Thursday, August 23, 2007


Making Money from Open Source

Stephen O'Grady of RedMonk recently discussed how to make more money from open source but left out a couple of important considerations...

My first comment is is that the conversation centers around support and services fees but doesn't address one of the most expensive considerations when starting a software firm which is the cost of sales. Consider the fact that having to deal with us enterprise architect types are very expensive. You have to hire sales people to cold call us with your value proposition, do Powerpoint presentations for our internal minions multiple times, and spoonfeed us information on how to be successful and all of this occurs before you even get a single cent of revenue.

The enterprise marketplace is becoming even more difficult as folks have invented half-baked notions of governance and have increased the amount of paperwork required to simply procure software. Enterprises are also throwing more legal agreement at software firms who sell closed software which translates into more expensive legal fees paid to counsel.

Consider the scenario where you want to create a new software firm and you decide to sell it the closed source way. Let's say you divide the United States market into four equal quadrants where you have to hire a sales person along with a sales engineer equating to a total of eight people in the United States. Let's say you also do one pair for the UK and one pair for Asia/India. Your first year's expense for just the sales orientation could hit $2 million once you pile on travel expenses.

Open source makes all of those expenses go away. You don't have to incur the expense of multiple trips to meet with various characters in large enterprises and their somewhat frivolous ceremonial proof of concepts and instead get them to do their own selling internally as well as finding someone motivated and not just assigned to make it happen. Open source guarantees not only lower expenses but better success.

Another dimension that no one will probably ever talk about is the simple fact that closed source software vendors usually are required to spend more in terms of industry analyst fees than open source. Have you ever seen Gartner publish in their magic quadrant any non-commercial open source projects next to proprietary closed source projects? If you understand that it simply isn't going to happen, you can then focus your money on areas that will actually have a return.

Let's say you spend $50K each with Gartner, Forrester, IDC and Yankee. As an open source firm, how much coverage can you possibly get for your spend? Would you be better served by paying a noted blogger to amplify instead of getting less than you pay for? Sure, I have heard the argument that the value proposition for analyst firms from analysts firms is more than advertising and lead generation but does anyone really believe this?

For the record, I am not saying that you shouldn't procure analyst firm services. In fact, I would recommend folks going down this path engage with firms such as Redmonk, Entiva, The 451 Group and other analyst firms that actually understand open source and will provide you with a better return on investment over the previously mentioned ones. Besides, the smaller firms tend to be cheaper than the bigger guys which also helps ROI.

The final consideration that I have is that open source solves some public relations issues for you. Most enterprises nowadays have media relations departments that don't allow their employees to say anything in public about the products they buy. Closed source vendors rant about this all the time. So, the obvious solution to solving the marketing problem may be to not sell to certain enterprises so that they can exercise their right to talk about it without running into issues regarding conflict of interest, code of ethics, media relations and other constraints. Figure out which enterprises can speak publicly about open source when you aren't a vendor and pursue them while selling services to the ones that simply want cheaper software. This way you can also out-market closed source competition...

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