Software Wars Challenge Industry Players The Massachusetts computer and software industry is legendary.
It gave rise to companies like Data General, which inspired the Pulitzer Prize-winning book, The Soul of a New Machine.1
Sad to say, the Massachusetts software industry recently posted its fifth straight year of losses in jobs and number of businesses, according to an Associated Press2 report.
The same pattern is unfolding throughout the global software industry.
One reason is that the industry is mature and going through consolidation.
Another reason, according to The Oakland Tribune,3 is the mainstreaming of open source software.
Open source means that the source code in which the program is written is not proprietary.
It is usually published on the Internet. Then, anyone can download it and change it.
Any program that’s vaguely interesting attracts a large number of programmers, whose skills are pooled in improving it and extending its features.
The improvements are then incorporated into various iterations of the program.
The operating system known as Linux is the best known of these open source programs and has been developed through this process over many years.
The Firefox browser and MySQL database are two other well-known open source programs available for free on the Internet.
The question that immediately comes to mind, especially for software executives, is obvious:
If it’s free, how do you make money from it?
Think of open source software today as being where the Internet was in 1995.
People then were asking the same question about it:
If anyone can get online and do whatever they want for free, where’s the profit?
Today, a number of entrepreneurs and more established competitors are trying to answer that question.
One idea comes from Scalix, a start-up in San Mateo, California, which offers a calendar and e-mail program for running servers.
The programs are free in their basic version, called the “community edition.”
But another version, with more features, the “enterprise edition,” sells for $60 with a $12 update each year.
Scalix and many similar companies were founded in response to customers’ dissatisfaction about becoming locked into proprietary software.
Anyone with a Microsoft operating system, for example, has to run programs designed specifically for Windows, often written by Microsoft.
Scalix operates on the widely shared belief that Linux and other open source programs are causing a global disruption of the software business model, from the top right down to the seemingly trivial level of e-mail and calendars.
As with any disruptive model, customer dissatisfaction provides a huge opportunity for start-ups to answer needs.
One of the ways people are trying to make money with open source software is by tweaking it to create a somewhat different product that fills one of those needs exclusively and can therefore be resold as a new product.
For example, Novell is essentially betting its entire company on the premise that a new desktop suite based on Linux will dislodge Microsoft from its virtual monopoly in that market.
Novell Data Systems made another such bold move in the 1980s when it introduced its own personal computer, only to find that IBM was releasing its PC a month later at a much lower price.
When a key investor went out to Utah to see if there was anything to salvage of the company, he found three computer consultants playing an arcade-style game on three networked computers of different brands.
That doesn’t sound so odd today, but back then it was revolutionary.
And it put Novell on the map with its NetWare solutions.
Now, according to Chief Executive Magazine,4 Novell is using some of the cash from the Microsoft anti-trust settlement to attack that company with open source software on its home turf:
America’s desktop.
Novell, like many other traditional software companies, is fighting for its life.
The entire software industry is facing a slowdown, according to David Roux, who appeared at last fall’s Red Herring conference on small technology companies.
Roux is the co-founder and managing director of Silver Lake Partners, a venture capital firm in Menlo Park, California.
He described the changing ? and aging ? face of the software business and remarked, “We’ve seen the end of the 20 and 30 percent growth years.”
Roux believes that, as a whole, the software industry will post only single-digit growth ahead, which is what the rest of the computer industry is experiencing.
In fact, software prices have been in freefall recently, and companies have been trying to keep it quiet while they hastily look for a new strategy.
Despite declines, the software industry has remained profitable due to cost-cutting and productivity measures.
But, for smaller, newer companies, network effects and other economic factors pose severe problems.
Roux argued that only the largest companies, those with more than $5 billion in revenue, can sustain 30 percent profit margins these days.
Companies between $1 billion and $5 billion can manage about 17 percent profit.
And companies between $100 million and $1 billion can squeeze out 9 percent.
A company that can’t cross the $100 million mark early in its growth cycle risks becoming a perpetual loser.
In short, the days of the small-time software start-up are long over, and the biggest question a software CEO needs to answer is how to get to $5 billion in revenue as quickly as possible.
For some, an open source strategy is seen as one of the few new games in town these days.
Some industry insiders even claim that “traditional software is dead,” and that the future lies in applications running on the Internet.
Smaller companies are using the Web to try to erode Microsoft’s hold on document production, at the low end.
Zimbra and Writely offer online collaboration and document management services.
And, there’s no question that enterprise resource planning, or ERP, software is migrating to the Internet, threatening the high-end packaged software business.
That may be why some companies that vehemently opposed the open source movement are now climbing on the bandwagon as they see their own business models threatened.
For Instance, IBM recently bought a company called GlueCode Software and has contributed heavily to the open source movement.
In fact, Big Blue recently donated its Rational Unified Process software platform to the open source movement, according to Market Wire.
This process, developed at IBM, has been used by half a million developers around the world.
It is a comprehensive database of methods and best practices for writing effective, standardized software.
IBM has also donated 500 of its patents to the open source movement.5
Even Microsoft, which once tried to kill open source software, has acquired a partner called SugarCRM and now offers an open source version of its Microsoft Office suite.
Forrester Research, which has been trying to get a handle on how many companies are now using open source software, reported that among the largest U.S. firms, 56 percent are using Linux or some other type of open source software for at least part of their operations.
Another 19 percent are ramping up to adopt it.6
One of the problems with open source software is that, because it is generally free, it comes with no customer service or handholding.
Some companies have found that because of these support needs, adopting it can be as expensive as buying proprietary software.
That has led to the founding of companies like Exadel, SpikeSource, and Funambol, all of whom are trying to cater to companies that don’t have big IT departments but need help setting up and maintaining their open source software.
Zmanda, in a similar vein, sells data protection, storage, and archiving for open source software.
In view of this important trend, we offer the following five forecasts for your consideration:
First, the application software industry as a whole is changing beyond the point of no return.
In the short term, expect the industry to continue to slow its growth, and expect to see some formerly stable companies make big mistakes in the face of this uncertainty.
The penalties for these mistakes will be severe in a fast-changing market.
Second, one of the most contentious issues during this period will be whether to develop software that customers adapt to in-house use, or to migrate to Web-based applications that are provided as a service.
This fundamental question has been around for some time, but now is the “hour of reckoning.”
Third, over the next five years, software companies will have to determine how to restructure their licensing models.
Today’s models include charging per CPU, per server, or per user.
This will prove to be unsuitable to the new software environment, especially as applications migrate to the Web.
Innovative pricing models adapted to “virtual architectures” will evolve.
In addition, an increasing number of companies will find it more profitable to give away software and charge for maintenance and customer service.
Fourth, the balance of power in software will tip toward customer-defined schemes.
Bloggers and other Internet users are already enjoying increasing autonomy.
And, customers of all sorts face a wider range of choices than ever.
With more freedom everywhere in the marketplace, software customers will demand open source software and will, to one extent or another, dictate new pricing models.
Companies that figure out how to leverage this fundamental change will win big.
Fifth, within 10 to 15 years, virtually all applications will migrate to the Internet.
In an always-on, totally connected world, this is inevitable, and much of the software of the future will be adapted for increasingly mobile devices.
The fundamental platforms on which this software is built will be open source, but there will be an infinite variety of proprietary offerings built on top of that architecture.
The age of software in a box will have ended. References List :
1. The Soul of a New Machine by Tracy Kidder is published by Little Brown and Company. ⓒ Copyright 1981 by John Tracy Kidder. All rights reserved.
2. The Associated Press, November 1, 2005, “State News of National Interest.” ⓒ Copyright 2005 by The Associated Press. All rights reserved.
3. The Oakland Tribune, March 2, 2006, “Startups Mainstream Open-Source Software,” by Barbara Grady. ⓒ Copyright 2006 by ANG Newspapers. All rights reserved.
4. Chief Executive, November 2005, “Novell Bets Its Future on Linux,” by Erik Sherman. ⓒ Copyright 2005 by Chief Executive Group. All rights reserved.
5. The Oakland Tribune, March 2, 2006, “Startups Mainstream Open-Source Software,” by Barbara Grady. ⓒ Copyright 2006 by ANG Newspapers. All rights reserved.
6. For information about IBMs contribution to the open source community, visit their website at: www-03.ibm
