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The tanking economy and OSS

By Keith Ward on November 21, 2008 (9:00:00 PM)

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The economy is falling as fast as temperatures in November. Recession seems certain, if it's not already here. The stock market's performance resembles Disney World's Space Mountain roller coaster. And every open source vendor, every Linux project, will be touched in one way or another.

Matt Asay of Alfresco, which makes a Linux-based open source content management system, sees different effects on the open source software (OSS) community in the short and long term. "Short term -- the next few weeks -- everyone, whether commercial or proprietary, is going to find life unpleasant," Asay says, adding that the last several months have been the "most unpleasant quarter I've ever been through."

That's the bad news. The good news, according to Asay, is that "Long term, I think open source will significantly benefit, as companies will significantly re-jigger budgets, keeping them the same or [making them] smaller." That's where the essentially free up-front cost of open source comes in.

Mark Driver, a research vice president at analyst firm Gartner, agrees. "I would think open source software would be extremely attractive, since the cost of acquisition is so much lower. If I can use it without paying for it, that's great."

It may be great for companies using OSS, but effect is less certain on vendors who rely on service and support contracts to stay in business. Thus far, though, the impact of the economy has yet to be felt strongly in this space.

Canonical, for instance, makes its money selling and supporting Ubuntu. Canonical is somewhat insulated, since founder Mark Shuttleworth privately funds the company; still, Marketing Manager Gerry Carr says that Canonical has grown to more than 200 employees, and "added 100 employees in last year. We're hiring more and more core developers and growing our commercial arm -- the people who work with OEMs. Growth is very strong."

Winning on price

Asay notes that Linux companies usually undercut proprietary software companies on price, which can be a critical factor when the economy goes south. "The shocking thing is that even in a frozen economy, just this past week, we had bids go in on three different opportunities; [on one of them], one competitor had a $5 million bid, and we won with a $500,000 bid. We won another with a $250,000 bid; and another in Canada, [the bid from the proprietary software company] was well over $1 million, and ours was $100,000."

Joel Berman, director of marketing strategy for Red Hat, agrees that when economic times are tough, Linux and OSS become more attractive options. "It should be a net positive for us. Companies looking at moving to open source ... have convinced themselves there's a huge amount of money to be saved in acquisition and operating costs. They can take existing servers and run Linux on them, and can breathe new life into old servers."

Canonical's Carr says he's not surprised at those success stories. "Linux is pretty well placed in this type of market; people are looking to save money on IT infrastructure. Cost isn't everything, but it is very important."

It's been important for Zimbra, too. Zimbra is an email and calendar software vendor that competes directly with Microsoft's proprietary Exchange product. In the last year, Zimbra, owned by Yahoo!, has gone from 12 million commercial mailboxes to more than 20 million, and from 10,000 customers to more than 30,000, according to John Robb, vice president of marketing and products. "We wake up every day thinking, 'How can we grow?'" he says.

Zimbra's development community has grown from 12,000 to 18,000 members. The company, which doesn't divulge specific sales figures, just started offering a hosted solution for its email, and recently saw one of India's biggest companies move from Lotus Notes to its solution.

Driving without insurance

Despite encouraging news like that, though, there is a significant risk to OSS: the chance that the customer will get used to free. "I clearly see a downturned economy driving a broader interest in open source," Driver says. But "if the economy stays down a long time, a real recession that lasts a year or longer -- if that's the case, one of the things I look at is if the average IT shop [stops] assuming they need a service and support chain. If they don't get it and 'drive without insurance' ... they may realize they can get away without the need for commercial service and support for a long time."

The dangerous bottom line for OSS vendors, Driver says, is that "the longer my customers use my software without my services, the more they realize they don't need me."

That has happened to most, if not all, OSS companies. "In every case with us, and across the board with companies I work with, customers can evaluate a long time before they make a purchasing decision," Asay says. "One Fortune 10 company has been using our product in production for a while without paying us a dime."

That is more of a danger than ever, especially for smaller companies. As Driver says, "It's less about open source than how does a small vendor survive in this world? The fact that they're small is more important than [the fact that] they're open source.

"Traditional open source vendors have a hard time turning users into customers," Driver adds. "In a down economy, that becomes more difficult, because users have an incentive not to become a customer, and can use that [product] for free."

Get creative

So what should OSS vendors be doing in what could be a protracted recession? Asay has some suggestions. "Everybody should be thinking profitability. Growth, yes, but profitability first.

"Software has to sell itself as much as possible. Focus even more on research and development. If a product is good, sales will come. It's particularly true now, when you have to rely on your product cutting through the noise."

You also have to separate yourself from the competition. "Make sure you have significant differentiation between what you sell and [what you] give away. Extensions, add-ons, enhanced support experience, online services like SaaS [Software-as-a-Service], hosted [software]. Hosted is a primary area open source should be investing in. Give [customers] the ability to sign up month-to-month. That could be a big winner," Asay says.

Driver says creativity and development and sales are more important than ever. "For smaller vendors, this is the time to tighten the belt, go into your core audience, and leverage the parts of open source unique to open source -- factors like open innovation, which can create a catalyst for a new business model. Cloud computing, subscription pricing -- innovation that touches customers, not just in technology. [They] should be building collaborative vertical user communities, and throwing more options out there. If I'm an open source vendor, I want to find new ways to deliver my product and engage the community around the product."

That's advice Red Hat has implemented to find new revenue channels. Berman says, "We've recently started an assessment service for global consulting. We will come out and look at [a customer's] hardware, software, etc., and see what could be moved onto open source. The demand for those kinds of services are increasing; a lot of people are looking at it. The hits on our Web site are going crazy."

The industry's major players can also pick up some bargains, Driver points out. "I think larger vendors can look at acquisitions at fire-sale prices. I think if someone has the finances, this is a great time."

That viewpoint is shared by Canonical, Carr says. "We see it as a great time to expand. Good people are going to become available, and advertising costs are going to reduce. We have a lot of contracts signed for delivery through 2011 -- we have to hire just to service those contracts."

Hold on tight

Finally, advice that applies anytime becomes even more critical in times like these. "Really focus on your existing customers," says Asay. "The first thing to go and worst thing that can happen is that your customers leave. They'll be the most sure source of income. Hold on to what you've got and try to sell deeper into existing accounts. Customers could be harder to come by for a little while."

The most important thing open source companies can do is to not overreact to the situation, and ride out the tough times; these too shall pass. As Asay says, "Don't panic -- if your business has been built prudently all along, there's no reason to hit the panic button and fire everybody."

Keith Ward is a freelance technology journalist.

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on The tanking economy and OSS

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Bad business

Posted by: Anonymous [ip: 82.192.250.149] on November 22, 2008 09:18 AM
"one competitor had a $5 million bid, and we won with a $500,000 bid....and another in Canada, [the bid from the proprietary software company] was well over $1 million, and ours was $100,000."

This guy is showing very poor business judgement. The only reason to be in business is to make a profit, and it's also nice if you can pay your employees decently, give them good working conditions, and build good team spirit. His bids should have been at least double what they were. He'd still have won the contracts.

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Closed bids

Posted by: Anonymous [ip: 84.251.129.228] on November 22, 2008 01:11 PM
The bids of the competitors may not have been known by all until after the contract was awarded, then it's too late to ask for 200,000 instead of 100,000.

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Outside of the office

Posted by: Anonymous [ip: 71.32.249.213] on November 22, 2008 10:01 AM
While many commercial software developers are loosing their jobs due to lay-offs (do you really need 10 PHP developers?), we who develop software in our free time will thrive. While startups shrink and venture capital disappears, our work will continue at it's usual speed. We will probably even gain contributors due to the abundance of developers with savings and no day-job. Since we our driven by necessity and not money, open source will thrive when the commercial software industry freezes over.

Best of luck, see you in the coffee shop.

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The tanking economy and OSS

Posted by: Anonymous [ip: 71.184.167.214] on November 22, 2008 12:49 PM
Mark Driver has it right. Financial success for software supplier A, B or C in a down economy will have nothing to do with open source terms and conditions or the open source culture. The key determinants of success (as measured in the context of your article--"the bottomline for OSS vendors"--) will be solely whether they build a better mousetrap and whether the market wants to catch mice.

That's not to say that the open source culture can't keep producing software, just as non-professional painters keep painting in good times and bad times and find it fulfilling (and even a good way to overcome the angst of the down times).
It's important to note that Alfresco itself says its open source product is recommended for the "Developer, Highly Technical Enthusiast. Non-Critical Environments."

Also as a nit, Alfresco should not be described as "Linux-based." Like most open source software (at least in terms of installation surveys if not in terms of number of projects on sourceforge), it runs both on multiple Linux distros and Windows. According to a survey done by Alfresco's marketing VP, most people start using open source software on Windows and later migrate to Linux (the survey is skewed to Alfresco users so presumably the finding applies to Alfresco).


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The tanking economy and OSS

Posted by: Anonymous [ip: 74.42.204.106] on November 23, 2008 04:59 AM
I was hoping to install linux because the windows operating system is not working very well on two of my computers. I don't want to put all the blame on windows but the high cost of getting a new operating system again is frustrating. I have operated windows computers for 20 years+/-. I sure wish linux was easier to install. I am sitting here with several reformatted hard drives and a stack of linux operating systems: puppy linux, knoppix, pclinuxos, ubuntu, slackware, freespire, and ark linux. I just cannot believe something that should be so easy like installing a linux operating system has to be so difficult. I had hoped to learn linux as I know there are others like myself who hate to have replace their computer. With windows it seems as if you might as well upgrade your computer since it costs so much for the os and to upgrade your hardware. Quite often, it is almost as cheap to buy a new computer. While I know I am not a College educated man I have worked with computers and technical equipment since 1979. Programmers please, please there are many of us who would love to use linux and linux would then become popular. Maybe we could all benefit then. I am not going to buy linspire if I can't even install freespire. My feeling is....doubt I would be able to install it either?

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Re: The tanking economy and OSS

Posted by: Anonymous [ip: 24.6.79.71] on November 23, 2008 05:42 PM
> I sure wish linux was easier to install.

I've installed Ubuntu multiple times and the process is fairly easy. In fact, I have a harder time installing XP and had to go hunting for drivers (SATA, wireless, sound, graphics card). Ubuntu worked out of the box.

I you are having trouble, I would suggest that you find the distribution's chat room or forum and look for answers there. Good luck.

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Re(1): The tanking economy and OSS

Posted by: Anonymous [ip: 82.152.27.154] on November 24, 2008 11:39 AM
> I've installed Ubuntu multiple times and the process is fairly easy. In fact, I have a harder time installing XP and had to go hunting for drivers (SATA, wireless, sound, graphics card). Ubuntu worked out of the box.

Since when has XP needed SATA drivers? Our ancient VL XP-Pro CD (service pack 0, no 128gb+ hard drive support) recognises SATA devices (hard drives and optical) with no issues - there isn't a motherboard in existance that cann't present SATA as a legacy device?

Maybe you mean RAID drivers, which the last time I used a *hardware* raid array, my Debian install still needed them. Software RAID doesn't count (which XP-Pro can also do 'out of the box')

Graphics drivers can't have been that hard - intel.com, ati.com, nvidia.com or matrox.com - hardly a big deal to get hold of, I doubt any are more than 5 clicks from the homepage.

I'm not a linux or windows obsessive - I just like fact-based discussions :o) I install Debian and XP on all kinds of hardware all the time - while I vastly prefer the flexibility of the Debian installation process, the XP setup must be described as 'easier'.

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Re: The tanking economy and OSS

Posted by: Anonymous [ip: 71.180.73.109] on November 23, 2008 06:46 PM
Hi, I do not want to come across as being critical so please do not take this the wrong way. I feel that since you are having so many difficulties installing linux on your systems you must be doing something fundamentally wrong at the very beginning. The list of distros that you named are all in my opinion except for Knopix (which I believe is still meant to be run as a live CD session) much easier to install than Windows XP or especially Vista. You did not mention what problems you have run across but I bet if you are trying to set up a dual boot system then you might be having problems understanding the set up of the HD's and possibly Grub (the boot loader). All of these distros are either live CD's or DVD's at download or a live one is available. If your systems successfully starts up and runs under a live session and it recognizes your hardware then your install to hd should go without too much difficulty. I have been looking for a new distro to use so have tried most on your list with out any difficulties except for a wireless card not working on some. In my opinion the easiest ones to try would be Ubuntu, Mepis, Fedora, and Dream Linux and the order that I listed them has nothing to do with how easy I think each is, only listed them as they came to my mind as I thought about it. Oh also Mandravia should be added to that list as well and I am sure that there are others. Have you tried to get your difficulties resolved using the various distros user forums? I have not been on any lately where you cannot get good friendly useful help. I do not want to post my email address here but if you want to join the Mepis forums at http://mepislovers.org you can after logging in go to the private messages area and send me a private message if you have any questions you think I might be able to help you with. My user name there is robert3353. I hope to hear from you as I know that we will be able to get linux up and running on your systems with out too many difficulties.

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Re(1): The tanking economy and OSS

Posted by: Anonymous [ip: 74.42.204.106] on November 23, 2008 07:53 PM
Robert, Thank-you for your reply. I will sign up and see if I can send you a private message. I know I must be doing something wrong and I am waiting to receive a 2007 Linux Bible I ordered thru Amazon. I am trying to install it on a computer I have dedicated (no windows os) just dedicated for me to learn the linux operating system. The computer is a 1.6 ghz pentium 4, 750 mb ram with 30 gig of hard drive. I was able to operate a few of the linux "live" systems but when trying to install many different "flavors" nothing but various errors. I have installed Windows operating systems: radio shack tandy 1000, msdos, freedos, 3.1, 3.11, 95, 98, 98se, 2000, 2000 professional, xp home and never had the problems installing before. I just wish linux was easier to install. I have even gone so far as to change hard drives everytime I try a different flavor of linux. (just in case that was my error in installing linux). Mike in Cookeville, TN

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Re: The tanking economy and OSS

Posted by: Anonymous [ip: 24.25.143.114] on November 24, 2008 05:04 PM
Try Fedora

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The tanking economy and OSS

Posted by: Anonymous [ip: 205.208.133.95] on November 23, 2008 05:52 AM
Yet if people would bother looking at past downturns of the economy you'd see that very few people switched then, they just put off upgrades. Exactly like what will happen now.

FOSS won't be replacing any Windows oriented installs until it realizes that it has to be better than what it is replacing. I'd imagine the existing Unix installs may go FOSS, but the FOSS userland still has a lot of work required to be able to compete with the Windows userland.

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The tanking economy and OSS

Posted by: Anonymous [ip: 147.91.1.45] on November 26, 2008 10:25 AM
Users are used on 'free' but F in FOSS is about freedom, not price. Price is also free to assume any particular value. FOSS copies could be sold for high (at least initially high) prices determined by their supply and demand. None said you have to publish your software for anyone to pick it up. However, each of your customers can do that (give away, sell for low price, put for free download), if they please. But, if supply of copies in circulation is low, the customers would be reluctant to do so, because they could profit from selling copies of their copy for significant fraction of the price they themselves payed (provided the vendor commits to keeping the price at same level at least for some time). It is similar (although not identical) to artistic works: if their maker treats them as valuable, others will do so, too.

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