James Dixon’s Blog

James Dixon’s thoughts on commercial open source and open source business intelligence

Comparing open source and proprietary software markets

with 22 comments

An excellent post on decisionstats.com in response to Jason Stamper’s CBR interview with SAS CEO Jim Goodnight highlights some issues that arise when you try to compare open source, commercial open source, and proprietary software in the marketplace.

The issues arise because the economics of the  offerings are so different that traditional measures don’t work as well as they used to. As pointed out on decisionstats the commercial open source offerings (as yet) don’t amount to much when you compare revenue $ on paper.

There are several problems when attempting an analysis like this.

1. Stale Metrics

A few years ago the analysts of the operating systems market were confused. Everywhere they went they saw Linux machines in the server room. But every time they surveyed the market their results showed that Linux had a 2% market share. Their statistical data did not match the real world they witnessed. Why? They were asking the wrong question.

I’ll illustrate this problem using another domain. Let’s say we compare the actual usage of automobiles (vs unit sales) by looking at the total amount of gasoline bought by their owners. Up until a while ago the differences in mileage consumption between different vehicles was small enough to be safely ignored. But if you use that metric today you’ll come to the conclusion that the hybrid cars are not driven very far each year, and the electric cars are not driven at all. Clearly ‘gasoline spend’ is the wrong metric today, but would have been ok in the past.

Let’s switch back to software. After the Red Hat purchase of JBoss I received a survey from a well known analyst company. They were trying to gauge market reaction to the purchase. Here are two sample questions:

  • How much did you spend on JBoss licenses last year?
  • How much do you expect to spend on JBoss licenses next year?

My truthful answer to these questions would have to be $0. JBoss does not have a license fee. It is purchased on a subscription basis. There were other questions about spending on JBoss vs WebSphere and WebLogic. Even if I answer based on subscription dollars $1 of JBoss buys me much more than $1 of WebSphere, so dollar for dollar comparisons aren’t valid.

For most commercial open source companies the subscription is around the same as the annual maintenance for the equivalent proprietary software – with no up front license fee. Let’s say the proprietary software is $100k with 20% maintenance. So the first year revenue is $12ok, and $20k per year after that. The (approximately) equivalent commercial open source software will have $0 license fee and an annual subscription of $20k or less per year. Over three years the proprietary software would cost $160k and the commercial open source software would be $60k – roughly 3 times cheaper. Independent assessments show the savings to be greater than that but I’ll stick to 3x for now.

Any company using pure open source or a community edition will report even lower figures when it comes to software spend.

The analysts in the operating systems market now ask many more questions about how many CPUs are deployed, instead of just questions about money. Some even ask about Linux variants like Fedora. They ask these questions because they have learned that they don’t have a clear picture of the market without them.

Each analyst decides what questions they want to ask. In the BI space, to date, most of the questions are about spending, not usage.

Hidden Utilization

Just after Sun acquired MySQL Jonathan Schwartz (Sun CEO) took Marten Mikos (MySQL CEO) with him on a visit to the CIO of a large financial services company. The CIO was pleased to meet Mickos but didn’t know why he was there – ‘we don’t use MySQL’ he said. Mickos informed the CIO that there had been over 1000 downloads of MySQL by employees in his company. At this point the IT director informed his CIO that they used MySQL all over the place. Ask a CIO how much open source software is used in his company and you will often get an underestimate – sometimes wrong by many orders of magnitude.

Factoring in Community Edition

There is another problem with questions asked about software expenditure – it assumes that the open source software has no value outside of a subscription.

Many commentators on software markets won’t include data about companies who use software but do not have a support agreement. I assume the logic is that if you don’t have a support agreement, you’re not really serious about it. Maybe its just because it’s a lot easier to analyze this way. But at some point it becomes like analyzing the travel market and saying that if you don’t use a travel agent you’re not really serious about traveling, and therefore don’t count. At some point the analysis no longer reflects reality.

The most popular open source software such as Firefox, OpenOffice, MySQL, Linux  etc are used by thousands or millions of people. Look at the effect of the Apache HTTP server on that market. How can you assume that this usage does not affect the market share across that market segment?

So usage of open source BI is hard to ignore, but also hard to quantify. Maybe we factor it in under a new metric.

Intangible Market

There is a portion of any given software market that is intangible because open source software is being used. This intangible market is not monetized by the commercial open source company – it is not revenue or bookings. It is value (or savings if you prefer) that the market derives from the open source software.

Here is one way to estimate the size of the ‘Intangible Market’ of a commercial open source company that makes $10m in revenue:

  • These companies deliver functionality about 3-5 times cheaper than the proprietary software vendors – let’s use 3
  • These companies get about 70% of their revenue from subscriptions – a factor of 0.7
  • The ratio of community installations to customer installations is between 1:5000 and 1:100 – let’s use 1:100
  • The same number of installations, under a proprietary model, would generate $10m x 3 x 0.7 x 100 = $2.1 bn

So is the ‘intangible market’ of a $10m commercial software company really over $2bn? This seems a little extreme, but then so does assuming that usage of community edition software has zero impact. The $2.1bn is clearly strongly affected by assuming that every installation of the community edition has the same economic weight as a paying customer. So let’s mitigate. Many of these installations are:

  • At deployments where there is no software budget for BI tools.
  • In geographies where none of the proprietary vendors offer sales or support.
  • In economies where exchange rates make the proprietary offerings non-viable

These installations represent a new market that has not been included before. But assuming a dollar for dollar exchange with the ‘old’ market is not reasonable. On the other hand many of these installations are:

  • Are at deployments of SMB and enterprise companies with BI budgets.
  • In North America, Europe and other regions where proprietary vendors offer sales or support.
  • In economies where the proprietary offerings are frequently purchased.

So how do we balance these? I’m going to go with a factor of 0.1. Which says an installation of open source BI software (with no support contract) is effectively worth 10c where a supported commercial open source package or proprietary package would be worth $1.

So a commercial open source company with $10m in annual revenue has an intangible market of $10m x 3 x 0.7 x 100 / 10 = $210m. Overall these factors comes out to 21 x annual revenue.

So there you have it. My initial estimate of a generic FOSS Intangible Market Factor (FIMF) is 21. To be accurate you’d need to estimate the FIMF for each open source offering within a given market.

Then again, I’m a code jockey, not an analyst. Maybe they can estimate each of these factors more accurately.

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Written by James

November 2, 2010 at 4:15 am

22 Responses

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  1. [...] more here: Comparing open source and proprietary software markets « James … This entry was posted on Tuesday, November 2nd, 2010 at 4:15 am and is filed under Cars, Linux, [...]

  2. So, I’ve long wondered: Let’s assume single-vendor commercial open source turns out to be the better model, delivering superior software faster better cheaper. Why then would single vendor open source firms not start charging an upfront license fee? Today I see it as an attempt to disrupt the market and get in when tackling an existing 800 pound gorilla, but I don’t see any economic reason why they wouldn’t try extracting that money too.

    Dirk Riehle

    November 2, 2010 at 9:44 am

    • Hi Dirk,

      That’s a good question.

      I suppose that if the model becomes dominant, the major players will be single-vendor commercial open source companies. Any vendor charging a license fee will be at a disadvantage in the market, and will drive customers to their competitors.

      James

      James

      November 2, 2010 at 1:27 pm

    • This comment is from Marten Mickos:

      I must admit I find many of the questions about open source business models academic because we have had so very very few large commercial successes with open source. We should focus on building and boosting the businesses, not debating what will happen in the relatively unlikely event that someone strikes it big.

      And I think it is in the few large successes that the answer lies. Look at Red Hat. For practical purposes it should in my mind be seen as a successful single-vendor commercial open source vendor. They have not changed to charging an upfront license fee.

      James

      November 2, 2010 at 3:16 pm

  3. My point was: What’s stopping you from charging a license fee if you can get away with it? There is nothing inherent in the single-vendor model that requires you not to charge a license fees. The competitive situation may make it hard in some situations but I’m sure there’ll be markets with a strongly dominant open source player so why wouldn’t they choose to charge an upfront license fee?

    Red Hat is not a good counterexample because SUSE is explicitly being supported to keep Red Hat from completely dominating the market which would just be another Microsoft situation which lo and behold might mean upfront license fees :-)

    Dirk Riehle

    November 2, 2010 at 11:05 pm

    • Part of the reason that companies like open source solutions is that they want relief from vendor lock-in that they experienced in the past. So I think most markets will support a ‘SUSE’, to keep the options open. So I think Red Had is a great example. There may be a dominant Linux offering, but there are lots of others to choose from. There may be a dominant open source database, but there are lots of others to choose from.

      In a mixed market the free market economy will drive single-vendor commercial open source companies to stick to the subscription model to maintain their growth in market share.

      In a heavily dominant scenario, where there are no proprietary vendors left, and no other viable open source offerings to choose from the community edition will be the main competition. Commercial open source vendors have a < 1% conversion rate. Charging an up-front license fee will drive that ratio lower and possible result in a hostile fork.

      James

      James

      November 3, 2010 at 2:28 am

    • They regularly can not get away with it. I think they resemble those who sell Open Source software on ebay. In a transparent market with informed participants that is not a viable business.

      Andreas Kuckartz

      November 3, 2010 at 6:05 am

      • I do not understand your comment.

        These companies employ the majority of the code committers. They provide useful open source software. They also provide support and services for those that wish to purchase it. Why is this not a viable business?

        James

        James

        November 3, 2010 at 6:35 am

      • In reply to the reply by James:

        Offering support and services is not the issue here but only “upfront license fees”.

        Andreas Kuckartz

        November 3, 2010 at 7:09 am

      • Ok, yes I agree with you Andreas. I think charging an up-front license fee is not likely to succeed.

        James

        James

        November 3, 2010 at 1:14 pm

  4. Can you provide sources for the ratio of community installations to customer installations ?

    Andreas Kuckartz

    November 3, 2010 at 5:56 am

    • Hi Andreas,

      They come from conversations I have had with employees from MySQL, Sun, Red Hat, Zimbra, Alfresco etc.

      I do not have a third party source I can give you.

      James

      James

      November 3, 2010 at 6:32 am

    • I found a data point for you. This is from the Actuate (BIRT) 2010 Q3 quarterly reports.

      They have 1,000,000 BIRT community members and about 1,200 BIRT customers, making their ratio 1:833. That’s close to the middle of the range that I quoted.

      James

      James

      November 5, 2010 at 3:57 pm

      • Thanks for the data point, James.

        I wonder how much the ratio depends on the type of software.

        Andreas Kuckartz

        November 6, 2010 at 9:56 am

  5. James

    Red Hat is worth 7.8 billion USD in market valuation now. I wish all the best for Pentaho and your team- but I feel open source pricing needs to be rethinked and so does the community version/ corporate version software divide by open source companies. Some more thoughts by me..

    go get em boss

    Ajay Ohri

    November 4, 2010 at 4:47 am

  6. [...] It is community action which prevents them from offering their software by ridiculously low bargain basement prices. James Dixon, head geek and founder at Pentaho has a point when he says traditional metrics like revenue need o be adjusted for this impact in his article at http://jamesdixon.wordpress.com/2010/11/02/comparing-open-source-and-proprietary-software-markets/ [...]

  7. [...] Comparing open source and proprietary software markets Interesting article (and discussion below it) explores whether there is a way to do an apples-to-oranges comparison of open source and proprietary software. Pretty raw, plenty to argue with, but interesting all the same. (tags: OpenSource BusinessModel Analysis Market) [...]

  8. [...] Comparing open source and proprietary software markets So there you have it. My initial estimate of a generic FOSS Intangible Market Factor (FIMF) is 21. To be accurate you’d need to estimate the FIMF for each open source offering within a given market. [...]

  9. James,

    Here’s a recent Gartner article about rethinking the value of a non paying customer:

    http://blogs.gartner.com/michael_maoz/2010/11/03/could-your-best-customer-spend-no-money-with-you/

    Doug

    Doug Moran

    November 5, 2010 at 3:36 am

  10. [...] Accordingly I disagree with the sentiments but not the maths at http://maxschireson.com/2011/04/22/measuring-the-success-of-open-source-projects-a-case-study-around-mongodb/ and http://jamesdixon.wordpress.com/2010/11/02/comparing-open-source-and-proprietary-software-markets/ or [...]

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