If someone like Capgemini was to say that they are in the People Business I can understand, because they make money from selling bill time of people. But if Google was to say that they are in the people business because people are there single differentiating factor - I would not agree. Google is in the advertisement business to any Financial Analyst.

To me companies like Sun Microsystems, Redhat , springsource and a ton of small companies are “opensource companies”.

Now going back to IBM-Sun. How are IBM and Sun really different from an open source strategy perspective?

IBM has a clear demarcation between for-profit-revenue generating products (like websphere , db2) and for-leverage-cost-only-opensource products(like eclipse , apache software etc), while SUN on the other hand has a phase-customer-in approach where all products are free to use and you pay for it only if you want an insurance policy against something going wrong.

This demarcation IMHO is the key to successful use of opensource. Opensource in itself is not a revenue generating business. It is a leverage and an execution strategy. It can be a very good market capture strategy (downloads leads to adoption), a very good component sourcing strategy (the way IBM uses Apace foundation), a cost effective developer relations approach and a very good distribution vehicle.

Today – Sun Microsystems and Redhat are the biggest opensource companies in the world. Sun software and services is more than a billion while redhat is still about 300Million. After Sun gets bought over by IBM there will be no billion dollar open source business and my guess is that someone like redhat might also get absorbed by Oracle /HP.

So my viewpoint is that future of an successful open source company is to get bought out to enable better monetization or somehow undergo metamorphosis in the way they think about revenue. To be able to monetize better you need to have relationship managers that talk to executives that actually make purchases. Yes downstream adoption of the technology in the organization is a good thing but it is not a differentiating factor for a purchase decision. You need to have a flavor of the product branded differently that has a mandatory cost(Rational studio and eclipse). Yes you might tolerate piracy but you need to make the customer obligated to pay.

Free for all approaches work for the first $50 Million revenue but do not scale.To grow to a billion dollar of revenue , you need to make customers obligated to pay after certain thresholds are reached.