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Open source: a savvy bet, even in tough times

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Open...and Shut Even as the economy slouches its way toward another bout of recession, the software industry has been in comparatively rude health. Earnings across the board have been impressive and, as a recent SIIA and OPEXEngine study (warning: PDF) shows, software companies are returning to robust profitability after years of red ink.

In other words, when the economy has boomed proprietary software companies have also boomed. When it went bust, so did they, to varying degrees.

Such a phenomenon stands in stark contrast to the commercial open-source world, which has managed a largely unreported continuity of vitality. Open-source companies like Alfresco - where I was vice president of business development before joining Canonical - Cloudera, MySQL, and others never hit the skids during the downturn, unlike their proprietary peers. Instead they grew gradually and continuously in the midst of tightened budgets.

This shouldn't be surprising. Pinched corporate pocketbooks sent more IT directors scouring the web for high-quality, low-cost open-source software. And they found it, leading to robust earnings at public and private open-source companies alike.

Red Hat has nailed quarter after quarter of impressive sales and profitability. Alfresco has notched 20-straight quarters of growth, becoming profitable in 2009. These are but two examples of the profitable growth the downturn engendered in the open-source set.

Others include Cloudera, SugarCRM, Jaspersoft, and Funambol, each of which grew sales by at least 50 per cent each year through the downturn, often while keeping their bottom lines in the black.

Life is good in open-source land. Even when it's bad everywhere else.

And let's face it: while things currently look good for proprietary software companies, bad earnings are just a downturn away, especially since open-source alternatives are increasingly top-of-mind for more CIOs. Gartner has already registered a move away from proprietary software to open-source and home-grown software.

When it's bad, it's really bad. Just look at these OPEXEngine profitability benchmarks for 2009, below.

OPEXEngine profits

The large, public (proprietary) software companies have the bargaining clout to hold their customers' feet to the fire, even when times are bad, and didn't fall too hard into the red ink during the downturn. But smaller startups? These are always going to fund a certain period of unprofitability with venture capital as they grow, but the benchmarks show them taking some serious blows during the downturn.

It would be easier to pass this off as "normal" but for the fact that open-source startups experienced the inverse during the downturn. These companies may not have experienced the peaks that their proprietary peers have, but they also generally avoid the valleys. This should be manna to investors, as well as CIOs who are looking for stability in their suppliers.

Still not convinced that open source offers a better way to build a business? Consider revenue growth rates for public and private companies over the past few years, according to these OPEXEngine benchmarks, below.

OPEXEngine revenue

So, the biggest, most profitable, public proprietary software companies grew revenues by 10 per cent from 2008 to 2009 while Red Hat more than doubles that rate. Even private proprietary software companies can't match Red Hat's growth, averaging 21 per cent from 2008 to 2009. They fare even worse in a comparison with their open-source peers, who experienced much higher growth, on average. At least double.

So, better growth and better profitability for open-source companies. What's not to love?

But wait: it gets better.

One of the great things about open source is that it tends to distribute benefits, rather than hoarding them in any single company.

Take, for example, Selenium, an open-source web testing tool sponsored by Sauce Labs, whose customers include Motley Fool and VMware. Sauce Labs co-founder Jason Huggins tells me the company has boomed through the downturn, but it's not the only one: Selenium job postings continue to register a 140-per cent compound annual growth rate (CAGR), according to Indeed.com job trends data. Some of these hiring companies are undoubtedly Sauce Labs customers. But many more aren't. Selenium, like open source generally, tends to enrich the ecosystem, not merely the project sponsor.

Indeed, this may be the biggest reason for open-source developers and entrepreneurs to be optimistic as we head for yet another economic crunch. Open source is enabling enterprises to do more with less, and that "more" depends upon hiring or retaining developers, the "new kingmakers" that Redmonk analyst Stephen O'Grady lauds.

It also increasingly leads companies to top up their internal expertise in an open-source project with external support and services. So, General Electric is getting big value out of Big-Data tool Hadoop, but it's also frustrated with Hadoop's "management tools, underdeveloped utilities, [and the] constantly evolving demands on our experts."

Cloudera, the primary sponsor of Hadoop, can fill those voids.

Such "topping up" is what makes open-source companies a good bet for venture investment, even as they remain a safe, stable option for enterprise IT. No, not all open-source companies have the Midas touch. Some fail. But on the evidence of this last downturn, and how well open-source companies have fared, open source seems like a savvy business bet.

Disclosure: I am on the advisory boards of Jaspersoft and SugarCRM. ®

Matt Asay is chief operating officer of Ubuntu commercial operation Canonical. With more than a decade spent in open source, Asay served as Alfreso's general manager for the Americas and vice president of business development, and he helped put Novell on its open-source track. Asay is an emeritus board member of the Open Source Initiative (OSI). His column, Open...and Shut, appears every Friday on The Register.

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