It’s amazing how quickly the technology industry changes. Until recently, enterprise software companies held an enviable position. The combined market cap of Microsoft, SAP, Seibel, and Oracle approached $800 billion (by way of comparison, Australia’s GDP in 2001 was $611 billion). It’s an understatement to say things have changed: multiples have compressed, revenue growth curves flattened (or turned negative), market caps are way down, and the mood among many enterprise software investors is downright gloomy. Why?
While it’s difficult to pin the cause on any single factor, I think FLOSS has been a major contributor. I’m not talking about dental tape; FLOSS is an acronym for Free/Libre/Open-Source-Software, or open source. The basic, and well known, idea behind open source is that a program’s source code and documentation should be freely available. Moreover, any individual has the right to take apart an open source application, change it (for example, by porting it to another platform), and even market it. Business models for companies hawking open source products, like Red Hat, are generally based on subscriptions for configuration support and product updates.
Free software (even when bundled with subscriptions as described above, which are not free, but are still pretty cheap) presents an enormous challenge for traditional enterprise vendors. Take Microsoft: in FY2005, the company generated almost $40B in revenues and $14.6B in net income. 56% of the company’s revenue ($22 billion) came from two operating units ("client," or operating systems, and "information worker," or Office). More important, those two divisions accounted for a whopping $17B of net income. What’s the problem? Today, one can easily go on the internet and download a highly functional operating system (Linux) and a complete set of office productivity tools, including word processor, spreadsheet, presentation maker, and database (OpenOffice), all at no charge whatsoever. That pricing model presents a thorny challenge for Microsoft–it’s hard to compete against free.
Today, there open source databases (MySQL), encyclopedias (Wikipedia), games (FreeCiv), money management applications (JCash), typing tutors (GNU Typist), and much, much more. While open source product quality isn’t uniformly high (the same could be said for commercial software) much of it is extraordinarily well done.
Given the amount of free software available for easy download, what’s a traditional software vendor to do? The answers are fairly straightforward (at least in theory): improve quality and support; lower "total cost of ownership;" and develop compelling new features, particularly those that lock people in to a specific platform or application.
Most of this is old news. However, it serves as a good backdrop for my next post, which will cover user generated content.
