Open Source Proves Elusive as a Business Model
SAN FRANCISCO — In many ways, MySQL embodies the ideals of the populist software movement known as open source, in which a program’s creator releases it to the world free of charge, and legions of volunteers contribute improvements that are also freely shared.
The start-up company came out of nowhere, building a database application beloved by vibrant, young Internet companies. Logging in from homes scattered around the globe, its workers seemed more a part of a virtual commune than a corporate monolith, and they relished taking on proprietary software giants like Microsoft.
But like most open-source companies, MySQL’s sales, tied to support deals, never matched the astronomical number of downloads for its product, about 60,000 a day. In January 2008, the founders decided to sell the company for $1 billion to Sun Microsystems. And this year, Sun agreed to sell itself to Oracle, which makes database software aimed at larger companies and tougher jobs, for $7.4 billion.
Now, disagreement over the value of MySQL — both as a stand-alone entity and as part of a big company — lies at the heart of a bitter public battle between Oracle and the European Union over the Sun acquisition. The fight illuminates a larger truth about open-source companies: their societal and strategic importance far exceeds their financial value as operating businesses.
European regulators view MySQL as sort of a database of the people, a low-cost alternative to Oracle’s costly proprietary products. The regulators worry that Oracle may stop improving MySQL in favor of protecting its core traditional products, and customers will lose an important option in the database market.
“In the current economic context, all companies are looking for cost-effective I.T. solutions, and systems based on open-source software are increasingly emerging as viable alternatives to proprietary solutions,” said the European Commission’s competition chief, Neelie Kroes, in a recent statement. “The commission has to ensure that such alternatives would continue to be available.”
Oracle, meanwhile, insists that it will continue to develop MySQL and other Sun technologies. Oracle’s chief executive, Lawrence J. Ellison, contends that MySQL serves a different part of the database market than Oracle’s main products do — an assessment supported by many analysts. One main incentive for Oracle to keep improving MySQL is that the program serves as a bulwark against Microsoft’s SQL Server database, which challenges Oracle’s products on the low end.
“The commission’s statement of objections reveals a profound misunderstanding of both database competition and open source dynamics,” Oracle said in a statement.
To Ms. Kroes’s point, there is an open-source alternative, and usually a pretty good one, to just about every major commercial software product. In the last decade, these open-source wares have put tremendous pricing pressure on their proprietary rivals. Governments and corporations have welcomed this competition.
Whether open-source firms are practical as long-term businesses, however, is a much murkier question.
The best-known open-source company is Red Hat, which produces a variant of the Linux operating system for server computers. Like most of its peers, Red Hat offers a free version of its base product and relies on selling support services and extra tools for revenue. In its last fiscal year, which ended in March, the company’s revenue rose 25 percent to $653 million, and it reported net income of $79 million.
But Red Hat is a rare case. “There’s only one company making real money out of open source, and that’s Red Hat,” said Simon Crosby, the chief technology officer at Citrix Systems, which acquired the open-source software maker XenSource for $500 million in 2007. “Everyone else is in trouble.”
The enduring appeal of open-source software revolves more around its disruptive nature than blockbuster sales.
As long as there has been software, there have been some people eager to share and improve it for the common good. The rise of the Internet made such sharing easier than ever, enabling people the world over to work together on projects outside the confines of a formal corporate structure.
Open-source software has thrived and played a prominent role in the building of the Internet’s infrastructure. Many companies rely on Linux-based computers and Apache Web server software to display their Web pages. Similarly, the Mozilla Firefox Web browser has emerged as the most formidable competitor to Microsoft’s Internet Explorer.
The grass-roots nature of open source has led advocates to view the projects as a populist foil to proprietary software, where a company keeps the inner workings of its applications secret.
But in the last decade, open-source software has become more of a corporate affair than a people’s revolution.
In some cases, dominant technology companies have used open-source projects as pawns. Google, for example, has needled Microsoft by providing financial support to the nonprofit Mozilla Foundation, which oversees of the development of Firefox. I.B.M. has been a major backer of Linux, helping to raise it as a competitor to Microsoft’s Windows and other proprietary operating systems.
Many of the top open-source developers are anything but volunteers tinkering in their spare time. Companies like I.B.M., Google, Oracle and Intel pay these developers top salaries to work on open-source projects and further the companies’ strategic objectives.
In the last three years, there have been five big acquisitions in which a major technology company bought an up-and-coming open-source company for many times its annual revenue. Sun, for example, bought MySQL for about 10 times its revenue, while Citrix bought XenSource for more than 150 times its revenue, according to people familiar with the companies’ sales.
Most recently, VMware, the leading maker of virtualization software, brought SpringSource for $420 million, or about 20 times its annual sales.
“A lot of these guys were getting close to an I.P.O., but they elected to go the acquisition route instead,” said Michael Olson, the chief executive of Cloudera, an open-source start-up. “A lot of open-source firms are one-product companies, and it’s hard to build a long-term, successful business that way.”
The larger technology companies have tended to buy these one-trick ponies for strategic purposes. With its core server business declining, Sun hoped it could piggy-back on MySQL’s momentum with Internet companies. In SpringSource, VMware acquired a company that had cultivated deep interest with software developers and helped VMware diversify beyond its virtualization roots.
“VMware took into consideration that which money can’t buy, which is a critical mass of adoption,” said Peter Fenton, a venture capitalist at Benchmark Capital, who has been involved in some fashion with many of the large open-source deals. “SpringSource’s main product was the equivalent of a best-selling novel.”
Citrix took perhaps the biggest risk of all, paying a huge premium for XenSource in the hopes of disrupting VMware’s position in the virtualization market.
“I don’t think Citrix would ever say it paid too much,” Mr. Crosby said. “Citrix leaped to the forefront of a whole software category. The ability to talk credibly about virtualization is worth a huge amount in its own right.”
Meanwhile, the ideal of an independent open-source giant has faded.
Mr. Fenton said that many open-source advocates had once hoped Red Hat would scoop up the top open-source start-ups, keeping these crown jewels out of the hands of proprietary software makers. But the company failed to go after other open-source companies initially and later could not afford to pay the high prices offered by larger companies.
“You could make the case there was a window of opportunity to do that three to five years ago,” Mr. Fenton said. “That opportunity has gone away. And it’s hard to put Humpty Dumpty back together again now.”
So, you can't form a mega-corporation and use consolidation as a strategy for open products
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