Conversations With My Dad About Open Source

My father was one of those old school guys when it came to adopting computer technology. He managed to build and run a successful company, and retire in 1998, without ever actually having a computer in his office. It was just never an absolute necessity for him to do his job.

During the early years of the Internet, it took him a while to get his mind around the business model. Back in the go-go dot-com days, he would look at the IPOs and say to me, “Am I missing something, or are these guys selling one dollar bills for 80 cents? How is that a sustainable business?”

While his suspicions were spot-on for a large swath of dot-com flame-outs, he came around to the notion that the Internet’s effect on our lives was much more profound than the ability to buy dog food online.

By 1999, he had jumped online for stock trading. He called me one day and said “Know anything about this company Red Hat? They went public with a $3 billion market cap and near as I can tell, their software is free. Am I missing something? How is that a sustainable business? Or should I short Microsoft stock?”

I thought of my dad while attending this year’s Open Source Business Conference (OSBC) because about the time he passed away four years ago, I was just starting to do public relations work for open source companies. He did not live long enough to see the truly deep implications of open source. But I have no doubt that, as a savvy businessman, he would have figured it out.

Or would he?

I ask this because as I prepared to attend OSBC this year, I looked at the names of some of the panels and I asked myself: “Has the open source business community figured it out?”

After attending multiple sessions at this year’s conference, I heard some doubt, intermingled with unbridled enthusiasm for all things open source. Here are some random thoughts that I might have discussed with my dad as we tried to figure out this whole “open source thing”:

Work in Progress

Building a company around delivering open source software to customers is still a work in progress.

The conference session topics ranged from “this stuff is ready for prime time” to “um… how do we make money from this?” For example: there was an entire track of sessions dedicated to the legal side of running an open source business. We all know that lawyers will get involved in anything where there is perceived money to be made, but the titles of the tracks were really focused on real world business problems:

• “Jumping into the Pool: A Legal Guide to Engineering you Open Source Code Release”
• “Outsourcing, Contractors and Open Source Code”
• “A Practical Guide to License Conflicts”

These are the problems of real businesses, just like in the proprietary software world.

On the other hand, there was a session entitled “There is No Such Thing as an Open Source Business Model.” Really? Don’t tell the folks who attended “Tailoring an Open Source Business Model for Your Business.”

Then of course, there was the session called “What Open Source Can Learn from Microsoft and the Proprietary World.” Wow. Who would have thought that at any open source conference someone would be extolling the virtues of Microsoft’s business practices? But then again, the head lawyer for Microsoft was a keynote speaker, so if you thought you felt the earth tilt slightly off its axis on March 25, now you know why.

How Big Can You Get?

Open source companies can be big, but can they be really big? The conference opened with a keynote by Jim Whitehurst, the CEO of Red Hat, which is the largest, pure-play open source company.

Whitehurst said a couple of things that really stuck out. First, he said that open source is not just about extracting value for customers, but also for shareholders. In other words, for an open source industry to succeed, both sides of the vendor/customer equation have to benefit.

He also asked, somewhat rhetorically, how does someone patent any technology that is essentially owned by the community? Good question. And one that follows the previous point quite well. If you can’t patent a technology, can you ever really make big money off it?

Whitehurst pointed out to the audience that, despite being the biggest and the most successful of the open source companies, Red Hat is still pretty small potatoes in the IT world. As previously mentioned, Red Hat’s market capitalization after the first day of trading in 1999 was about $3 billion. Today? About $4 billion. Not the worst stock in tech, but hardly a growth machine.

It is only fair, however, to point out that in 1999, Microsoft’s market cap was north of $500 billion. Today, it is around half that. In fact, since 2002, Red Hat’s stock price is up 190 percent, while Microsoft has lost 20 percent, though Microsoft has been paying a dividend since 2003. But, by the measure of pure stock performance, open source wins hands down.

From a revenue perspective, which one could argue is a much more accurate measure of industry impact, the story is a bit different. For its fiscal year ending February 2000, Red Hat booked $42.5 million in sales. In FY 2007, it was $400 million - so 10x revenue growth in eight years, but holding at less than half a billion. Microsoft, in that same period, grew revenue from $23 billion to $51 billion

Zimbra, or Microsoft?

If open source is ever to have meaningful financial impact in the market, entrepreneurs should build their companies as if they want to be the next Microsoft, not the next Zimbra.

Venture capitalists were well represented at OSBC. And, of course, the exhibit hall was well populated with lots of cool companies doing exceptionally cool stuff with open source. The VC agenda is clear: fund promising companies and hope to see a nice return with an exit event. Once upon a time, companies cashed out via the IPO. These days, buyouts are the way to go for open source companies, as evidenced by Zimbra and XenSource, to name a couple of prominent recent sellers.

But while a buyout is certainly in the best interest of the investors and the founders, is it in the best interest of the open source industry, community and customers?

Let’s be honest — does anyone really believe that Zimbra has flourished under Yahoo? And what will happen to it if Microsoft acquires Yahoo? And what of XenSource? Sure, Xen will live on, but Citrix is pretty cozy with Microsoft and since it was acquired, XenSource has been pretty darn quiet.

So, it would seem that if an open source ecosystem is to take on proprietary software, it would be in that ecosystem’s best interest to build companies for the long-haul and not the quick cash. But then again, when it comes to cashing out, a bird in the hand…

A Useful Conference

OSBC, which seems to be about “how and why” open source can impact customers, is a much more useful and practical conference than, say, LinuxWorld Expo.

Anyone who has attended LinuxWorld Expo in the past couple of years knows that it seems to be slowly fading. Red Hat pulled out and one of the biggest exhibits was from… Unisys??? The Abe Vigoda of technology? (Who knew it/he was still alive?)

Maybe the demise of LinuxWorld is a good thing. Maybe it shows that the open source business is on the same maturity trajectory as the overall IT industry. After all, Comdex died. PC Expo died, but the computer industry thrives, with newer, more focused events cropping up all the time.

If LinuxWorld Expo was the “open source tradeshow 1.0,” OSBC is version 2.0. And that augurs well for open source as a viable business model. Evidence of this was all over the place at the conference. It was, after all, the “Open Source Business Conference” and over the course of two days, I attended sessions, saw technology demonstrations and spoke with seriously smart people associated with very cool companies that I honestly believe have the potential to change the face of IT while becoming big businesses.

That is because capitalism is about filling the supply/demand equation. There is absolutely a desire among business IT buyers to embrace and deploy open source. And there is a plethora of companies ready, willing and able to fill that need. So, there has to be a business model in there somewhere, wouldn’t you think?

My father used to say to me that his specialty — electrochemistry — was evolutionary, not revolutionary. Unlike computers, there was no Moore’s Law that predicted quantum leaps in speed and cost reduction. Rather, it was the hard work of smart scientists and engineers that made for batteries and fuel cells that get slightly better with each passing year.

The beauty of the open source development model is that it, too, is an iterative process. Improvements are being made every minute of every day. Generally speaking, there are never any explosively important improvements, but rather incremental, yet extremely useful ones.

Maybe that is the destiny for the business side of open source. Since the companies are based on technology that is not explosive by its very nature, then maybe we can never expect Google, VMware, or Salesforce types of valuation growth.

But the laws of supply and demand always seem to work in the long run. If we build it, they will come. And in time, that will result in very large businesses indeed.

I only wish my dad was still around to see it happen.