The Upside of Open Source (Business): Community

Matt Asay recently opined on his blog about the downside of open source business models being "freeloaders" and "leakage".  I would like to respectfully disagree and offer a different opinion. 

Matt makes several points I see differently.  From his post:

• You wouldn't be happy if too many customers were using your software for free.
• "You have to be prepared to watch would-be customers, big and small, derive immense value from your software without paying you. Value that they'd gladly pay for in a proprietary world. Value that they would have to pay for."
• We need to make open source software more "sales efficient".
• "You must have a hook that convinces would-be customers to buy, and not merely use. Free downloads invite use, but only some proprietary (pardon the word) hook effectively closes sales."
• "For MySQL (which, I believe, derives a massive percentage of its revenues from OEM/embedded sales), this means that it offers a clean way out of the GPL."
• "Systems integrators and others who make their money on professional services - in the proprietary and open worlds - always have an incentive to drive the cost of software to zero to make their services more appealing/less expensive. This is normal and natural. It's not, however, good for the creators of the software."

I like to use MySQL as a good example here.  As Marten Mickos (MySQL CEO) pointed out a year ago at LinuxWorld: The early community is willing to trade time to save money.  The later community is willing to trade money to save time.  MySQL customers are in the latter group.

Corwin's Razor: If they're not willing to put their money where their mouth is, they're not a customer. 

Walli's Open Source Corollary:  They could still be GREAT users. 

MySQL celebrates the difference between their customers and their community.  Despite 4 million plus users in the community, the ratio of support and maintenance paying customers is apparently about 1:1000 users.  (Let's for a moment put aside the different OEM revenue stream, and focus on the original business.) MySQL understands that fundamentally those users will NEVER be customers, but provide business value differently.  (They may even encourage another set out of the community to become customers of a different vehicle called the "MySQL Network" -- and that's different too.)

Let's look at what those "freeloaders" provide:

• Huge beta test community:  Are all of them beta testers?  Obviously not.  But with a user base that large, they probably have a pretty reasonable test bed of real world experience to match any closed source company, AND some percentage of them will likely even offer fixes, some of which might be good, so the value of that beta tester is higher than a binary beta user (e.g. a Microsoft beta tester).  Even with the order of magnitude drop between users, bug reporters, bug fixers, and good bug fixes, a base of 4M means the collection of freeloaders provides a lot of collective value.
• A word-of-mouth marketing organization: Seth Godin regularly talks about "making something remarkable" and let your customers tell your story.  In this case, it's let your users tell your story.  Larry Augustin presented at OSBC a couple of years ago and talked about reducing the cost of sales on the balance sheet in an open source company, and how that still preserves the interesting ratios to Wall Street.  It's about not wasting time qualifying a sale down the "funnel" until you close the sale, but allowing a prospect to qualify themselves down the funnel such that sales's job is the minimal amount of time needed to close.  I think we would find that MySQL didn't need a pin-stripe suited direct sales force for some time keeping the cost of sales low.  This is incredibly efficient when it comes to the margins. 
• A platform innovation engine:  Here's where Alfresco may be blind to the opportunity in their community.  I imagine the MySQL partner community, i.e. the channel rather than the end customer may be more efficient at offering new innovations on the relational database engine.  The average end user may not have a lot to offer in query optimizer skills, but then who should *I* be to judge that fact?  A Microsoft story: within 24 hours of releasing the first (beta) version  of Rotor we received an optimizer fix for the JIT on the Intel chip set.  About twenty lines of code that created a 10% increase in JIT performance.  Rotor is a complete C#/CLR/Base Class Library implementation in source form at about 1M lines of code including the test suite.  Think about all those numbers for a moment. (Of course we couldn't accept the gift from our community, but that's a different story.)  Darned freeloaders.

Disclaimer: Optaros is a systems integration partner of Alfresco.  We are not a reseller.  We aren't interested in SPIFs.  We are technology agnostic and we will listen to our customers -- that's our incentive.  But if we use Alfresco as a base for a document management solution for our customer, REGARDLESS of whether or not Alfresco is able to sell the customer on the enterprise edition, we're going to make best efforts to provide any changes, enhancements, and bug fixes back to Alfresco. 

This is exactly what Optaros did in the ActiveMQ community.  We added a fundamental bit of functionality about a year ago, on behalf of a customer.  The customer agreed to assign the ownership of the change back to us to take back to the community, and we appropriately assigned the ownership to LogicBlaze Inc., the maintainer of that community.  (It turns out that this piece of missing functionality is what caused a large open source savvy financial institution to pass on ActiveMQ, and therefore LogicBlaze, in the previous year.) 

The change we made was certainly "mission critical" to our customer in the context of the solution, BUT it wasn't business differentiating to them, and they were happy to get the change back to the core community for the engineering efficiency of support in the future.  They weren't being altruistic.  They received value from the software.  They wanted to continue to see the value in the software.  They didn't want to live on a fork and eat the entire cost of maintenance.  Customer wins.  We win.  ActiveMQ project wins. LogicBlaze wins. 

But this presumes there is a fundamental message that is set from the very top.  You have to be rabidly fanatical about your community and the contribution they make.  If you scare them off, denigrate their work, or down play their importance, then you break the relationship and will get what you deserve.  Telling your community they're the unsupported experimental fringe in the same breath that you're telling your customers they should value "your" software isn't a good marketing message. Separate the messages. Two audiences require two discussions. 

Lastly, let's take a look at the whole "price" and proprietary "hook" issue.  First: price.  Price is the "equal sign" in the equation between consumers and producers.  It is set by the marketplace, not the producer or the consumer alone.  The "hook" is the value proposition to the customer.  Here's what the hook looks like:  30 seconds into the discussion with a prospect, the customer says, "Wait a minute:  This is a replacement for the over-bloated over-priced document management solution I get from Documentum, and it's an order of magnitude cheaper and easier to use?!?!?! I got to get me some of that!"

It has NOTHING to do with Alfresco's perception of the value of their hard work.  It has EVERYTHING to do with the customer's perception of the value of the solution.  Microsoft makes this mistake constantly.  They can see the hard work that goes into the innovation side of the equation and therefore believes the customer should see it that way too. 

Red Hat didn't succeed because they were selling "support and maintenance" on "free software" instead of a "license fee".  They succeeded because the customer perceived the value proposition of a well-packaged well-supported Linux-on-Intel replacement for their expensive SPARC/Solaris UNIX environment.

Customers care about business models about as much as they care about patents and other legal tools a producer uses in their operational environment.  Communities, however, care a lot about open source collaborative environments. Celebrate the differences between these two groups.  Love them each for the value brought to the company.   

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Comments

[Matt Asay]

The problem I have with this sanguine view of the world, Stephe, is that it deprecates the very thing that gives you a job: someone else's code. Someone had to write that code. Blessed are those who get to use without having to write, but if everyone's a user, and no one is a buyer, there is no more software to consult around.

Also, keep in mind that the views you promote above apply reasonably well to the OS, middleware, and database layer: infrastructure. They apply much less well to the applciations world, on several levels.

1. Customers more easily perceive "value" (in your view) in the infrastructure world because they're afraid to run it in a serious environment without support, or without investing a heck of a lot of internal resources to support it. Not so in the apps world.
   
2. It's easier to get away with an app that crashes than a database underlying a mission critical system. If Word crashes (which it does), I may lose a document. If my banking system goes down, I'm out serious cash. And yet I still think I should have to pay for Office. It offers me huge value. But if I could get it for free, I undoubtedly would.
   
3. It's harder to build communities around applications, because you don't have the same breadth of population to draw from. So, unlike MySQL, not everyone can afford to spread 70M databases throughout the world in the hopes of monetizing 1000 of those. Because there aren't 70M people using a CRM system, etc. It's just harder.

I'm not arguing that open source is bad - you know me better than that. I'm just arguing that it's not an easy road (though I do think it's better), and that I shouldn't be ecstatic to see users instead of buyers. Do I derive value from users? Absolutely. Can I stay in business on the basis of users alone. Absolutely not.

[Stephen Walli]

I'm going to push back in one place and (almost) agree on another. First the push back: there is nothing sanguine about consulting services businesses in the post bubble era, any more than there is around the value of packaged software. Our customers challenge us on rates constantly, asking why they should pay our rates for the solutions we build versus the rate for work done in India, or the rate from a local body shop full of the employees put out of work by the job migration to India. And then of course there's the challenge of margins. Please don't assume that the consulting business has it "easy" compared to product companies. We are every bit as creative in shaping our business model to the way customers buy consulting services today, as you need to be in the document management software product space.

Let's bring it back to the customer perspective (and draw on Christensen heavily). In Christensen's "Innovator's Solution", he sets a new business versus the incumbents with a few sets of "simple" questions. The answers drive the business model.

Is there a large group of people that historically have not had the money, equipment, or skill to do this thing for themselves, and as a result have gone without it altogether or have needed to pay someone with more expertise to do it for them? To use the product or service, do customers need to go to an incovenient, centralized location? One or both need to be TRUE.

Are there customers at the low end of the market who would be happy to purchase a product with less (but good enough) performance if they could get it at a lower price? Can we create a business model that enables us to earn attractive profits at the discount prices required to win the business of these over-served customers at the low end? BOTH answers need to be TRUE.

Finally: Is the business model innovation disruptive to ALL of the significant incumbent firms in the industry? (If it appears to be sustaining to one or more significant players in the industry, then the odds are stacked in that firm's favour, and the entrant is unlikely to win.)

I believe we will start to see the large systems integration firms hurt from the likes of our business models in the same way the large software companies are hurting in selective over-served spaces from companies developing open source solutions today. Those firms will fight it equally poorly to the FUD slinging of the threatened large software firms. Value moves to the adjoining network nodes.

I appreciate your challenge as an application is different than infrastructure software. But let's look at a different perspective on your "blessed are those who get to use without having to write." If Optaros developed a solution for a customer using Alfresco, REGARDLESS of your ability to sell the enterprise support and maintenance, we would be working with our customer to contribute the solution back. Let's assume it's a solution around document management in a particular vertical you haven't yet penetrated. Alfresco gets software BACK. The customer gets a customer solution quickly based on high quality solution. Optaros gets to pursue solutions with other customers in the vertical with similar needs, and an edge over our competition (and on rates) based on experience.

I am of course assuming here that Alfresco's use of Lucene and Spring means you're contributing all fixes and extensions back to those respective communities.

[Eric Albert]

"Of course we couldn't accept the gift from our community, but that's a different story." Ah, yes. Sigh. I wonder what things would've been like if that'd been possible....

[Ken Mulcahy]

Steven –

I saw Matt’s original post on this last week and have just now found time to get back and read the thread. What a lively conversation you’ve had. You both raise interesting points.

This conversation will evolve over time to be sure and to Matt’s original point, open source application vendors need to really get their model working or become irrelevant. Open source adoption and consolidation will happen quickly in the space.

Remember the old expression, “Netscape created the demand for the internet and Cisco filled it”. Will we be saying similar things like, “Alfresco created the demand for Open Source Document Management and _____________ filled it”?

Open Source application vendors have to be really concerned about where this train is headed. It’s obvious that Matt is.

Anyway, the main reason I’m posting is that I want to comment to your post about having your financial services client give you the IP rights to their code so that you could turn the code over to the community by giving the IP rights to the LogicBlaze and the ActiveMQ project.

Being a person who’s managed professional services engagements for over 10 years, I’ve spent a great deal of time on contractual issues like IP, liability, and indemnification. Most old school contracts cling to concepts like “work for hire”, “master slave”, and “total ownership of all IP”. While some companies like to try these approaches initially, I have found that they quickly back off once they understand the ramifications for this approach for your business and theirs.

I have concerns about you allowing your client to retain your IP rights, particularly when they’re associated with an open source project. Not only does this limit your company’s ability to do future professional services for other clients but it exposes future clients to the possibility of infringement and litigation.

I’m probably misinterpreting what you said, but if not, I will be happy to supply you with language that I have used with the Fortune 50 [including FS firms]in contracts for many years that will eliminate this problem. You can contact me directly if you’d like that language.

Great dialog . . . .

[Russ Danner]

As an open source company at the application layer you have to look for a completely different community. On the infrastructure layer you are looking for geeks to be your maker/innovators on the application layer you need to open it up to non technical people who can use configuration and plug ins to make new functionality. Yes you want them to download and use the software because you want them to innovate.

If they dont pay you they were never going to pay you anyway -- they just wouldnt use your software.