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The informal description: The enterprise software market is in the midst of a major structural shift. Open source is a change in the conduct of the market – it’s not about ideology. If we understand why this is happening, we can figure out how to respond. The firms that develop a strategy to deal with the new market realities and open source will be the ones who make money. The others, not so much. The formal one from the conference: Why open source? Why now? What should a software vendor do in a commodifying market? This presentation explains how an open source strategy can work in today's business intelligence market and what values are "better than free." He explains the range of options available to a vendor, the situations where value can develop, the risks and the rewards. Madsen will also give examples of the rationale for and benefits of partnering with or using open source.
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Attribution-NonCommercial-No Derivativehttp://creativecommons.org/licenses/by-nc-nd/3.0/us/
Going Open The Perils and Promise of Open Source Mark Madsen –June 26, 2008 www.ThirdNature.net
Slide 2June 2008 Mark Madsen
The Short Version
•The enterprise software market is in the midst of a major structural shift.
•Open source is a change in the conduct of the market – it’s not about ideology.
• If we understand why this is happening, we can figure out how to respond.
•The firms that develop a strategy to deal with the new market realities will be the ones who make money.
Slide 3June 2008 Mark Madsen
Peril
Slide 4June 2008 Mark Madsen
Promise
Slide 5June 2008 Mark Madsen
The First Recorded Patent
Slide 6June 2008 Mark Madsen
The First Monopoly
Slide 7June 2008 Mark Madsen
Déjà vu All Over Again
“The greatly increased mass of participants has produced a change in the mode of participation. The fact that the new mode of participation first appeared in a disreputable form must not confuse the spectator. Yet some people have launched spirited attacks against precisely this superficial aspect.”
Walter Benjamin, 1935The Work of Art in the Age of Mechanical Reproduction
Slide 8June 2008 Mark Madsen
What is the State of the Enterprise Software Market Today?
Slide 9June 2008 Mark Madsen
Any Industry This Big is Maturing
Annual US software sales
-10
10
30
50
70
90
110
130
150
70 75 80 85 90 95 00Source: US Dept. of Commerce
Slide 10June 2008 Mark Madsen
Evolution of the Software Market
Source: John Prendergast (data: Bloomberg, Factset)
Slide 11June 2008 Mark Madsen
Evolution of the Software Market
Source: John Prendergast (data: Bloomberg, Factset)
Slide 12June 2008 Mark Madsen
Evolution of the Software Market
Source: John Prendergast (data: Bloomberg, Factset)
Slide 13June 2008 Mark Madsen
The BI / DW Software Market Today According to IDC, the analytics and data warehouse software market is growing at 10.3% CAGR
17,38619,342
21,40823,601
26,00128,682
31,595
2005 2006 2007 2008 2009 2010 2011Source: IDC
Slide 14June 2008 Mark Madsen
BI is Just Entering Mainstream Adoption
The BI market has lots of segments, most new, some mature, some being rejuvenated.
Platforms
DatabasesReporting & Analysis
Data Integration
Predictive analytics
Source of diagram: TCG Advisors
Slide 15June 2008 Mark Madsen
BI is Already Becoming a Commodity
According to this people just assume that the features are there; evaluation is about aspects other than features.
Source: IDC
Slide 16June 2008 Mark Madsen
What does it look like from the CIO perspective?
Indications of the commoditization of software
Slide 17June 2008 Mark Madsen
It Looks Expensive
IT costs as a percent of equipment investment
0
10
20
30
40
50
68 72 76 80 84 88 92 96 00 04Source: US Dept. of Commerce
Slide 18June 2008 Mark Madsen
The Devaluing of ITFor most businesses, nearly 80% of IT budget is dedicated to basic infrastructure
…and more than 60% of IT labor cost goes to keep things running, i.e. basic operations and support.
Commodity
Strategic
Slide 19June 2008 Mark Madsen
It Wasn’t Always This WayAs technologies mature and spread to competitors, they cease to be differentiators. Unfortunately, this is what packaged software vendors want to do.
CommodityCommodity
The old advantages becomes the new focus of cost reduction.That’s one of the things that makes open source compelling.
Strategic Strategic
Slide 20June 2008 Mark Madsen
Commoditization!
“There is no reason anyone would want a computer in their home.”
Ken Olson, CEO of DEC, 1977
“…by 2008 we will be producing one billion transistors for every man, woman and child on earth”Semiconductor Industry Association, 2007
Slide 21June 2008 Mark Madsen
What Commoditization Drives in IT
Time
Equipment
Expensive: outsource to reduce equipment cost
Labor
Affordable: insource for control, innovation
Dirt cheap: outsource to reduce labor cost
Cost
Slide 22June 2008 Mark Madsen
Perspective on Where IT Came From
The model evolved from build in the early days
BuildHigh differentiation
High cost
Slide 23June 2008 Mark Madsen
Enterprise Software Options Evolved
…to a choice of buy versus build
Buy
Build
Low differentiation
High differentiation
High cost
Low cost
Slide 24June 2008 Mark Madsen
…and Options Evolved Further
The Internet generated a new option
Buy Lease
Build
Low differentiation
High differentiation
High cost Low cost
Slide 25June 2008 Mark Madsen
Open Source Gives IT New Options
The Internet and Open Source enables a fourth and also reduces the cost of the buy option.
Buy Lease
Build Compose
Low differentiation
High differentiation
High cost Low cost
Slide 26June 2008 Mark Madsen
Reasons for Adopting Open Source?
Source: North Bridge Venture Partners
Slide 27June 2008 Mark Madsen
Benefits Seen After AdoptionAfter your organization adopted open source software, what was the primary benefit of its use?
Source: The 451 Group
31%
31%
15%
10%
7%
4%
3%
Flexibility
Lower cost
Reduced dependence on vendors
Performance
Reliability
Security
Other
Slide 28June 2008 Mark Madsen
The Real State of Enterprise Software
Slide 29June 2008 Mark Madsen
Enterprise Software Consolidation
Number of public US enterprise software companies
240
289268
248222 217
183157 149
2000 2001 2002 2003 2004 2005 2006 2007 2008
Sources: Thomson Financial
Slide 30June 2008 Mark Madsen
Something’s Going on Here
Tech Industry IPO Activity has not recovered
5275
126
86
195
243
155116
381
264
26 22 2252 54 40
68
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Sources: Thomson Financial
Slide 31June 2008 Mark Madsen
Software Economics: Primed for OSS
•
70% - 80% of sales & marketing is for new sales
•
76% of new license revenue goes to sales & marketing
•
Maintenance makes up 45% of revenues and this number is increasing
•
75% of R&D for mature products is for updates, bug fixing, and non- revenue enhancements
•
Maintenance and support is becoming the biggest factor is software company profitablility.
Sources Goldman-Sachs, Tech Strategy Partners, Forrester
The enterprise software model is breaking down. Some facts:
Slide 32June 2008 Mark Madsen
IT Has Changed, Making OSS Use Easier
Slide 33June 2008 Mark Madsen
What Do They Know That We Don’t?
Venture capital and deals in open source
Slide 34June 2008 Mark Madsen
Acquirer Acquired Price
$1 billion
$500 million
$350 million
$350 million
$35-50 million
There Must be Value There Somewhere
Slide 35June 2008 Mark Madsen
Why invest in open source startups entering a maturing market?
Because the structure of the market has already changed
Slide 36June 2008 Mark Madsen
Theory of Disruptive Innovation
Product performance
Time
Customer demands
High-end customers
Low-end customers
Slide 37June 2008 Mark Madsen
Theory of Disruptive Innovation
Product performance
Time
Customer ability to adopt
Rate of existing technology improvement
Slide 38June 2008 Mark Madsen
Theory of Disruptive Innovation
Product performance
Time
Customer ability to adopt
Rate of new technology improvementNew entrant
Rate of existing technology improvement
Slide 39June 2008 Mark Madsen
Theory of Disruptive Innovation
Product performance
Time
Customer ability to adopt
Rate of new technology improvementNew entrant
Rate of existing technology improvement
OSS is disrupting through new production and distribution methods
Slide 40June 2008 Mark Madsen
What’s Really Going on Here?The Internet, providing connectivity to…Lots of demand (users), connecting to…Lots of supply: (developers), all of whom can find each other via…The Internet.
In other words, the conditions of the market now enable commons- based peer production methods.
Slide 41June 2008 Mark Madsen
The Internet is a Great Big Copy Machine
Cognos for $20!
Citrix Metaframe for $30!
Low volume high margin selling is going away.
Slide 42June 2008 Mark Madsen
Software is a Perfect Commodity
$0
Nobody ever thought infinite fixed supply would be a reality.
Slide 43June 2008 Mark Madsen
A Perfect Commodity Changes Things
Open source is a means of production and distribution of software, and is driving change in the market.
But the fact that the internet is a massive copying machine for the perfect commodity is the real change in conditions.
Maybe enterprise software isn’t such a great business to be in.
Slide 44June 2008 Mark Madsen
The Economics of Scarcity is About Rivalry for Resources
Rivalry: the more I use the less you have
Exclusion: intellectual property law is exclusion; you can’t use it unless you pay me
Slide 45June 2008 Mark Madsen
The Economics of Abundance Requires New Principles Anti-rivalry: there is no consumption, only use. Open source licensing is a way of addressing the change in this dynamic.
Inclusivity: the network effects of inclusion mean more use = more value; and as cost goes down, usage and value go up.
Data warehousing is actually all about the network effects of data.
Slide 46June 2008 Mark Madsen
Anti-rivalry + Inclusivity = Collaboration
Slide 47June 2008 Mark Madsen
Open Source is an Inevitable Consequence
If the means of production is widely distributed at commodity costAnd the internet connects all those means of productionAnd the supply of any software program is infiniteThen we need to rethink some things.“The era of high capital industrial production is giving way to a different model.” – Peter Drucker
Slide 48June 2008 Mark Madsen
What’s Happening With Open Source in the BI Market?
Slide 49June 2008 Mark Madsen
Open Source Disruption
Which sector of the industry is most vulnerable to disruption by open source in the next five years?
1. Web publishing and content management2. Social software3. Business Intelligence
Source: North Bridge Venture Partners
Slide 50June 2008 Mark Madsen
Time
Adoption Rate
What About Adoption?
End of LifeNew innovation
Slide 51June 2008 Mark Madsen
Adopter Categories
Innovators Late Majority
Early Majority
Early Adopters
Laggards
People here tend to focus technology as a means to capitalize on future opportunities.
e.g. time is more important than money
People here tend to view technology as a means to resolve present problems.
e.g. money is more important than time
Slide 52June 2008 Mark Madsen
Time
CumulativeAdoption
Market Adoption
Slide 53June 2008 Mark Madsen
Product Maturity
Some Ideas Aren’t That Good
End of LifeTimeNew innovation
A lot of vendors hope this is open source
Slide 54June 2008 Mark Madsen
Curves Can Explain a Lot
Time
Product Maturity
Slide 55June 2008 Mark Madsen
Where is Open Source?
The open source segments are slightly trailing the commercial BI/DW segments in maturity.
Middleware
Platforms
Dev tools
Applications
Source of diagram: TCG Advisors
Slide 56June 2008 Mark Madsen
This Can’t be Good News for BI
“The tools market is dead. Open source killed it. The only commercial tools that can survive today are the ones that leapfrog open source tools.”
John De Goes, president of N-BRAIN, on announcing that they are giving away their source code editor.
The value they add in the commercial product is the collaborative edition, which they can still charge for.
Slide 57June 2008 Mark Madsen
Who’s Adopting Open Source for BI?
1. ISVs2. The over-served3. The under-served4. The under-budgeted5. Developers who never
had it before
More co-existence and use in edge cases than straight replacements, and often competing with lack of use
Slide 58June 2008 Mark Madsen
OSS as a Source of Innovation
•Not all open source markets are over-served.•OSS will head off some new markets before
they become larger tools markets, as it did with web servers.
Slide 59June 2008 Mark Madsen
Where do people expect innovation?
“Few customers expect to see innovation coming from large software vendors.” – McKinsey survey
22
59
19
0 20 40 60 80 100
Other
SmallVendors
LargeVendors
Slide 60June 2008 Mark Madsen
How can we bet with the market instead of against it?
Slide 61June 2008 Mark Madsen
How Do You Compete With Free?
“When copies are super abundant, they become worthless. When copies are super abundant, stuff which can’t be copied becomes scarce and valuable.”
Kevin Kelly
E.g. trust, security, authenticity, quality, reliability, availability, optimization, customization, configurability, support, training, documentation, usability
“When technology delivers basic needs, user experience dominates”
Don Norman
The #1 complaint about open source applications is fit & finish.
Slide 63June 2008 Mark Madsen
Look For the Resulting Impacts
"Every abundance creates a new scarcity“Chris Anderson
An abundance of choice can create a scarcity of advice• Ever tried to choose a Java web framework?
An abundance of content can create a scarcity of time• Really, a scarcity of attention. Who can sift through all those
open source projects? Which things are important?
An abundance of people competing for your attention can create a scarcity of trust
• If anyone can distribute the code, where do you get it?
Slide 64June 2008 Mark Madsen
Where do Larger Returns Come From?
1. Innovation: implies no incentive for commodity open source, only for novel open source projects
2. Network effects: better reach or more cost- effective scaling for the types of software that increase in value with the size of the network
3. Scale of the vendor: by doing more of more things, there are more relationships between offerings which provide more opportunities for value to develop
4. Lock: even free software can create lock-in through high switching costs or process integrationWhat do the economics of abundance mean for these?
Slide 65June 2008 Mark Madsen
Competing With FreeAn example from the financial industry:Deregulation led to a deflationary spiral in trading transaction revenues: ~50 cents to nearly free.It killed agent-based firms and it forced a lot of market consolidation.Survivors did different things:
• Compete on scale• Stop sharing research data and
use it to internal advantage• Front-end fees
Slide 66June 2008 Mark Madsen
An Open Source Analogue
Slide 67June 2008 Mark Madsen
Three Strategies for Working With OSS
•
BecomeGive up the proprietary model completelyEmbed with contamination
•
BefriendInclusions and natural extensionsShared resources
•
Build onLoose embedding (without contamination)Copyleft buyout
Slide 68June 2008 Mark Madsen
Become
Examples:• Partial: Autodesk, Sun• Complete: Jaspersoft, Ingres
Different companies did it for different reasons.Money follows the path of attention: reach.Risky move unless you understand the markets, e.g. building community, license incompatibilities with partners, as likely to be SaaS’d
Slide 69June 2008 Mark Madsen
As a New OSS Vendor What Can You Do?
Apply Christensen’s and Moore’s theories about commodification and technology adoption:
• Target the over-served customers by offering a “good enough” commodity at a lower price.
• Target the under-served customers by meeting their specific needs.
Interestingly, the BI market exists simultaneously in both over- and under-served states.
“If a company enters into an industry at the bottom of the market, they are 6 times more likely to succeed.”
Clayton Chistensen
Slide 70June 2008 Mark Madsen
BefriendExtending to a whole product or adding natural extensions:
• Appliance vendors partnering with open source for ETL
• Deep integration requirements
Taking advantage of shared resources (“Feed the cow and share the milk”)
• Eclipse as a shared developer platform for multiple products
• Autodesk helping found the Open Source Geospatial Foundation
Slide 71June 2008 Mark Madsen
Build on
Extension• E.g. Infobright, Greenplum• OSS BI partners
Loose embedding and aggregation
• Vertical and horizontal community stacks
• Virtual appliances
Extension often involves some form of copyleft buyout if the license is viral.
Slide 72June 2008 Mark Madsen
Innovation is Still Valuable
This means you can adopt one of two approaches to monetizing software depending on where you sit:
• Focus on the core IP and use OSS for the commodity elements or as the framework
• Focus on the center and give away the edgesExample: Actuate with BIRT
• Focus on the edges and give away the centerExample: most OSS vendors with a proprietary version, also vendors like Oracle and Microsoft with ETL
Razor and blades, or blades and razor?
Slide 73June 2008 Mark Madsen
The Big Vendors Are Already Committing
Slide 74June 2008 Mark Madsen
Who Gets the Lion’s Share of OSS Revenue?
Source: North Bridge Venture Partners
Slide 75June 2008 Mark Madsen
Questions?“When a new technology rolls over you, you're either part of the steamroller or part of the road.” – Stewart Brand
Slide 76June 2008 Mark Madsen
Creative CommonsThanks to the people who made their images available via creative commons:canal - http://flickr.com/photos/mcsixth/150749007/
glassblower - http://flickr.com/photos/cazasco/261229878/
porthole - http://flickr.com/photos/lwr/24925322/
baby - http://flickr.com/photos/pichichi/55381094/
lock - http://flickr.com/photos/tremeglan/400428163/
Cliff divers - http://flickr.com/photos/raveller/
befriend.jpg - http://flickr.com/photos/ehrgeizier/114385285/
spanish_on_incan_ruinsjpg - http://flickr.com/photos/districtsoul/182813119/
butterfly_hatching.jpg - http://flickr.com/photos/pezlet/2390627403/
oxygen_bar1.jpg - http://flickr.com/photos/tomlawrence/1413798276
whirlpool vortex.jpg - http://www.flickr.com/photos/26864055@N00/86457712/
highway storm.jpg - http://flickr.com/photos/areyoumyrik/235230688
cat_dog_bw.jpg - http://flickr.com/photos/sweetz_eyez/2606385414/
child_alone.jpg - http://flickr.com/photos/beija-flor/129669668/
children playing.jpg - http://www.flickr.com/photos/beija-flor/52292046/
beer_free_beer3.jpg - http://flickr.com/photos/henrikmoltke/142750871/
firemen not noticing fire.jpg - http://flickr.com/photos/oldonliner/1485881035/
changing of the guard.jpg - http://flickr.com/photos/mambo1935/160739264/
beer_free_beer2.jpg - http://flickr.com/photos/fzero/173386050
surfer1_large.jpg - http://www.flickr.com/photos/millzero/2093324718
teapot.jpg - http://flickr.com/photos/joi/411403/
Slide 77June 2008 Mark Madsen
Creative CommonsThis work is licensed under the Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 United States License. To view a copy of this license, visit http://creativecommons.org/licenses/by-nc-nd/3.0/us/ or send a letter to Creative Commons, 543 Howard Street, 5th Floor, San Francisco, California, 94105, USA.