On the perceived danger of open source

A blog post was written making the argument that, as pricing dropped, so did quality, in software, in patents, in pretty much everything covered. The author suggested that open source will be, effectively, the death of the software industry. Not to mention burying Sun Microsystems.

Ok … I could fisk the post, but its better just to note that too many things are being conflated and confused in the article … it would take less time to simply point out reality than try to correct what I saw.

First major point: open source is providing a significant challenge to pre-existing business models. Specifically business models that dependent upon scarcity, and controlled access are fundamentally under attack by a model that effectively requires free redistribution rights. That is, what is under attack is the basis for the business model, and therefore the business model itself. This doesn’t mean that it is impossible to make money with open source software. Sadly the author didn’t quite grasp this.

To wit, Redhat sells a product (not quite, more in a moment) that is free. That is, they are required to enable others to download their bits, and cannot impose any restrictions on source OR binary redistribution. So, with this incapacity in mind, precisely why is Redhat breaking profitability and growth records?

Remember … they sell a product …. or … do they? Redhat is an open source aggregator. They take many different projects and weave them all (with open source code) into a complete package. They then support this package.

And they make you pay for support. You buy a license, not for the software, but for the support.

If the author of the article got this, then it wasn’t apparent in his writing.

Redhat, an open source company, is making money by selling service, support, and an aggregation of value.

It is making very good money, and is by all measures, continuing a rapid expansion of its business.

And its software can be copied for free. With no restriction.

And corporations buy these licenses for access to support, by the barrel.

Again, if the posts author grasped this, he probably would not have made the argument he did.

Open source is most definitively challenging existing software business models. It is forcing companies to adapt business models.

The author pulls out the cell phone industry as an example of his race to zero thesis, with free calls, free phones,etc. So if new technology drops the marginal cost for a provider, of providing a call … that is, their cost for each call just went from $X to $(X-delta), where delta may be of comparable size to X, then the cell phone companies margins have just massively increased. If they want to pressure their competitors, they can. By lowering prices, without impacting margins.

Changing technology allows a shift of business model.

It doesn’t mean that the price will drop forever, but as technology and production costs get better with new processes, marginal cost of the next handset is lower. Keep improving the handsets, and you can cover the purchase cost with a slightly higher margin, and guaranteed income for N years. This is the basis for the discounted phone plans. They have a guaranteed income, with good margin. They can cut out the cost of the phone from some of that margin, without impacting profits.

Which is what they do.

I am not attacking the author. He claimed “he gets it” relative to open source. Unfortunately, his examples are flawed (see above), and his analysis of the flawed examples doesn’t lend support to his thesis.

Second major point: Sun Microsystems isn’t augering in due to open source software. Sun is a hardware company. Really. Software (like it is for most hardware companies) is a distraction for them. Sun still hasn’t come quite to terms with the status of Solaris in the market, and are having trouble accepting the verdict of the market. They are free to try to change this, and they are trying.

Fundamentally, what is doing in Sun, is what did in SGI, and any number of other companies. A fundamental failure to adapt to a changing market, and changing market conditions.

Not to mention a changing IT hardware market.

There was a period of time where when you started a new IT project, you called up Sun, and bought hardware. Sun sold so much stuff. It never quite learned why it sold. Which meant that it never really figured out what to do when its stuff stopped selling and other things started selling.

Companies still bought hardware.

Just not Sun’s.

Which is why Sun is where it is today. They still haven’t quite grasped the business model they need. Read various online fora where current/former Sun folks hang out, and you get a sense bewilderment. Not that the people at Sun are dumb, they most assuredly are not. Its simply that they (the ones who need to) don’t grasp how the market has changed, and where and how they can fit in. The worker bees to which I refer, are largely scratching their heads, making for a good imitation of stuff that happened within SGI when we saw the (often ridiculous) crap that senior management foisted on us as the next great thing.

Sun is very much headed down that same path. It is because it still wants to charge customers like its 1999 (no offense to Prince), not quite grasping what is different about 2009 … in terms of what it needs to do.

It still could pull out of a tail spin, though this isn’t likely withsineout outside intervention, to make the hard choices that need to be made.

IBM would have been an interesting acquisition. I doubt there are other suitors … Dell’s business model is one that works, and hopefully they won’t buy a business model that doesn’t work. IBM is very good at running businesses. They make hard choices. With so much overlapping product offerings, huge swaths would have been cut out of Sun.

We could venture into discussions of what killed the deal, but it is better to ask where is the value within Sun. Remember, they are a hardware company. But thats not where the value is.

Until you understand your business, and what your customers are willing to pay for and why, you can’t grow your business … well … not in a sustainable manner. This is something IBM has done a bangup job with, and something Sun has not.

Sun isn’t going under due to open source. Sun is in trouble because of a rapidly changing hardware market where they have a technology of diminishing interest to the market, and haven’t quite formulated a way that they differ from Dell to explain to the market, that the market actually values. And they need to.

Because you need to understand your market value, and what customers value from you in order to be able to explain why you are different and better. Otherwise you are the same as the others, and then you have to worry about getting into an arms race with an opponent (or set of opponents) with much better capitalization, market share, and mind share. There is no way this can end other than badly for Sun, unless they change some fundamental things.

Don’t get me wrong, this is not easy. Ask a Sun person what their elevator pitch is and chances are you are going to hear things the market doesn’t value. And they haven’t changed it in a while.

They haven’t adapted.

The pitch may have made sense at some point, but does it now?

A good company, one that wants to grow, adapts to changing market and business conditions. A company whose raison d’etre is being threatened will fight tooth and nail to prevent that model from changing. Ala the RIAA lawsuits against their own customers.

Instead of grasping the new business mode, they fight terribly hard against it. It doesn’t look like Apple is doing too bad with that model … it looks like that model is swamping the rest of their business. And Apple is smart enough to adapt to a changing market. A fairly large number of RIAA members have been dragged kicking and screaming into this business model. The ones who saw the light early are doing well. The others …. not so much.

Whats killing Sun? Failure to adapt.

Same thing thats killing news outlets in the US. Customers want them to push bits, not atoms. They haven’t quite figured out a business model with that yet. Though, if they were clever, they would sit down with Google and hash one out. I’d bet Google has a very good idea on how to make money in this.

What kills companies in a rapidly changing market, is a failure to adapt to the new situation.

This is what is the point of stress in the software industry the blog poster missed. It’s not a race to zero price, with value being the inverse of price …

Open source lowers acquisition costs. It lowers marginal deployment costs. It lowers barriers to usage.

Take Sun’s ZFS for the moment. Without an OpenSolaris, ZFS would have effectively languished as a very small installed base file system. With OpenSolaris, it is open to a much wider audience. Imagine if they had gone whole hog and GPLed it. I’d imagine that a fairly large percentage of Linux users would use it.

What Sun doesn’t comprehend is the value in this. Which is a shame.

Unfortunately, the author of the blog post also missed this.

The market is changing what it values, and it is causing stress to companies with business models which are under attack.

Like Clayton Christensen pointed out, there is creative destruction in the market. Not just products are under stress, but models.

Whats going on in the market is simple.

Think of it as evolution in action.

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