Can a FOSS Firm Hit the Billion-Dollar Jackpot?

In any discussion of FOSS’s potential to be profitable, Red Hat is invariably held up as the poster child for success.

After all, the company is now a US$750 million business, as CEO Jim Whitehurst recently pointed out.

There’s no doubt that’s impressive; at the same time, as noted by Glyn Moody soon afterward, it falls considerably short of the $5 billion target Whitehurst set for the company back in 2008.

Moody’s question — and the one being pondered throughout the Linux blogosphere in recent days — is, Why?

‘Stop Chasing That $1 Billion Dream’

Whitehurst’s answer, essentially, “was that to attain that $5 billion of revenue Red Hat would have to displace software that currently costs $50 billion,” Moody explained. “Selling $50 billion-worth of software — even if it only costs $5 billion — is somewhat hard, which is why it will take a while to achieve.”

What’s particularly interesting about that answer, Moody pointed out, is that “this is the first time I’ve heard someone as senior as Whitehurst admit something rather profound: that open source solutions save money for customers by doing away with the fat margins for existing computer companies — and thus shrink the overall market.”

His conclusion?

“Open source companies really need to stop chasing that $1 billion dream — the idea that if they try hard enough they will break through the magic nine zero barrier,” Moody asserted.

‘Strips Away High Profit Margins’

“It isn’t going to happen, for the very reason that open source will take over from proprietary software at most levels of the enterprise stack: because it strips away the traditionally high profit margins and leaves the money with the customer,” explained Moody.

That revelation clearly came as profound to many other ears as well, if bloggers’ responses were anything to go by.

Pagefuls of comments soon appeared on the Computerworld UK site, even as bloggers on Slashdot, on Linux Today, on LXer, on 451 CAOS Theory and beyond raced to register their own views.

‘I Hope It Never Does’

“There is little benefit to there being multi-billion dollar companies except to a handful of multi-billionaires,” cjm pointed out on Linux Today, for example.

“One of the things so refreshing about GNU/Linux is that the largest commercial player hasn’t managed to reach the $1 billion benchmark,” cjm added. “For everyone’s sake, I hope it never does.”

On the other hand, it is clear “that proprietary software vendors are increasingly using open source as a means of maintaining their profits and disrupting competitors and that, given the option, many (former) open source specialists are more than happy to compromise their commitment to open source software licensing in order to compete,” 451 Group’s Matthew Aslett pointed out.

“Perhaps this is a short-term approach and Glyn is right that ‘open source will take over from proprietary software at most levels of the enterprise stack,'” he noted, “but in the meantime a lot of proprietary and hybrid software vendors are going to make $1bn (and many of them a lot more than that) with the help of open source software.”

Hear the debate brewing? Linux Girl’s barmates down at the Punchy Penguin blogo-bar had plenty more to add.

A Question of Definition

“It depends on how you define an open-source company,” noted Barbara Hudson, a blogger on Slashdot who goes by “Tom” on the site.

“I seem to remember IBM spending a billion dollars a year on linux research and development,” Hudson pointed out. “I’m sure they make their money back on it and then some every year. The same would apply to Google.”

Then too there are the companies “that rely on open source to power their infrastructure, such as Yahoo and Facebook,” she added. “Is Facebook worth a billion? Microsoft thinks so — they paid $240 million for 1.6 percent.”

Finally, there’s “the new crop of smart phones,” Hudson said. “The companies behind them are billion-dollar-a-year businesses, and many of those devices run on open source.”

‘We Don’t Need $Billion Companies’

Indeed, “what do you mean, no $billion FLOSS companies?” blogger Robert Pogson exclaimed. “IBM is big, RedHat is getting close, Ubuntu could do it, too. How many $billion non-FLOSS companies are there? M$, Oracle, and …”

The problem, rather, is that “monopolies like M$ do not like to share the wealth,” Pogson explained. “Would not the world be a better place if M$ were split into a bunch of $billion FLOSS projects? How many could you make, 40?”

Of course, “the way FLOSS works, we don’t really need $billion companies,” he added. “A few hundred million works just fine. You can distribute a lot of copies for free with bittorrent, you know.”

Further, “a lot of very large businesses and governments are becoming major producers of FLOSS — everyone needs software, and the world can produce its own,” Pogson pointed out. “Fat corporations need not apply if we do it ourselves. That’s the great thing about sharing: You don’t need to do it all yourself, just a tiny piece that you share with others.”

‘There Simply Aren’t Enough Paying Customers’

Slashdot blogger hairyfeet wasn’t so sure.

“This is the catch-22 for FLOSS,” hairyfeet countered. “The fact that it is ‘free as in beer’ means that many that use it will simply never pay for software, as they can get it for free.

“Compare that to Adobe or MSFT where every single customer equals a sale, and it isn’t hard to see where the money is at,” he explained. “There simply aren’t enough paying customers. The Linux DIY ethos is both a blessing and a curse.”

‘Installation and Customization’

Still, “a significant amount of the funds paid to major software companies, particularly in major areas like enterprise resource management, is for installation and customization services to tailor the software company’s generic big software package to meet the needs and workflow of the client company,” Slashdot blogger PatHMV told Linux Girl.

“The idea behind open source software providers, as I’ve always understood it, is that they would do the same kind of customization and tailoring services, at similar rates to those charged by the Oracles of the world, but the client companies would save money because there would not be any licensing fees for the software added on above and beyond the cost of the installation and customization,” PatHMV added.

‘The Idea of Competition Becomes Laughable’

In fact, billion-dollar companies are a symptom of a dangerous lack of regulation, Slashdot blogger Darren Baker told Linux Girl.

Specifically, in North America “things have changed so much over the last 50 years that it’s gone from being a Work-to-Live society to a Live-to-Work society,” Baker explained. “Corporations are allowed to merge and grow so large that the idea of competition, which is the basic ethos of capitalism, becomes laughable. Companies are so large now that they have the breadth and girth to hold our governments hostage with threats of job cuts.”

No one company should be able to “dictate terms to the governments who allow them to exist in the first place,” he added. “The problem here is that, for many reasons, the people who should be breaking these companies up are beholden to said companies.”

‘FOSS Is Showing Capitalism How It’s Done’

In a nutshell, “capitalism is failing in North America, and indeed, the rest of the world will follow until people have had enough, and they start regulating again,” Baker predicted.

What is happening in FOSS, however, “is that the niche markets are staying niche, and specializing in what they do,” he noted. “When it comes to innovation, we’re seeing it flourish because nobody has a headlock on an industry sector. If you slow down, or don’t change to meet the needs of the people who use your product, someone will fork your code, taking the baton and running with it.”

In that way, “FOSS is showing capitalism how it’s done,” Baker concluded. “Open source, and its rippling effects, are changing things. I certainly believe that in the next 15 years we will see things change dramatically.”

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