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10.5 Why Give It Away? The Business of Open Source

Learning Objectives

  1. Understand the disproportional impact OSS has on the IT market.
  2. Understand how vendors make money on open source.
  3. Know what SQL and MySQL are.

Open source is a sixty-billion-dollar industry,M. Asay, “Open Source Is a $60 Billion Industry,” CNET, May 15, 2008. but it has a disproportionate impact on the trillion-dollar IT market. By lowering the cost of computing, open source efforts make more computing options accessible to smaller firms. More reliable, secure computing also lowers costs for all users. OSS also diverts funds that firms would otherwise spend on fixed costs, like operating systems and databases, so that these funds can be spent on innovation or other more competitive initiatives. Think about Google, a firm that some estimate has over 1.4 million servers. Imagine the costs if it had to license software for each of those boxes!

Commercial interest in OSS has sparked an acquisition binge. Red Hat bought open source application server firm JBoss for $350 million. Novell snapped up SUSE Linux for $210 million (and was later bought by Attachmate for $2.2 billion). And Sun plunked down over $1 billion for open source database provider MySQL.A. Greenberg, “Sun Snaps Up Database Firm, MySQL,” Forbes, January 16, 2008; G. Huang, “Attachmate Buys Novell for $2.2B—The End of an Era,” Xconomy, November 22, 2010. And with Oracle’s acquisition of Sun, one of the world’s largest commercial software firms has zeroed in on one of the deepest portfolios of open source products.

But how do vendors make money on open source? One way is by selling support and consulting services. While not exactly Microsoft money, Red Hat, the largest purely OSS firm, reported nearly a billion dollars in revenue from paying customers subscribing for access to software updates and support services.A. Greenberg, “Sun Snaps Up Database Firm, MySQL,” Forbes, January 16, 2008.  Oracle, a firm that sells commercial ERP and database products, provides Linux for free, selling high-margin Linux support contracts for as much as five hundred thousand dollars.J. Fortt, “Why Larry Loves Linux (and He’s Not Alone),” Fortune, December 19, 2007.  The added benefit for Oracle? Weaning customers away from Microsoft—a firm that sells many products that compete head-to-head with Oracle’s offerings. Service also represents the most important part of IBM’s business. The firm now makes more from services than from selling hardware and software.J. Robertson, “IBM Sees Better-Than-Expected 2009 Profit, Earns US$4.4 Billion in Q4,” Associated Press, January 20, 2009, http://humantimes.com/finance/business/sanfrancis/54853.  And every dollar saved on buying someone else’s software product means more money IBM customers can spend on IBM computers and services. Sun Microsystems was a leader in OSS, even before the Oracle acquisition bid. The firm has used OSS to drive advanced hardware sales, but the firm also sells proprietary products that augment its open source efforts. These products include special optimization, configuration management and performance tools that can tweak OSS code to work its best.C. Preimesberger, “Sun’s ‘Open’-Door Policy,” eWeek, April 21, 2008. 

Here’s where we also can relate the industry’s evolution to what we’ve learned about standards competition in our earlier chapters. In the pre-Linux days, nearly every major hardware manufacturer made its own, incompatible version of the Unix operating system. These fractured, incompatible markets were each so small that they had difficulty attracting third-party vendors to write application software. Now, much to Microsoft’s dismay, all major hardware firms run Linux. That means there’s a large, unified market that attracts software developers who might otherwise write for Windows.

To keep standards unified, several Linux-supporting hardware and software firms also back the Linux Foundation, the nonprofit effort where Linus Torvalds serves as a fellow, helping to oversee Linux’s evolution. Sharing development expenses in OSS has been likened to going in on a pizza together. Everyone wants a pizza with the same ingredients. The pizza doesn’t make you smarter or better. So why not share the cost of a bigger pie instead of buying by the slice?S. Cohen, “Open Source: The Model Is Broken,” BusinessWeek, December 1, 2008. With OSS, hardware firms spend less money than they would in the brutal, head-to-head competition where each once offered a “me too” operating system that was incompatible with rivals but offered little differentiation. Hardware firms now find their technical talent can be deployed in other value-added services mentioned above: developing commercial software add-ons, offering consulting services, and enhancing hardware offerings.

Linux on the Desktop?

While Linux is a major player in enterprise software, mobile phones, and consumer electronics, the Linux OS can only be found on a tiny fraction of desktop computers. There are several reasons for this. Some suggest Linux simply isn’t as easy to install and use as Windows or the Mac OS. This complexity can raise the total cost of ownership (TCO)All of the costs associated with the design, development, testing, implementation, documentation, training and maintenance of a software system. of Linux desktops, with additional end-user support offsetting any gains from free software. The small number of desktop users also dissuades third party firms from porting popular desktop applications over to Linux. For consumers in most industrialized nations, the added complexity and limited desktop application availability of desktop Linux just it isn’t worth the one to two hundred dollars saved by giving up Windows.

But in developing nations where incomes are lower, the cost of Windows can be daunting. Consider the OLPC, Nicholas Negroponte’s “one-hundred-dollar” laptop. An additional one hundred dollars for Windows would double the target cost for the nonprofit’s machines. It is not surprising that the first OLPC laptops ran Linux. Microsoft recognizes that if a whole generation of first-time computer users grows up without Windows, they may favor open source alternatives years later when starting their own businesses. As a result, Microsoft has begun offering low-cost versions of Windows (in some cases for as little as seven dollars) in nations where populations have much lower incomes. Microsoft has even offered a version of Windows to the backers of the OLPC. While Microsoft won’t make much money on these efforts, the low cost versions will serve to entrench Microsoft products as standards in emerging markets, staving off open source rivals and positioning the firm to raise prices years later when income levels rise.

MySQL: Turning a Ten-Billion-Dollars-a-Year Business into a One-Billion-Dollar One

Finland is not the only Scandinavian country to spawn an open source powerhouse. Uppsala Sweden’s MySQL (pronounced “my sequel”) is the “M” in the LAMP stack, and is used by organizations as diverse as FedEx, Lufthansa, NASA, Sony, UPS, and YouTube.

The “SQL” in name stands for the structured query languageA language for creating and manipulating databases. SQL is by far the most common database standard in use today, and is supported by many commercial and open source products., a standard method for organizing and accessing data. SQL is also employed by commercial database products from Oracle, Microsoft, and Sybase. Even Linux-loving IBM uses SQL in its own lucrative DB2 commercial database product. Since all of these databases are based on the same standard, switching costs are lower, so migrating from a commercial product to MySQL’s open source alternative is relatively easy. And that spells trouble for commercial firms. Granted, the commercial efforts offer some bells and whistles that MySQL doesn’t yet have, but those extras aren’t necessary in a lot of standard database use. Some organizations, impressed with MySQL’s capabilities, are mandating its use on all new development efforts, attempting to cordon off proprietary products in legacy code that is maintained but not expanded.

Savings from using MySQL can be huge. The Web site PriceGrabber pays less than ten thousand dollars in support for MySQL compared to one hundred thousand to two hundred thousand dollars for a comparable Oracle effort. Lycos Europe switched from Oracle to MySQL and slashed costs from one hundred twenty thousand dollars a year to seven thousand dollars. And the travel reservation firm Sabre used open source products such as MySQL to slash ticket purchase processing costs by 80 percent.D. Lyons, “Cheapware,” Forbes, September 6, 2004.

MySQL does make money, just not as much as its commercial rivals. While you can download a version of MySQL over the Net, the flagship product also sells for four hundred ninety-five dollars per server computer compared to a list price for Oracle that can climb as high as one hundred sixty thousand dollars. Of the roughly eleven million copies of MySQL in use, the company only gets paid for about one in a thousand.A. Ricadela, “The Worth of Open Source? Open Question,” BusinessWeek, June 26, 2007. Firms pay for what’s free for one of two reasons: (1) for MySQL service, and (2) for the right to incorporate MySQL’s code into their own products.D. Kirkpatrick, “How the Open Source World Plans to Smack Down Microsoft and Oracle, and…,” Fortune, February 23, 2004. Amazon, Facebook, Gap, NBC, and Sabre pay MySQL for support; Cisco, Ericsson, HP, and Symantec pay for the rights to the code.A. Ricadela, “The Worth of Open Source? Open Question,” BusinessWeek, June 26, 2007. Top-level round-the-clock support for MySQL for up to fifty servers is fifty thousand dollars a year, still a fraction of the cost for commercial alternatives. Founder Marten Mickos has stated an explicit goal of the firm is “turning the $10-billion-a-year database business into a $1 billion one.”D. Kirkpatrick, “How the Open Source World Plans to Smack Down Microsoft and Oracle, and…,” Fortune, February 23, 2004.

When Sun Microsystems spent over $1 billion to buy Mickos’ MySQL in 2008, Sun CEO Jonathan Schwartz called the purchase the “most important acquisition in the company’s history.”S. Shankland, “Google’s Open-Source Android Now Actually Open,” CNET, October 21, 2008, http://news.cnet.com/8301-1001_3-10071093-92.html. Sun hoped the cheap database software could make the firm’s hardware offerings seem more attractive. And it looked like Sun was good for MySQL, with the product’s revenues growing 55 percent in the year after the acquisition.M. Asay, “Open-Source Database Market Shows Muscles,” CNET, February 3, 2009, http://news.cnet.com/8301-13505_3-10156188-16.html.

But here’s where it gets complicated. Sun also had a lucrative business selling hardware to support commercial ERP and database software from Oracle. That put Sun and partner Oracle in a relationship where they were both competitors and collaborators (the “coopetition” or “frenemies” phenomenon mentioned in Chapter 6 "Understanding Network Effects"). Then in spring 2009, Oracle announced it was buying Sun. Oracle CEO Larry Ellison mentioned acquiring the Java language was the crown jewel of the purchase, but industry watchers have raised several questions. Will the firm continue to nurture MySQL and other open source products, even as this software poses a threat to its bread-and-butter database products? Will the development community continue to back MySQL as the de facto standard for open source SQL databases, or will they migrate to an alternative? Or will Oracle find the right mix of free and fee-based products and services that allow MySQL to thrive while Oracle continues to grow? The implications are serious for investors, as well as firms that have made commitments to Sun, Oracle, and MySQL products. The complexity of this environment further demonstrates why technologists need business savvy and market monitoring skills and why business folks need to understand the implications of technology and tech-industry developments.

Legal Risks and Open Source Software: A Hidden and Complex Challenge

Open source software isn’t without its risks. Competing reports cite certain open source products as being difficult to install and maintain (suggesting potentially higher total cost of ownership, or TCO). Adopters of OSS without support contracts may lament having to rely on an uncertain community of volunteers to support their problems and provide innovative upgrades. Another major concern is legal exposure. Firms adopting OSS may be at risk if they distribute code and aren’t aware of the licensing implications. Some commercial software firms have pressed legal action against the users of open source products when there is a perceived violation of software patents or other unauthorized use of their proprietary code.

For example, in 2007 Microsoft suggested that Linux and other open source software efforts violated some two hundred thirty-five of its patents.A. Ricadela, “Microsoft Wants to ‘Kill’ Open Source,” BusinessWeek, May 15, 2007. The firm then began collecting payments and gaining access to the patent portfolios of companies that use the open source Linux operating system in their products, including Fuji, Samsung, and Xerox. Microsoft also cut a deal with Linux vendor Novell in which both firms pledged not to sue each other’s customers for potential patent infringements.

Also complicating issues are the varying open source license agreements (these go by various names, such as GPL and the Apache License), each with slightly different legal provisions—many of which have evolved over time. Keeping legal with so many licensing standards can be a challenge, especially for firms that want to bundle open source code into their own products.Sarah Lacy, “Open Warfare in Open Source,” BusinessWeek, August 21, 2006. An entire industry has sprouted up to help firms navigate the minefield of open source legal licenses. Chief among these are products, such as those offered by the firm Black Duck, which analyze the composition of software source code and report on any areas of concern so that firms can honor any legal obligations associated with their offerings. Keeping legal requires effort and attention, even in an environment where products are allegedly “free.” This also shows that even corporate lawyers had best geek-up if they want to prove they’re capable of navigating a twenty-first-century legal environment.

Key Takeaways

  • Business models for firms in the open source industry are varied, and can include selling services, licensing OSS for incorporation into commercial products, and using OSS to fuel hardware sales.
  • Many firms are trying to use OSS markets to drive a wedge between competitors and their customers.
  • Linux has been very successful on mobile devices and consumer electronics, as well as on high-end server class and above computers. But it has not been as successful on the desktop. The small user base for desktop Linux makes the platform less attractive for desktop software developers. Incompatibility with Windows applications, switching costs, and other network effects-related issues all suggest that Desktop Linux has an uphill climb in more mature markets.
  • MySQL is the dominant open source database software product. Adoption of the SQL standard eases some issues with migrating from commercial products to MySQL.
  • OSS also has several drawbacks and challenges that limit its appeal. These include complexity of some products and a higher total cost of ownership for some products, concern about the ability of a product’s development community to provide support or product improvement, and legal and licensing concerns.

Questions and Exercises

  1. Describe the impact of OSS on the IT market.
  2. Show your understanding of the commercial OSS market. How do Red Hat, Oracle, Oracle’s Sun division, and IBM make money via open source?
  3. Visit Mozilla.org. Which open source products does this organization develop? Investigate how development of these efforts is financed. How does this organization differ from the ones mentioned above?
  4. What is the Linux Foundation? Why is it necessary? Which firms are members, underwriting foundation efforts?
  5. List the reasons why Linux is installed on only a very small fraction of desktop computers. Are there particular categories of products or users who might see Linux as more appealing than conventional operating systems? Do you think Linux’s share of the desktop market will increase? Why or why not?
  6. How is Microsoft combating the threat of open source software and other free tools that compete with its commercial products?
  7. What is the dominant open source database software product? Which firms use this product? Why?
  8. Which firm developed the leading OSS database product? Do you think it’s more or less likely that a firm would switch to an OSS database instead of an OSS office suite or desktop alternative? Why or why not?
  9. How has stewardship of the leading OSS database effort changed in recent years? Who oversees the effort today? What questions does this raise for the product’s future? Although this book is updated regularly, current events continue to change after publication of this chapter. Investigate the current status of this effort—reaction of the developer community, continued reception of the product—and be prepared to share your findings with class.
  10. List some of the risks associated with using OSS. Give examples of firms that might pass on OSS software, and explain why.