Source:
LinuxInsider.com
URL link:
http://www.linuxinsider.com/rsstory/46479.html
Highlights:
Eighteen months ago, John
Roberts, Clint Oram and Jacob Taylor decided to quit their jobs at Epiphany, a maker of customer-relationship software Get
your FREE Oracle Database Software Kit today!. The trio wanted to target the same market, but write a new application
developed using open-source code. It took them only three months to create the program and just another month to close their
first round of funding. Little more than a year later, their company, SugarCRM, has given away more than 325,000 copies of
its software, and raised a second round of capital, for a total of US$7.75 million.
Giving away software isn't your
typical path for a venture-capital-backed startup. But Roberts & Co. are smack in the middle of the next frontier of the
open-source movement: business applications. "No one had funded an open-source application company at that point -- it was
all infrastructure," says CEO Roberts. "We broke a glass ceiling."
A Step at a Time
Consider it
shattered. The open-source movement is making another big thrust forward. Entrepreneurs, investors and many analysts say
they're confident that all of a company's business software -- representing hundreds of millions in sales -- will soon be
available as open source Security, strength, a lower TCO: find out about all the advantages of IBM Middleware on Linux.
Latest News about open source. "I don't think there are any limits," says Ray Lane, a Kleiner Perkins Caufield & Byers
partner and software industry veteran.
Many of Lane's colleagues agree. Venture capitalists have pumped nearly $400
million into 50 open-source companies in the last 18 months -- and more are on the way. That may not seem like a lot of
money, but bear in mind these companies are incredibly capital-efficient. They don't need to hire armies of salespeople or
engineers, because the open-source community does a good deal of the heavy lifting.
Investors have funded new
ventures offering everything from broad business applications, like business intelligence programs that monitor company
operations, to very specialized applications, like running a hospital's computer systems.
Every open-source program
companies download, investors say, marks one step closer to changing forever the applications business long dominated by the
likes of SAP (NYSE: SAP) Latest News about SAP AG, Oracle (Nasdaq: ORCL) Latest News about Oracle and Microsoft (Nasdaq:
MSFT) Latest News about Microsoft. Software that companies once paid millions for is now available for free via the Internet
Web Hosting and Web Design services from the original domain name registrar, Network Solutions.. Harried tech managers can
simply download an operating system or application and play with it -- no need to free sizable chunks of the budget or get
the board to sign off, as is the case with big, multimillion-dollar purchases. And since this is open source, they can
customize the programs on the fly to better fit their needs.
Whole Enchilada
A new open-source
ecosystem is emerging. While a big push is on to develop more applications, the movement is much broader: Tech-services
companies are popping up to jump-start adoption of all of this open-source software.
Consider SpikeSource, headed by
software veteran Kim Polese, who founded Marimba and is one of the original developers of Sun Microsystems' (Nasdaq: SUNW)
Latest News about Sun Microsystems Java Latest News about Java software. SpikeSource was incubated at Kleiner Perkins under
Lane's watch. "We were looking at these open-source component companies like MySQL and JBoss, and every one of these things
is just a little piece of a big puzzle," says Lane. "We said, 'Why don't we play the whole puzzle?'"
SpikeSource,
and competitor SourceLabs, both act as a go-between for big corporations and open-source projects, by finding, testing and
evaluating ideas by the hundreds. Then they consult with companies on how to implement them, and provide support if something
goes wrong. For legal safeguards, there are even startups like BlackDuck, a Waltham, Mass.-based company that digs into
whatever open-source code a company has downloaded to make sure the licenses are all in order to avoid liability
issues.
Trailblazers
"It was really a Wild West when we started with open source," says Charlie
Brenner, senior vice-president of Fidelity's Center for Applied Technology, which manages its open-source projects. The
financial services giant is an investor in SpikeSource -- and also a customer. "SpikeSource is a perfect example of a company
doing for the external world what we've done internally. It's well worth the price for us."
The Linux operating
system, which burst on the scene in 1991, led the first big wave of open-source software. The program, developed and
maintained by thousands of volunteers, already represents a $4.2 billion slice of the $49 billion server Get Linux or Windows
Managed Hosting Services with Industry Leading Fanatical Support. Latest News about Servers market, and is set to grow at
least 15 percent a year for the next five years.
In the Web-browser market, open-source champion Mozilla Latest News
about Mozilla Foundation Firefox has captured an 8 percent share of the business. That's not much when you compare it to the
87 percent share held by Microsoft's Internet Explorer. But Firefox has been steadily growing -- knocking IE's share of the
market to under 90 percent for the first time in years. Not many software companies have been able to chip away at the giant
of Redmond, Wash.
Bottom-Line Impact
Then came infrastructure Discover a better way to manage the
business of IT with IBM Tivoli solutions. companies such as MySQL, a challenger to Oracle's database business, and JBoss,
which markets open-source application-server software to compete against proprietary programs sold by BEA Systems (Nasdaq:
BEAS) Latest News about BEA Systems and IBM (NYSE: IBM) Latest News about IBM. So far, these companies are mostly small and
private, but they're doubling and tripling in revenue every year.
More impressive, many already are profitable,
thanks to the low cost of operating an open-source business. Analysts expect MySQL to make $40 million in revenue this year.
"We're probably one of their biggest customers," says Greg Gianforte, chief executive of RightNow Technologies (Nasdaq:
RNOW) Latest News about RightNow Technologies, which hosts software that manages call centers for
companies.
Gianforte says his company has slashed expenses by running entirely on open-source software. "[Open
source] has a tremendous impact on the profitability of the business," he says. His tech costs, which include personnel,
communications and equipment, now run approximately 6 percent of revenues -- down from around 20 percent if he used all
proprietary software or as high as 40 percent for top-of-the-line proprietary software, he says.
Buzz
Word
A gold-rush mentality is developing in open source. Many venture capitalists are so eager to find the next
hot vehicle, they're going so far as to scour Web sites that coordinate ongoing open-source projects, looking for anything
that promises to blossom into a business.
Entrepreneurs are every bit as eager. The words "open source" are finding
their way into pitches and PowerPoint presentations around the world. After Nick Sturiale, partner at Sevin Rosen Funds,
invested in open-source startup XenSource, which makes software to manage efficient use of computing power, more than 30
entrepreneurs came to pitch him open-source ideas.
Sturiale didn't fund any of them, and more than half weren't
worth a second meeting, he says. "There's a flash crowd developing, and it's unfortunate," he says, skeptical that many of
the deals being funded will make it. "There are too many VCs and not enough growth markets."
Freeloading
Of course, it's too early to tell if these companies will sprout into thriving ventures and
produce venture-style returns. Most business models rely on giving the software away over the Web, then either charging for a
souped-up version of the program or for training, maintenance and support.
But revenue continues to be a problem.
While open-source companies trumpet hundreds of thousands of downloads, on average just about 2 percent of those customers
are actually paying any money. After all, just because every piece of software companies rely on to run their businesses can
be replicated with open-source alternatives, that doesn't mean there's a market for it, caution analysts.
The
upside is that many more companies will try open-source software because it's free. The viral nature of the Web and the
open-source community means companies don't need a costly sales organization. Instead of hiring expensive, experienced
salespeople and investing a lot of money and time in closing deals with skeptical CIOs, open-source companies just put their
code online. Developers within companies often download the software for a test drive. Word of mouth spreads the news. Before
long, young companies such as SugarCRM and JasperSoft are getting tens of thousands downloads a day, without spending a dime
on sales calls.
Niche Dwellers
Because of this low cost of entry, some companies are skirting
the venture-capital route altogether. Two of the oldest and most successful application companies, Digium and Compiere, have
never taken a dime of funding, nor have they needed it. They may never develop into $1 billion businesses, but they've
carved a nice niche in the open-source landscape. Jorg Janke, founder of Compiere, says he has turned down numerous offers of
venture-capital funding.
Compiere makes open-source enterprise resource-planning software. It's a tough category,
because the program runs everything from a company's accounting to manufacturing to human resources. The software usually
takes a lot of customization and can cost companies millions of dollars to install and maintain.
Even so, companies
have downloaded nearly 900,000 copies of Compiere's software since the outfit was launched in 1999. Janke doesn't delude
himself that big companies will pick Compiere over SAP or Oracle, but he has found interesting niches in the midsize business
world -- prisons, for example. Most have several small businesses Latest News about small business running within them, such
as license-plate manufacturers, and need some low-cost software to manage those operations. "We didn't even target them," he
says. "They found us."
Three Requirements
But Compiere makes money on only a small percentage
of its customer base. It relies on a network of some 60 independent resellers to do a lot of the customization its software
requires. Some implementations reach the $50,000 range, but Compiere takes just a small cut of that. But with very low
overhead, the company has been profitable since 2003 and is doubling revenue every year, Janke says. "Our business model
isn't to conquer the world or to be super-profitable," he says. "We just want to have a sustainable
business."
Companies with venture backing will have to do better than that. And because only a small percentage of
downloaders are paying customers, they'll have to do far more volume than the average startup. That worries some
investors.
Danny Rimer of Index Ventures has been one of the more aggressive investors in open source. Having funded
MySQL and voice over Internet protocol company Skype, Rimer isn't turned off by a business model that relies on free
downloads to gain steam. But making such businesses successful requires three things, he says.
First, it has to be a
commodity product, like database software in the case of MySQL. It also has to be a type of software that's so common
companies know what it is and why they need it before they consider replacing their existing software with a no-frills
alternative. And it needs a huge market of users so frustrated by the expense or hassle of existing software that they're
motivated to try open source. Rimer thinks there's opportunity for some of the service companies and infrastructure
companies. But when it comes to open-source applications, he's not so sure the commodity market is large enough.
Big Guns
Rimer may have a point -- at least in the near term. Even the biggest proponents of open
source aren't moving their entire businesses to it any time soon. "We're great enthusiasts of open source, but we're still
very much committed to the systems we get from large vendors," Fidelity's Brenner says. "We rely on large-scale commercial
vendors' applications, and we're not likely to move away from them."
Over time, if the software works as
advertised, you can bet companies like Fidelity will move more and more of their business to open source. But it will be a
gradual process -- and that could spell trouble for VCs betting too heavily on it now. "A small business that's highly
profitable making $15 million year in and year out isn't going to move the dial for us," Rimer says. "We're looking to
invest in major software vendors."
The new generation of open-source companies will soon get the chance to prove just
how mainstream their software can become.