About open source business strategies

strategyA few weeks ago, the 451 group posted an update for their open source business strategy framework, which summarizes the different strategies that can be put in place by an open source vendor in aspects like license, copyright, development and business model.

The framework is comprehensive but at the same time condensed, and it is quite self-explanatory for anyone in the open source business. However, I wonder whether it would make more sense to extend the framework to apply to any software vendor, including also the strategies that could be implemented by a business choosing not to open up the source code. I believe it would be very interesting to be able to grasp at a single glance what are the different options a software vendor can choose regarding revenue, licenses and development models, without having to be previously categorized into open source or closed source vendor.

open_source_strategies

One reason to support a more generic vendor approach is that it is very hard to implement a purely open source strategy, when most of the possible options are just a combination of open and closed source licensing: dual licensing, open core, open platform, etc. So, the limits between an open source-based business strategy and a closed source one are at least fuzzy. How much different would be, let’s say, a business developing an open core product under a cathedral development model from another business not publishing any of its code but giving away a trial version for free? They might execute differently, but the results would be reasonably similar: they would both find it hard to have a developers community but they would both have good chances to create a successful users community. Just remember that the largest users community is that of Photoshop, not quite open source I would say.

Another reason is that a company needs to be able to explain its strategy to very different audiences, from customers, partners and media to community members and investors, and not all of them are open source savvy. Sadly, one generation after the first release of Linux, a large part of the market and influencers still see open source as a geek, idealistic, non-commercial movement. Explaining the plan of action of an open source-based business as a natural set of decisions within a generic software vendor strategy framework would do much to overcome their initial prejudices.

And finally, if you have a look at the 451 group’s framework, there are actually few modifications required to make it work for a generic software vendor. For example, the list of revenue generators are valid for almost any software company, from Google to Microsoft, from Oracle to Facebook, from IBM to RedHat, or from a system integrator to a local reseller.

I believe the 451 group is doing a great job in analyzing and modeling different viable strategies for open source-based companies. But I also believe that there is a risk in assuming that their management and direction are completely different from more “traditional” software companies. In my opinion there are way more similarities than dissimilarities and there is a lot to learn from, let’s say Microsoft, but I leave that for another post.

January 31st, 2011

Disrupting the market of SMB servers

DisruptiveTechnology< borrowed from Wikipedia >Disruptive technologies are innovations that improve a product or service in ways that the market does not expect, typically by being lower priced (“low-end disruption”) or designed for a different set of consumers (“new-market disruption”). Disruptive technologies are particularly threatening to the leaders of an existing market, because they are competition coming from an unexpected direction.

In low-end disruption, the disruptor is focused initially on serving the least profitable customer, who is happy with a good enough product. This type of customer is not willing to pay premium for enhancements in product functionality. Once the disruptor has gained foot hold in this customer segment, it seeks to improve its profit margin. To get higher profit margins, the disruptor needs to enter the segment where the customer is willing to pay a little more for higher quality. To ensure this quality in its product, the disruptor needs to innovate. The incumbent will not do much to retain its share in a not so profitable segment, and will move up-market and focus on its more attractive customers. After a number of such encounters, the incumbent is squeezed into smaller markets than it was previously serving. And then finally the disruptive technology meets the demands of the most profitable segment and drives the established company out of the market. An example of low-end disruption is the way digital photography has largely replaced film photography.</ borrowed from Wikipedia>

No market is shielded against disruptive technologies, and the market of SMB servers is no exception. In fact, it shows all the conditions for such a disruption to happen, as it is a market in which:

  • There is a clear leader (Microsoft)
  • With a mature product (Windows Small Business Server)
  • Over-provisioned product, providing more functionality than needed and overwhelming end users by the plethora of features
  • Established on a continuous, evolutionary innovation cycle
  • With little or no commercial interest in the lower segments of the market (WsSBS has no product or pricing segmentation for customers under 75 employees)
  • With a strong motivation in abandoning the less profitable customers and focus in the more profitable ones (rising the license price by 80% is forcing customers in the low-end to look for alternatives)

Moreover, Linux and the open source tools for network management (Samba, Postfix, Squid, Snort, eGroupware, Spamassasin, ClamAV, etc) have a huge disruptive potential in the SMB server market, as they bring a great advantage in pricing (in fact, they are free). Besides, similarly to other disruptive technologies, they started offering a lower level of functionality than their closed source alternatives, but they have evolved and caught up or even surpassed them in many markets (close to 90% of the supercomputers in the world are based on Linux, which is a good indicator of the quality level this technology has reached).

However, in spite of these conditions, open source solutions have a very low presence in the market of SMB servers. The reason is simple: for a server solution to enter the SMBs, it needs all its components to be tightly integrated and be easy to administrate. SMBs do not have resources nor time to deploy complex high-performance solutions, so highly integrated products such as WsSBS cover pretty well SMBs’ technological needs.

This is where solutions such as eBox Platform, developed after the integration of standard open source components, have the required disruptive potential to change the market balance. On the other hand, as the software integrating these components is also open source, there are additional advantages, both in development costs (users community greatly helps reducing the effort needed for design, development and testing) and in sales and promotion costs (due to the word-of-mouth effect generated by the community and the option to try the product without previously paying for it). Thanks to this, it is possible to compete with the market leader with a lower cost structure, turning thus the market of lower-end customers profitable.

Finally, as it is not possible to use a traditional license-based business model, there is need to be innovative in the value proposition and bring it closer to customer’s needs. For us the solution came in the form of SaaS model (access to the eBox Control Center, offered mainly for VARs and MSPs) and subscription services (disaster recovery, cheap VoIP calls, security audits, reports and alerts, etc), which are not offered by the market leader.

In summary, the key points to disrupt the market of SMB servers are:

  • Focus the product initially in the lower-end of the market, to later improve in functionality and start growing in the market stack
  • Center the innovation effort in improving system integration and task automation, as well as usability and easiness of administration
  • Use open source methodologies for development, distribution and commercialization of the product, generating a user community around the project
  • Develop the value proposition in technologies and services that allow for a better convenience of use, such as SaaS or subscription to remote services
  • 3 comments December 29th, 2009


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