10.5 Why Give It Away? The Business of Open Source

Open source is a sixty-billion-dollar industry (Asay, 2008), but it has a disproportionate impact on the trillion-dollar IT market. By lowering the cost of computing, open source efforts make more computing options accessible to smaller firms. More reliable, secure computing also lowers costs for all users. OSS also diverts funds that firms would otherwise spend on fixed costs, like operating systems and databases, so that these funds can be spent on innovation or other more competitive initiatives. Think about Google, a firm that some estimate has over 1.4 million servers. Imagine the costs if it had to license software for each of those boxes!

Commercial interest in OSS has sparked an acquisition binge. Red Hat bought open source application server firm JBoss for $350 million. Novell snapped up SUSE Linux for $210 million. And Sun plunked down over $1 billion for open source database provider MySQL (Greenberg, 2008). And with Oracle’s acquisition of Sun, one of the world’s largest commercial software firms has zeroed in on one of the deepest portfolios of open source products.

But how do vendors make money on open source? One way is by selling support and consulting services. While not exactly Microsoft money, Red Hat, the largest purely OSS firm, reported half a billion dollars in revenue in 2008. The firm had two and a half million paid subscriptions offering access to software updates and support services (Greenberg, 2008). Oracle, a firm that sells commercial ERP and database products, provides Linux for free, selling high-margin Linux support contracts for as much as five hundred thousand dollars (Fortt, 2007). The added benefit for Oracle? Weaning customers away from Microsoft—a firm that sells many products that compete head-to-head with Oracle’s offerings. Service also represents the most important part of IBM’s business. The firm now makes more from services than from selling hardware and software (Robertson, 2009). And every dollar saved on buying someone else’s software product means more money IBM customers can spend on IBM computers and services. Sun Microsystems was a leader in OSS, even before the Oracle acquisition bid. The firm has used OSS to drive advanced hardware sales, but the firm also sells proprietary products that augment its open source efforts. These products include special optimization, configuration management, and performance tools that can tweak OSS code to work its best (Preimesberger, 2008).

Here’s where we also can relate the industry’s evolution to what we’ve learned about standards competition in our earlier chapters. In the pre-Linux days, nearly every major hardware manufacturer made its own, incompatible version of the Unix operating system. These fractured, incompatible markets were each so small that they had difficulty attracting third-party vendors to write application software. Now, much to Microsoft’s dismay, all major hardware firms run Linux. That means there’s a large, unified market that attracts software developers who might otherwise write for Windows.

To keep standards unified, several Linux-supporting hardware and software firms also back the Linux Foundation, the nonprofit effort where Linus Torvalds serves as a fellow, helping to oversee Linux’s evolution. Sharing development expenses in OSS has been likened to going in on a pizza together. Everyone wants a pizza with the same ingredients. The pizza doesn’t make you smarter or better. So why not share the cost of a bigger pie instead of buying by the slice (Cohen, 2008)? With OSS, hardware firms spend less money than they would in the brutal, head-to-head competition where each once offered a “me too” operating system that was incompatible with rivals but offered little differentiation. Hardware firms now find their technical talent can be deployed in other value-added services mentioned above: developing commercial software add-ons, offering consulting services, and enhancing hardware offerings.

Linux on the Desktop?

MySQL: Turning a Ten-Billion-Dollars-a-Year Business into a One-Billion-Dollar One

Finland is not the only Scandinavian country to spawn an open source powerhouse. Uppsala Sweden’s MySQL (pronounced “my sequel”) is the “M” in the LAMP stack, and is used by organizations as diverse as FedEx, Lufthansa, NASA, Sony, UPS, and YouTube.

The “SQL” in name stands for the structured query language, a standard method for organizing and accessing data. SQL is also employed by commercial database products from Oracle, Microsoft, and Sybase. Even Linux-loving IBM uses SQL in its own lucrative DB2 commercial database product. Since all of these databases are based on the same standard, switching costs are lower, so migrating from a commercial product to MySQL’s open source alternative is relatively easy. And that spells trouble for commercial firms. Granted, the commercial efforts offer some bells and whistles that MySQL doesn’t yet have, but those extras aren’t necessary in a lot of standard database use. Some organizations, impressed with MySQL’s capabilities, are mandating its use on all new development efforts, attempting to cordon off proprietary products in legacy code that is maintained but not expanded.

Savings from using MySQL can be huge. The Web site PriceGrabber pays less than ten thousand dollars in support for MySQL compared to one hundred thousand to two hundred thousand dollars for a comparable Oracle effort. Lycos Europe switched from Oracle to MySQL and slashed costs from one hundred twenty thousand dollars a year to seven thousand dollars. And the travel reservation firm Sabre used open source products such as MySQL to slash ticket purchase processing costs by 80 percent (Lyons, 2004).

MySQL does make money, just not as much as its commercial rivals. While you can download a version of MySQL over the Net, the flagship product also sells for four hundred ninety-five dollars per server computer compared to a list price for Oracle that can climb as high as one hundred sixty thousand dollars. Of the roughly eleven million copies of MySQL in use, the company only gets paid for about one in a thousand (Ricadela, 2007). Firms pay for what’s free for one of two reasons: (1) for MySQL service, and (2) for the right to incorporate MySQL’s code into their own products (Kirkpatrick, 2004). Amazon, Facebook, Gap, NBC, and Sabre pay MySQL for support; Cisco, Ericsson, HP, and Symantec pay for the rights to the code (Ricadela, 2007). Top-level round-the-clock support for MySQL for up to fifty servers is fifty thousand dollars a year, still a fraction of the cost for commercial alternatives. Founder Marten Mickos has stated an explicit goal of the firm is “turning the $10-billion-a-year database business into a $1 billion one” (Kirkpatrick, 2004).

When Sun Microsystems spent over $1 billion to buy Mickos’ MySQL in 2008, Sun CEO Jonathan Schwartz called the purchase the “most important acquisition in the company’s history” (Shankland, 2008). Sun hoped the cheap database software could make the firm’s hardware offerings seem more attractive. And it looked like Sun was good for MySQL, with the product’s revenues growing 55 percent in the year after the acquisition (Asay, 2009).