Open Source

Open source is starting to make a dent in proprietary software fortunes

Open source has promised to unseat proprietary competitors for decades, but the cloud may make the threat real.

Open source

Proprietary software is dead. That's what we've been saying ever since Linux appeared, yet every year the Microsofts and Oracles of the world keep selling billions of dollars worth of software. And while there are clear signs that the proprietary party is slowing down, that hasn't necessarily translated into open source victory.

According to a new Deutsche Bank Securities analysis ("The Torvalds Legacy - The Rise of Open Source"), however, open source's "disruption risk appears to be rising."

The times they are a'changing

A lot has changed in the past 20 years relative to open source, but one thing remains true: there is only one billion-dollar open-source vendor, Red Hat. While there are a number of companies that make billions selling other services on top of open source, only Red Hat has managed to turn open source into big business.

That may be about to change, according to Deutsche Bank's research:

"Compared to the environment in the 1990's when Red Hat was scaling up and threatening Microsoft, open source has gone mainstream inside many large enterprises and there are dozens of credible open-source software vendors that have reached the scale necessary to service large and demanding enterprise customers.

"The incumbent and closed sourced software vendors themselves understand the appeal, as internally they are integrating more and more open-source components within their own offerings. Enterprise software is no longer built from the ground up; it is borrowed and patched together using open-source components, that's the new reality."

This is positive news, given that open source's biggest impact on proprietary vendors to date has mostly been about deflationary pricing pressure. For example, Hadoop comes in at 1/10th the cost of a traditional enterprise data warehouse appliance.

Part of the issue comes down to who makes purchasing decisions today. While it's overstated to suggest that developers drive all purchasing decisions, it's absolutely the case that the bottom-up approach to sales is increasingly the norm:

"The open-source vendors employ a bottom-up and developer-focused selling model. As overall IT budgets remain constrained and as software vendors need to sell to business units and CMOs in addition to the CIOs office, this sales model looks increasingly attractive."

Not that proprietary vendors can't mimic it. After all, Tableau and others have embraced a "try before you buy" model, and I suspect we'll see this become standard operating procedure for all companies, whether open source or not. Even so, it's an uncomfortable approach for many of the old guard which are used to a top-down, expensive sales force.

Who's most at risk?

This isn't good for incumbent vendors. As the report signals, "The popularity of open-source software has reached a point such that almost every incumbent and publicly-traded proprietary software vendor has an emerging privately held open-source rival that is targeting it." Still, a market like Business Intelligence is so large that an up-and-coming open-source vendor can easily get lost as a rounding error. At least for now.

Where open source is having a near-term impact, according to the report, is "more in the data management and infrastructure software sectors." Still, others are also feeling the heat:

"Publicly-traded vendors that are feeling some heat, include Microsoft (competing with various Google open-source products as well as Red Hat in the server OS space), Oracle and Teradata (dealing with the Hadoop and NoSQL vendors), Informatica (competing with Talend), TIBCO (dealing with MuleSoft), and Adobe (competing with Acquia)."

On the infrastructure technologies, former Cowen & Co. analyst Peter Goldmacher suggests that enterprises increasingly come to "the realization that not only are these products cheaper, but they are more flexible and better suited to many legacy workloads, and they offer end users the optionality to expand project scope beyond the constraints associated with legacy product, whether those constraints are cost or capabilities."

So, who makes a billion?

While this likely translates into lots of value for end users of open-source technology, it won't necessarily make any open-source vendor into the next billion-dollar unicorn. And that's OK. As Redmonk analyst Stephen O'Grady puts it, "The only remaining questions... regarding the economics of open source are whether they can duplicate the margins of their proprietary predecessors, and frankly, I think most customers hope they don't."

To get higher margins and generate more sales, virtually all open-source companies currently turn to at least a little proprietary differentiation to accelerate sales. Cloudera, a leading Hadoop vendor, will generate more than $100 million in revenue this year with such a model.

But I think more companies will increasingly turn to the cloud, selling software services even as they make the underlying code available under an open-source license. Red Hat already does this with OpenShift, and Acquia (Drupal), Alfresco, SugarCRM, and a range of other open-source companies have been experimenting with the model for years.

Unlike its deflationary effect on proprietary vendors, the cloud should prove an inflationary influence for open-source vendors, as it offers a clear monetization strategy. That's the one big thing that has been missing from open source's impact on software, and it won't be good news for the incumbents.

About Matt Asay

Matt Asay is a veteran technology columnist who has written for CNET, ReadWrite, and other tech media. Asay has also held a variety of executive roles with leading mobile and big data software companies.

Editor's Picks

Free Newsletters, In your Inbox