Response to “Will There Ever Be Another Red Hat”
Response to Dan Woods’ Forbes article “Will There Ever Be Another Red Hat”
This is a very nice piece. Although I wouldn’t say “never”. When IBM was riding high it was difficult to foresee the rise of Microsoft, and when Microsoft was riding high Apple was nowhere.
In the piece Dan refers to two of my blog posts about the open source business models. Dan infers that I was saying that open source companies do not need sales and marketing budgets. This is not exactly what I was trying to say. I was not saying that open source companies don’t need sales and marketing budgets. They do. The difference is that you can do a primarily or exclusively inbound sales model. This is much cheaper than an outbound model. You definitely need a marketing budget to create the inbound leads. Having an active community helps generate leads and lowers sales and marketing costs even more.
My main point was to refute the idea that the subscription model is inferior because the lack of an initial license fee hurts – in the proprietary model that license fee pays for the cost of acquiring customers and nothing more. As an example of the proprietary model Qlik is losing $25m-$30m per quarter on $125m revenue because their S&M budget is $75m. They are losing money to gain customers, with the hope that they can make enough services/support/up-sell dollars to make a profit eventually.
There are fundamental differences between the proprietary license fee model and the open source subscription model, and that unless you understand both of them well, you are not in a good position to compare them or criticize either of them (as an analyst was doing at the time).
Open source subscription models can be very successful, but their economics seems to be poorly understood by some. Amazon made $5bn last year renting out servers in the cloud. Google make billions by selling ad for 6c. In-app purchases generate billions 99c at a time. These are new and kinda weird ways to make money. Mobile, Cloud, Big Data, and IoT are changing things quickly and everyone (including analysts) will have to pay attention if they want to keep up.