Comparing open source and proprietary software markets
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.
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.
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.