Archive for May 28th, 2008
In response to Savio’s post: http://weblog.infoworld.com/openresource/archives/2008/05/is_open_source.html
I have to disagree with you on this one Savio. I do understand Ozzie’s point of view.
Ever read the Halloween emails? http://catb.org/esr/halloween/index.html
Whether or not you agree with all of Raymond James’ commentary those emails clearly show that Microsoft considered open source to be a threat at least 10 years ago. In the last decade Microsoft has actively fought many companies and technologies (PIMs, Netscape etc) with various techniques but the only major open source-related situation was the Novell deal last year.
When it comes to fighting a competitor Microsoft knows that if it can drive them out of business the software/technology goes away. Or they embrace, extend, and then extinguish. Or they acquire and expire. Look at all the anti-competitive issues they have been accused of. In these cases they have been using their might as a monopoly to fight a battle based on primarily on price. These approaches do not work against open source. There is no company to fight and they have no advantage on price.
I’m not being anti-Microsoft here I’m just saying that the strategies they have used in the past to try to maintain their position as market leader don’t work well, or at all, against an open source alternative.
Lets compare business to warfare (The Art of War is on most MBA reading lists). Microsoft vs Google is a conventional war using conventional weapons. Microsoft knows how to go to war in this case. Microsoft vs open source is a non-conventional war. In most cases the ‘enemy’ doesn’t show up for the battle because they don’t have to. The enemy virally and silently chips away at your dominance without ever showing itself. What’s worse in this case is that your customers either like the enemy or are the enemy. Microsoft declare war on its customers? Doesn’t seem like a good proposition. So Microsoft is trying to be more OSS friendly, to be more open itself (shared source etc). In the last ten years the Microsoft marketing machine has been unable to create an effective anti-open source campaign. I certainly see why Microsoft, faced with fighting a battle with no rules and an enemy they can’t see, views this as a harder problem than that posed by Google.
I agree with you that OSS is a huge opportunity. Unfortunately for a company that is large, proprietary, and historically more closed and aggressive than most, taking advantage of that opportunity is not a natural or easy thing to do.
In response to Matt Asay’s post:
This is interesting Matt.
It is a common assumption that a proprietary vendor makes their money upfront with the license fee. In a lot of cases the assumption is not valid. For example I have heard that SAP makes $4 to $5 in services for every $1 they get in license revenue. You can look at the SEC filings of publicly-traded enterprise software vendors to find out where their profit it. In the cases that we looked at they are spending about 35-40% of their overall budget on sales and marketing expenses and get 40-45% of their revenue from the sale of new licenses. In these cases almost all of the upfront license fee is used to fund the expenses of selling the software to other people next quarter. In some cases the sales and marketing teams are authorized to spend over 100% of the license fee in order to make a sale. In these situations the sale person is quite happy to make a sale that is close to (or even below) the break-even point for the company, they’re just trying to make their quota. After the initial sale, in order to be profitable, the vendor will need to augment the deal with services (low margin), training (low margin) or maintenance (higher margin).
So your large enterprise buyer is possibly mistaken. He may be in the situation where he ‘thinks’ the vendor will be happy just making the sale but where the vendor needs to find ways to augment the sale to make any profit at all.
I’d like to rephrase Schwartz’s question: given the different allocation of, and overall reduction in, costs associated with migrating to and between SaaS solutions, are there any long-term implications for the SaaS providers?
I think Schwartz has an interesting point although it is presented in such a way that it is hard to agree with. Personally I disagree with the term ‘throwaway’ if only because you can’t throw away what you never had. With SaaS you never actually ‘have’ the software so how could you throw it away? A niggle on terminology I agree but there’s lots to niggle with here.
I think the point that he’s trying to make is that with less up-front cost and easier set-up it is easier for a customer to switch from one SaaS vendor to another compared with switching from one on-site license-fee based solution to another. The key here is ‘easier’ but still not necessarily ‘easy’. If its easier to switch then the threshold of pain/missed-opportunity that a customer needs to experience before they decide to switch is lower. Most of the other comments on this piece point out that the cost of the solution and the cost of switching solutions includes lots of other costs that might be significant in the decision making process.
I think Schwartz is missing something however: no-one switches solutions just for the sake of it. To be worth switching the cost of switching must be less than the pain caused by not switching. Most IT budgets are stretched thinly so only the biggest pain points get dealt with first. If my existing CRM solution is one of my biggest pain points I might switch to a SaaS alternative, open source alternative, or a different proprietary in-house solution. Once I have switched CRM systems I’m not going to switch again until the new system becomes one of my biggest pain points again. As long as the new CRM system stays off the pain-point radar it will remain as the incumbent – potentially ‘forever’.
SaaS, as with other subscription-based business models, encourages the providers to demonstrate their value-add on a recurring and frequent basis. If they can do this and keep pace with features available elsewhere there should be no reason for their customers to ever switch away.