The future of software: Open source, but where’s the profit?

I’m fascinated by Open source. It’s changing how software is developed, marketed and customised but can commercial Open source firms make healthy profits? They have been grappling with this challenge since the 90’s.  “Keith Curtis, an 11-year veteran of Microsoft, believes deeply that open source is the future of software” as discussed by Paige Finkelman. It seems the old proprietary and open source models are dead and commercial Open source vendors are now evolving into a mixed hybrid model.

Is this the key to a profitable open source model?

This year I met two evangelical CEO’s of commercial Open source firms, Ismael Ghalimi of Intalio and Aaron Fulkerson of Mindtouch. Ismael attempted to commercialise with GPL licencing but had to restart his business twice, racking-up $43m $34m in debt investments. A recent report form The 451 Group entitled “Open source is not a business model” concludes,“There is very little money being made out of open source software that doesn’t involve proprietary software and services.” Stuart Cohen thinks that the Opensource model is broken and “open-source companies that rely on support and service alone are not long for this world.”

Open source firms such as Intalio and Mindtouch are increasing becoming a mixed model supplying both open source community versions and chargeable enterprise editions which are reliant on proprietary code. Whether they will make healthy profits is yet to been seen. We know it can be done. Red Hat is the leading Open source commercial provider with revenues of $400m (2007). Profiteering from an aquision as good as the Sun $1b purchase of MySQL is unlikely to come around again soon because the revenue challenge remains. MySQL makes a mere $60m from support and services. This compares against Oracle’s $22b in licence and service revenues.

Some concider MySQL a growing threat to Oracle. Conspiracy theorists see the Sun deal as trying to stop Open source growing so that the perpetual software vendors such as Oracle can continue to make huge profits. It turns out Sun’s aquision of MySQL is not going well with latest version having major bugs. Ismael believes that “traditional Software is a dead market with propriety software companies no long existing in the future”.

I believe this new hybrid Open source/propriety mix is the future of software. Open source brings firms like Intalio and Mindtouch a huge developer community and a powerful marketing channel.  Customers get cheaper, better software which is much easier to customise and integrate. This market change will spell the end of enormous profits for future software vendors.

However today’s big software vendors ain’t going down without a fight. Microsoft have taken a strong stance against Open source with accusations of patent violations. Some believe this attitude will change at Microsoft in the post Bill era as discussed by Dana Blankenhorn & Paula Rooney of ZDnet. I don’t think so. Does a leopard change his spots? The recession we are now entering is likely to be a long and deep depression. This pressure on budgets could be the catalyst which ushers in a new dominate software model into the market.

You read, I write

I was going to wait until next week to write about Economics in a planned and structured fashion, however I have had ‘a moment of clarity‘ thanks to you. Economics you say, well how dull or perhaps how exciting.  The Economics will have to wait until another day. The shocking thing is what you guys are doing on a Easter Bank holiday reading blogs and my need to blog immediately. Here’s the proof of the number of blog reads on my site for the last week with a relative high number at the weekend:

My point is that the new social way of behaviour on the Internet is very open and instant. This is me, here is my career, here are my colleagues, here are my friends, here is my family, here is my diary..here is what I think. And here is a graphical measure of how interested other people are in us and what we are doing. The next version of the Internet (so called Web2.0) is an expression of the self and then active participation in a community. By participating we become involved, by being involved we are drawn into participating further, thus me writing and you reading during our holiday.