November 21, 2008

The tanking economy and OSS

Author: Keith Ward

The economy is falling as fast as temperatures in November. Recession seems certain, if it's not already here. The stock market's performance resembles Disney World's Space Mountain roller coaster. And every open source vendor, every Linux project, will be touched in one way or another.

Matt Asay of Alfresco, which makes a Linux-based open source content management system, sees different effects on the open source software (OSS) community in the short and long term. "Short term -- the next few weeks -- everyone, whether commercial or proprietary, is going to find life unpleasant," Asay says, adding that the last several months have been the "most unpleasant quarter I've ever been through."

That's the bad news. The good news, according to Asay, is that "Long term, I think open source will significantly benefit, as companies will significantly re-jigger budgets, keeping them the same or [making them] smaller." That's where the essentially free up-front cost of open source comes in.

Mark Driver, a research vice president at analyst firm Gartner, agrees. "I would think open source software would be extremely attractive, since the cost of acquisition is so much lower. If I can use it without paying for it, that's great."

It may be great for companies using OSS, but effect is less certain on vendors who rely on service and support contracts to stay in business. Thus far, though, the impact of the economy has yet to be felt strongly in this space.

Canonical, for instance, makes its money selling and supporting Ubuntu. Canonical is somewhat insulated, since founder Mark Shuttleworth privately funds the company; still, Marketing Manager Gerry Carr says that Canonical has grown to more than 200 employees, and "added 100 employees in last year. We're hiring more and more core developers and growing our commercial arm -- the people who work with OEMs. Growth is very strong."

Winning on price

Asay notes that Linux companies usually undercut proprietary software companies on price, which can be a critical factor when the economy goes south. "The shocking thing is that even in a frozen economy, just this past week, we had bids go in on three different opportunities; [on one of them], one competitor had a $5 million bid, and we won with a $500,000 bid. We won another with a $250,000 bid; and another in Canada, [the bid from the proprietary software company] was well over $1 million, and ours was $100,000."

Joel Berman, director of marketing strategy for Red Hat, agrees that when economic times are tough, Linux and OSS become more attractive options. "It should be a net positive for us. Companies looking at moving to open source ... have convinced themselves there's a huge amount of money to be saved in acquisition and operating costs. They can take existing servers and run Linux on them, and can breathe new life into old servers."

Canonical's Carr says he's not surprised at those success stories. "Linux is pretty well placed in this type of market; people are looking to save money on IT infrastructure. Cost isn't everything, but it is very important."

It's been important for Zimbra, too. Zimbra is an email and calendar software vendor that competes directly with Microsoft's proprietary Exchange product. In the last year, Zimbra, owned by Yahoo!, has gone from 12 million commercial mailboxes to more than 20 million, and from 10,000 customers to more than 30,000, according to John Robb, vice president of marketing and products. "We wake up every day thinking, 'How can we grow?'" he says.

Zimbra's development community has grown from 12,000 to 18,000 members. The company, which doesn't divulge specific sales figures, just started offering a hosted solution for its email, and recently saw one of India's biggest companies move from Lotus Notes to its solution.

Driving without insurance

Despite encouraging news like that, though, there is a significant risk to OSS: the chance that the customer will get used to free. "I clearly see a downturned economy driving a broader interest in open source," Driver says. But "if the economy stays down a long time, a real recession that lasts a year or longer -- if that's the case, one of the things I look at is if the average IT shop [stops] assuming they need a service and support chain. If they don't get it and 'drive without insurance' ... they may realize they can get away without the need for commercial service and support for a long time."

The dangerous bottom line for OSS vendors, Driver says, is that "the longer my customers use my software without my services, the more they realize they don't need me."

That has happened to most, if not all, OSS companies. "In every case with us, and across the board with companies I work with, customers can evaluate a long time before they make a purchasing decision," Asay says. "One Fortune 10 company has been using our product in production for a while without paying us a dime."

That is more of a danger than ever, especially for smaller companies. As Driver says, "It's less about open source than how does a small vendor survive in this world? The fact that they're small is more important than [the fact that] they're open source.

"Traditional open source vendors have a hard time turning users into customers," Driver adds. "In a down economy, that becomes more difficult, because users have an incentive not to become a customer, and can use that [product] for free."

Get creative

So what should OSS vendors be doing in what could be a protracted recession? Asay has some suggestions. "Everybody should be thinking profitability. Growth, yes, but profitability first.

"Software has to sell itself as much as possible. Focus even more on research and development. If a product is good, sales will come. It's particularly true now, when you have to rely on your product cutting through the noise."

You also have to separate yourself from the competition. "Make sure you have significant differentiation between what you sell and [what you] give away. Extensions, add-ons, enhanced support experience, online services like SaaS [Software-as-a-Service], hosted [software]. Hosted is a primary area open source should be investing in. Give [customers] the ability to sign up month-to-month. That could be a big winner," Asay says.

Driver says creativity and development and sales are more important than ever. "For smaller vendors, this is the time to tighten the belt, go into your core audience, and leverage the parts of open source unique to open source -- factors like open innovation, which can create a catalyst for a new business model. Cloud computing, subscription pricing -- innovation that touches customers, not just in technology. [They] should be building collaborative vertical user communities, and throwing more options out there. If I'm an open source vendor, I want to find new ways to deliver my product and engage the community around the product."

That's advice Red Hat has implemented to find new revenue channels. Berman says, "We've recently started an assessment service for global consulting. We will come out and look at [a customer's] hardware, software, etc., and see what could be moved onto open source. The demand for those kinds of services are increasing; a lot of people are looking at it. The hits on our Web site are going crazy."

The industry's major players can also pick up some bargains, Driver points out. "I think larger vendors can look at acquisitions at fire-sale prices. I think if someone has the finances, this is a great time."

That viewpoint is shared by Canonical, Carr says. "We see it as a great time to expand. Good people are going to become available, and advertising costs are going to reduce. We have a lot of contracts signed for delivery through 2011 -- we have to hire just to service those contracts."

Hold on tight

Finally, advice that applies anytime becomes even more critical in times like these. "Really focus on your existing customers," says Asay. "The first thing to go and worst thing that can happen is that your customers leave. They'll be the most sure source of income. Hold on to what you've got and try to sell deeper into existing accounts. Customers could be harder to come by for a little while."

The most important thing open source companies can do is to not overreact to the situation, and ride out the tough times; these too shall pass. As Asay says, "Don't panic -- if your business has been built prudently all along, there's no reason to hit the panic button and fire everybody."

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