Open Source Commentary
from Navica's CEO, Bernard Golden
September 2006
In This Issue
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Post-Scarcity Software Economics: If
Support is the New Marketing, What is the New Sales?
-
Snap Circuits Update
-
Virtualization Seminar: Limited Attendance
Opportunity for Virtualization Smackdown
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Navica News
Post-Scarcity Software Economics:
If Support is the New Marketing, What is the New Sales?
If you read last month's newsletter,
you know that in a world of a software glut – post-scarcity
– the behavior of vendors and users changes dramatically.
Vendors no longer have the upper hand, with users being forced
to make huge upfront license payments to gain access to technology,
which they can then figure out whether it will solve their
problem or not.
In the post-scarcity world, users expect free or low-cost
access to software which they can experiment with, test, pilot
– even put into production – without any financial
commitment to a vendor. The financial commitment comes only
after the software is running in production, when the user
organization recognizes its dependence upon the product and
seeks to protect their business processes from interruption.
In this world, the traditional tools of marketing are far
less effective; since payment only occurs upon production-level
use, every vendor effort must be aimed at aiding the movement
of the user from initial awareness to dependency; most of
this relies on technology-focused efforts – crucially,
upon technical support resources to help users get the system
up and running. Curiously, however, as open source becomes
a venture-backed endeavor, more and more open source vendors
seem to be falling back on what I called the tired tools of
the enterprise software world – content-poor conference
speeches, analyst influencing, “Barney” partnership
announcements, and so on.
As you might imagine, this thesis was not without controversy.
Perhaps I did state the thesis a bit strongly. However, I
believe there is a kernel of truth in what I wrote: in a world
of little intermediation between the user and the use of the
software, most of the traditional influencing mechanisms are
far less effective.
That raises an issue, though. If you are a vendor and you
recognize that your primary marketing efforts must focus on
making the user successful with the software, once you do
that, how do you get paid? To extend last month's theme: If
Support is the New Marketing, What is the New Sales?
Traditionally, software has been sold as a bundle: access
to the intellectual property embodied in the product via a
licensing agreement; technical support for the use of the
product; maintenance/bugfix releases of the product; indemnification
against intellectual property infringement claims; and even
pre- and post-sales technology assistance in the form of sales
engineer visits and technology chalk talks, including perhaps
assistance in proof-of-concept software implementation.
Today, under the assault of open source and SaaS, this bundling
approach is breaking down. Access to intellectual property,
while still licensed, is free for open source software. Technical
support may be community-based or be provided by a third party
(this is true even for proprietary products – witness
the growth of lower cost third-party providers for PeopleSoft
support). End users ceaselessly complain about having to pay
for bugfix releases to solve problems caused by the vendor.
Indemnification is typically not provided for open source
products. The tradition of pre- and post-sales technology
assistance is being trimmed by cost-conscious vendors; look
for this to become a line-item fee in the near future.
So clearly there should be demand for higher quality, lower
cost alternatives like open source software. After all, if
you're unhappy with the high-priced alternative, wouldn't
you like to move to a much cheaper offering?
Curiously, though, if you talk to open source vendors, most
of them complain that it's hard to get end users to actually
cough up money. End users, they say, are happy to use free
software, but won't engage in the financial transactions necessary
for the vendor to survive and thrive. One colleague foresees
an end game where most open source vendors fail to generate
enough revenue to support their activities, discontinue active
development of their products, which eventually dissipate
into uselessness through lack of investment.
From my experience, this is definitely a reality. One vendor
called me for help strategizing how to approach a prospect.
This organization had decided to migrate away from a very
expensive proprietary product for which they were spending
millions of dollars per year. The new product -- supported
by the company that approached me – would become a critical
part of the organization's infrastructure. It would be used
to process hundreds of millions of dollar's worth of transactions
each day. They informed the vendor that the top price they
would pay for support for the new product was $25,000 per
year. Take it or leave it.
On the face of it, this seems irrational. If you're saving
millions, why would you quibble over thousands?
While this position might seem absurd, it is consistent with
the historical structure of software offerings. Put plainly,
in traditional offerings, the intellectual property access
portion – the license – was assigned the preponderance
of value of the total bundle. Of course, this makes sense
in a world of software scarcity. Access to the software was
critical and paid enormous end user financial benefits. Vendors
acquiesced to this value assignment, willing to discount the
value of the rest of their offering in order to gain access
to license fees, the highest margin business offering in the
history of humankind.
The historical value assignments to the bundle elements need
to be rethought in light of today's software realities. For
commercial offerings, the glut of software reduces the value
of intellectual property access. And, of course, with open
source there is no price for the software at all.
This does not mean that the total bundle is now nearly worthless.
Far from it. In a world of software glut, the other elements
of the bundle become much more valuable. If I can use more
software because it doesn't cost me license fees to build
systems, support is more important, since I'm more dependent
upon my larger software infrastructure. With increased dependence,
indemnification becomes more critical, since there is more
risk to business continuity through legal exposure.
The transition to revaluing the bundle will not be painless,
for vendors or users. Users will need to recalculate the importance
of their software systems, moving from a cost perspective
(how much does it cost me to get the software bits I use)
to a value perspective (how much does my business depend upon
specific software systems).
Vendors will also have to rethink how they approach offering
and valuing their services. Expect to see the bundle further
fragmented, with prices assigned to individual pieces, which
will be offered separately. An obvious example exists today
– many open source vendors offer support and indemnification
as separate services. However, you can expect to see this
taken further. As open source verticalizes, vendors will provide
certification of adherence to industry standards as another,
separately priced offering.
It's a cliché that software is moving from being a
product to being a service. It's worth thinking the implications
of that through, however. When a good is offered as a product,
it is pretty much undifferentiated no matter who uses it or
how much value a user achieves with it. The vendor makes no
particular effort to tweak the product per user.
Services, on the other hand, typically are customized far
more to meet the specific needs of the customer. A key part
of this is the fact that many services are packaged for a
particular industry and then further customized to better
fit the individual customer's requirements. In general, as
the service provider better understands the characteristics
of the customer and delivers a service more perfectly matching
the unique needs of the customer, the value of the offering
to the customer increases, enabling higher prices.
The lesson for open source pricing is clear. In a service
world, vendors will achieve higher prices and margins as they
deepen their engagement with individual customers. If, in
the example cited earlier, the vendor offering support to
the customer switching from a proprietary product could have
demonstrated how their support would enable that customer
to more quickly respond to the, say, seasonal flows or orders
characteristic of their industry, there would have been more
perceived value from the support, and a higher associated
price, rather than the $25,000 offered for standardized phone
support.
Another way to approach this services question might be to
re-examine what service is being provided. If the customer
is no longer buying a product, what are you selling them?
In some sense, much of the rest of the bundle is really safety
– protection from legal attack, help in time of need,
certification of standards support. In other words, insurance.
Just as insurance prices increase as exposure coverage increases,
open source pricing may, in the future, be priced according
to the risk exposure being protected against.
None of these changes will come easily. Moving from a product
perspective to a customer value and risk reduction perspective
will be enormously challenging to an industry attuned to a
“feature/functionality” mentality. When features
are no longer enough, however, value must be delivered in
another fashion.
Snap Circuits Update
A few months ago I wrote about the future of community, using
my son and his experience with an electrical learning product
called Snap Circuits as an example. I noted that Snap Circuits
has extended the base product with a community focused on
sharing user-created circuit designs. While mildly critical
of the quality of the community website, I gave a big endorsement
to the products themselves and the added usefulness provided
by the community. The primary theme of the newsletter was
that someone like my son, exposed to community dynamics from
early childhood, would develop much different – and
higher – expectations from product and service providers;
consequently, companies need to start raising their game to
be more responsive to customers.
A number of you wrote to me, offering stories of your experiences
and insights based upon your analysis of the community trends
in the marketplace. Several even offered praise for the column,
proving that it's always a good idea to include a child if
you want positive responses.
The story continues, however. We needed to buy some replacement
bulbs for the Snap Circuits kit, and I found myself on the
phone with someone from the sales department. I noted that
my son really liked the kits and the sharing of designs with
other users, and that I had even written about it in my newsletter.
The person I was speaking to asked me to forward a copy of
the newsletter to see what I had said.
A few days later, I got an email from a marketing person,
asking me to elaborate on my observations about the site,
since he was about to embark upon a redesign to make the site
more useful.
I have to say that I never expected my reactions to this
product's website would become input to its future design.
I found it intriguing, though, how things sometimes work out
in this world. The salesperson I originally spoke to has even
subscribed to this newsletter; heaven knows what he will make
of it, since it journeys far afield from learning toys!
We got the lightbulbs and I expect my son will find the website
even more valuable in the future. Community springs up in
pretty unexpected places.
Virtualization Seminar: Limited
Attendance Opportunity for Virtualization Smackdown
I will be speaking at a half-day seminar on October 27 in
Silicon Valley as the featured speaker on virtualization.
The sponsor of the event, Teladata,
has very graciously offered to allow me to invite a limited
number of guests. As an added bonus, the day will close with
a panel on real-world virtualization experiences; both VMware
and Xen will participate, so there should be an opportunity
for a real dust-up. If you would like to learn more about
the impact of virtualization on data centers by attending
this event, please contact me via email
Navica News
You can hear me speak at these upcoming events:
September 19, 9:00 a.m. (PDT): "Open Source Quality:
How Do You Know?", Agitar Webinar -- Register here.
September 21, 11:00 a.m. (PDT): "Open Source Backup:
The Time is Now", Zmanda Webinar -- Register at the Zmanda
website.
September 26, 9:00 a.m.: TechTarget Virtualization Seminar,
New York City
October 2, 1:30 p.m.: "Trends in Open Source Business
Models", Lecture to visiting Japanese System Integrator
Delegation
October 4, 10:30 a.m. (PDT): "Open Source ROI",
OpenLogic Webinar -- Register at the OpenLogic
website.
October 10: 1:00 p.m.: "Trends in Open Source: Evaluating
Open Source for Your Organization", Lecture to visiting
Norwegian ICT Delegation
October 12: 10:00 a.m.: "Making Your Organization Open
Source-Ready", GOSCON Conference -- Register at the GOSCON
website.
October 25, 1:00 p.m.: "Using Virtualization in Your
Data Center", Data Center Decisions Conference, Chicago
October 27, 8:30 a.m.: "Virtualization: Opportunities
and Challenges", Teladata Data Center Education Seminar
-- see above in this month's newsletter for registration information
November 7/8, 8:00 a.m.: Day 1 Chair and Speaker "Evaluating
the Business Models for Open Source Software in Mobile",
Open Source in Mobile Conference, Amsterdam -- Register at
the Informa
Telecoms and Media website.
If you are interested in having me speak at your
organization:
Contact me directly via email.
You might be interested in reading my blog posts
at CIO Magazine:
Nick Carr Redux
Open Source Goes
Vertical (This is a posting about the panel I moderated
on Open Source Business Models at the recent LinuxWorld HealthCare
Day)
Open Source in
Your Ear
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