|Home - Industry Article - Nov 05 Issue
Open Source, Software-as-Services Threaten the Software Industry
By Larry Bohn, Managing Director, General Catalyst Partners
Type the phrase, 'the end of software" on your Google toolbar and you see something remarkable. Not only do you get whopping 37 pages of results, but you see some of the technology industry's heaviest hitters weighing in on the issue.
From Mark Benioff and Larry Ellison to IT and business publications to the grassroots movement of the 'blogosphere', the sentiment reads like an obituary for the software industry.
That is, software vendors that are relying on big-ticket license models are in the crosshairs of history. You have only to look at the landscape of M&A in the enterprise software industry to see that it's an evolving market. And not necessarily for the better.
Long story short, selling software and then charging maintenance and support fees on top of the initial licensing fee, is becoming an outdated business model.
Another reason that enterprise software will go the way of the Digital Rainbow PC? Vendors have no good strategy for deals that fall below so-called 'big ticket" status; and the approach allows competitors to enter the market more easily to fill the considerable void that's left.
And these issues only touch upon flaws in the vendor business model. On the customer side, there is a recurring need to have innovative, best-in-class software.
Timothy Chou, former president of Oracle's On Demand business, even wrote a book about these phenomena called, "The End of Software." In it, Chou says, "The software industry has been growing in its current model for over twenty-five years. The result is many corporations spend over 75% of their IT budget managing that software, leaving little to spend on new software. Software companies are also challenged. Margin pressure resulting from increased competition with no cost relief is unsustainable. Software on Demand represents a path out of this 'perfect storm" and has profound and unseen implications on the software industry."
This 'perfect storm" of outdated business models, increased competition, desire for cost control and need to innovate will only hasten the transformation.
As a result, we're seeing an unprecedented transformation in the software business. The shift is away from monolithic business platforms that are licensed and hosted by a customer for hundreds of thousands or even millions of dollars to cheaper, more nimble technologies and methodologies.
So what will step in to fill the void? Open Source (and its supply chain) and software -sold as services.
In general, open source refers to any program whose source code is made available for use or modification as users or other developers see fit. (Historically, the makers of proprietary software have generally not made source code available.) Open source software is usually developed as a public collaboration and made freely available.
According to the Open Source Initiative, the basic idea behind open source is very simple: When programmers can read, redistribute, and modify the source code for a piece of software, the software evolves. They improve it, adapt it, fix bugs and in general create a synergistic relationship in which the whole is greater than the sum of its parts. And this can happen at a speed that, if one is used to the slow pace of conventional software development, seems astonishing.
In other words, open source software aggregates the talent of the community of interested parties to produce a higher quality, more open and reliable system.
The New PTSS
The proliferation of open source is a direct result of what I like to call, 'post-traumatic Siebel Syndrome'. That is, for years customers sank millions into the deployment and maintenance of a single system that encumbered the customer and didn't perform as promised. In fact, IT analyst firm Nucleus Research reported in 2002 that 61 percent of Siebel's own reference customers reported a negative return-on-investment.
Siebel is simply a convenient proxy for my point. The fallout of such betrayal is that customers now hate being captive to a single vendor. As a result, vendors are feeling the backlash and fueling the growth of open source projects such as Linux.
Market research firm IDC estimated that the Linux market - including servers, PCs and packaged software - is expected to register a 26 percent compound annual growth rate (CAGR) over five years, reaching a whopping $35.7 billion by 2008.
So what's fueling the growth of open source projects such as Linux? At the highest level, open source gives customers more choice in terms of product development and maintenance; and it gives customers far more flexibility with licensing.
More specifically, the advantages of open source over traditional enterprise software include:
- Reliability: In lab tests, IBM's Linux Technology Center found that, "the Linux kernel and other core OS components are reliable and stable … and can provide a robust, enterprise-level environment for customers over long periods of time."
- Performance: Consulting Times recently reported that, "When the Linux desktop gets performance tweaks, people can see a significant difference. Windows XP just cannot keep up. With the addition of a stream of new applications and multiple ways to run Win32 applications, the case for Linux becomes irrefutable." Tests from other publications-such as PC Magazine - show that configurations of Linux are consistently capable of beating various Windows operating system configurations in terms of performance.