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If you open source an old market, are you doomed to fail?

Going down with a closed ship

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Open...and Shut A few years back, a host of open-source businesses raised hundreds of millions of dollars on the promise that they would commoditize old, dying markets, and make a bundle of money in the process. Missing from this thesis, however, was its logical conclusion: winning in a fading market is tantamount to losing, as the commoditizing vendor goes down with the sinking ship.

Back in the day, one easy way to earn venture-capital investment was to find an established market and set up shop as the "open-source alternative to [name your big, proprietary vendor]." Open-source companies cropped up to take on middleware, operating system, database, and enterprise application incumbents, and they were liberally funded.

Some open-source vendors did quite well, at least in terms of exits. JBoss, Zimbra, and others found their ways to fat exits worth hundreds of millions of dollars. For those that didn't get bought at the peak of the open-source acquisition hype cycle, however, there's still a big problem to overcome:

They just might win. After all, even if a commodity open-source business can win over a bloated, slow-growth market, that market may be nearing terminal decline. Who wants to own such markets? I mean, beyond CA?

Yes, there's plenty of money to be made undermining the inefficient pricing of incumbent vendors, but unless open-source vendors have a second act - one that involves reinventing the old market to pave a way toward new growth opportunities - it may be doomed to win sexiest nun in the convent with no hope for redemption. Ian Murdock, founder of Debian, argues that open-source communization is natural and good:

[T]he open source movement is just another commoditization event; and…like other commoditization events, it represents a disruptive shift in the software industry as well as an opportunity for entrant firms to unseat the established firms against seemingly overwhelming odds. That being said, commoditization does not equate to certain death to the established firms, if they have the vision to see beyond the disruptive events that may befall them in the short term and can adapt themselves to the new commodity environment….

[C]ommoditization is a natural, and unstoppable, force that is good for everyone involved—if that force is allowed to develop on its natural course.

What he doesn't tackle is how this can be bad for the open-source companies who hasten such commoditization. Some will point to Red Hat as a counterexample. After all, Red Hat CEO Jim Whitehurst makes it clear that commoditization of others' innovations is standard operating procedure for the infrastructure leader:

Typically, most high-growth companies are growing fast because they invented a new sector or they're leading a new sector, and they're growing with that sector. Red Hat is different. We're in the business of taking share…. Unlike companies that lead or create categories, we fundamentally enter existing categories and take share…Frankly, for us is a lot less important whether the software market is $21 billion or $21.5 billion a year, but much more important how much share we take.

It's true that Red Hat has raked in nearly $1 billion in annual revenues by undermining the operating system and middleware businesses of established vendors like IBM, Oracle (Sun), and others. But while Red Hat's middleware business could be classified as a commodity play against IBM's WebSphere and Oracle's WebLogic, its Linux business is no longer about siphoning money out of a moribund Unix market.

More importantly, Red Hat is increasingly focused on taking share in relatively new, growing markets like cloud and virtualization. It has an Act II, in other words, and it's not about commoditizing old markets.

But what about MySQL? After all, this is the company that raked in nearly $100 million in annual sales on the road to then-CEO Marten Mickos' tagline of turning a $10 billion market into a $3 billion market, and owning a substantial chunk of the shrunken market. However, MySQL is actually a poor example of this commodity phenomenon, since it didn't really commoditize the database market, but instead innovated a new database market: the web database market.

In sum, while it can certainly be profitable to initially focus on commoditizing an old market, successful open-source vendors will be those that learn to enter newly minted markets or innovate their own. Otherwise they'll be left standing on the charred remains of a dead or dying market, losers even as they win. ®

Matt Asay is senior vice president of business development at Strobe, a startup that offers an open source framework for building mobile apps. He was formerly 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 twice a week on The Register.

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