'The New Kingmakers': Tech giants pay for the love of coders
If you can't win it, buy it
Open...and Shut The software industry seems hell-bent on following Steve Ballmer's chant to acquire "developers, developers, developers." This developer gold rush is playing out in Silicon Valley recruiting, something that venture capitalist Fred Wilson describes as "a massive talent war for software engineers" and that is loosening the purse strings in corporate M&A.
But does this developer mania make financial sense?
In one sense, the answer is clearly "Yes." Startups like Heroku and SpringSource had yet to hit their stride on revenue but more than made up for it with homerun sales to Salesforce.com and VMware, respectively. Their value? Developers.
In the case of Heroku, which may have only attracted a few tens of thousands of developers but was riding a rich vein of over a million Ruby developers. That was worth $212m to Salesforce.com, despite Heroku not generating meaningful cash for the SaaS giant for at least two years.
SpringSource, for its part, had managed to grow an impressive two-million-strong Spring developer community that turned into a $362 million VMware-fueled bonanza for the startup despite revenue reported to be in the $20m range.
These are but two examples among a growing number of others. There is a growing gap between the start-up firms that know how to attract developers, and the big proprietary software firms who don't, but have ample cash to buy the developer-rich minnows.
Why the struggle to gain developers?
Companies like VMware and Salesforce.com are public companies: their duty is to their shareholders. It can be difficult to balance longer-term value in influencing developers with short-term value in sales and profit. Former Sun Microsysetms' chairman Scott McNealy argues that even developer and open source-friendly Sun got this balance wrong, and paid the price:
We probably got a little too aggressive near the end and probably open sourced too much and tried too hard to appease the community and tried too hard to share. You gotta take care of your shareholders or you end up very vulnerable like we got...
That's the message. You gotta strike a proper balance between sharing and building the community and then monetizing the work that you do... I think we got the donate part right, I don't think we got the monetize part right.
It's that ability to monetize that companies like Oracle can bring to developer-centric startups, in large part because they appeal to a group that sits next to developers within prospective customer accounts: operations.
Lewis Cirne, chief executive of on-demand application management start-up New Relic, walked me through how this works:
A key strategy that has led to early success at New Relic is to engage the account at the developer level (specifically with a Lite or hybrid-freemium offer that is easy to try & buy), but then grow with the account by providing value to production operations (IT) over time.
If you think about it, developers typically are the early adopters of new technologies that ultimately IT standardizes on. I'd further argue Linux, virtualization, and cloud computing all have had their early start by getting traction in forward thinking pockets of the developer community.
But in each of these three cases, real business opportunities (read: monetization) came about when vendors focused on how these technologies deliver value to IT operations in the production environment. If your solution has fast time-to-value and truly solves a real world problem, the developer entry point is a far more efficient route to market than trying to sell directly to IT, where you have to outgun the likes of HP, Oracle, Cisco and IBM.
This is the exact playbook that Benchmark venture partner Rob Bearden put into action at JBoss, and later at SpringSource. JBoss had a massive developer following but little cash, most of which came from training and professional services. Rob and the JBoss team then kicked monetization into high gear with the addition of the JBoss Operations Network, which made widespread JBoss adoption within enterprises a "problem" solved and paid for by IT operations.
Developers get you in the door, but operations makes the stay worthwhile.
These big, proprietary software companies also bring value to developer-focused startups because they can more easily tread the fine line between open source and proprietary. As Redmonk's James Governor writes,
RedMonk fundamentally believes in sustainable business models - we always saw open source as a great enabler, but not the source of easy margins... Rather the margins come in the packaging for user experience, with the addition of proprietary elements - just ask Apple.
Those proprietary elements come naturally to the Oracles of the world, but may be harder for a startup to develop, and even harder for them to command a premium when they're just trying to get a customer to pay something, anything. That's just standard operating procedure in a startup, and is doubly so in those that target developers, particularly open-source developers.
Redmonk's Stephen O'Grady is dead-on correct: developers are "the new kingmakers." Why? Because developers are the fastest path to adoption and, eventually, to getting paid for that adoption. Salesforce.com, VMware, Oracle and so on aren't necessarily the best-positioned to attract developers, but they're in a great position to monetize others' developer outreach.
Developers are a canny bunch, and can't be bought by the highest bidder. But smart companies that buy into developer communities without trying to overwhelm them - who sell to the operations director who supports developers, and not to the developers themselves - will do very well. In this light, paying a premium for a Spring or Ruby developer may be smart business indeed. ®
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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