The commercial open source failure

This post was also published in BusinessWeek.

So what happened to open source as a business? There was a wave of “commercial open source” companies that were going to change the world, including SugarCRM, Alfresco, Jasper, Pentaho, and ActiveGrid, a company I started in 2003 to bring open source software into businesses. Each of these companies were going to lower costs with the open source business model and displace existing vendors in categories such as CRM, Document Management, Reporting, and Business Intelligence.

It’s been over six years, and no commercial open source companies other than Red Hat, MySQL, and JBoss have had liquidity events. So what happened? Oracle and IBM, which derive the vast majority of their software revenue from proprietary software, have an increasing share of the software market. And there’s a bunch of commercial open source companies still trudging along.

1. The only successful open source companies sell commodities. Linux, MySQL, and JBoss are the only open source companies with significant liquidity vents, and their success is more indicative that operating systems, databases, and application servers are commodities than that open source is a successful business model. No one can succinctly tell you the difference between Linux and IBM’s AIX, or JBOSS and Oracle WebLogic, so why not buy the cheaper one!

2. It costs as much to deliver open source software as proprietary software. Many open source companies exhibit at tradeshows, have salespeople, systems engineers, customer services departments, and on top of that employ the vast majority of developers that are working on their open source project. So their costs are comparable to proprietary software companies that offer free trial versions for lead generation. It’s great that some random guy in Lithuaniacan fix a bug for the commercial open source company, but the headache of maintaining a community and integrating random code patches is just as expensive as fixing reported bugs with your own people. So commercial open source companies have the same cost structure as the enterprise software companies that preceeded them.

3. Selling software is miserable. Selling software to a large business means approal from architecture committees, security audits, achieving approved vendor status, business unit sponsorship, executive sponsorship, etc. Enterprises see IT as a cost center and IT does whatever it can to not have to deal with yet another software vendor, especially a small startup that is likely to go out of business or get bought and then deal with software that’s no longer supported, making the IT buyer look bad.

4. Customers are switching to SaaS intstead of more software. Let’s say you run a division of a company and you need customer relationship management (CRM) or business intelligence. What are you going to do? Call your IT department so they can find software, purchase it, customize it, deploy it, and then roll out to your users, all while charging your through the nose? Or call a service provider like or GoodData and be up and going tomorrow? No brainer.

So when is open source successful? When it’s free and supported by a broad community of developers, not just one company trying to extract revenue. At my own company Transpond, where we help companies reach their audiences and customers on social networks and mobile platforms, we use a ton of open source software including Apache, PHP, Tomcat, MySQL, JQuery, Debian Linux, Quartz, Eclipse, Maven, and more, and we haven’t paid anybody anything other than contributing code to some of these projects. The point of open source was for people to share the costs of developing, debugging, and deploying common infrastructure. That does not mean that every successful open source project can sustain a commercial company, especially when they are delivering complicated applications rather than simple plumbing.