Open Core Software

I got to chat with Jay Lyman of the 451 Group today. Most analysts (with the exception of CotĂ©) tend to ignore our little ol’ project but the 451 Group likes to get in touch every several months or so.

It was fun to think and talk about the market for open source management tools for awhile, and I also wanted to find out who came up with the term “open core” (apparently it was Andrew Lampitt). I first saw it used in a 451 CAOS Theory blog post by Matthew Aslett.

As my three readers know, I have a bug up my skirt about the “hybrid” open source companies, where part of the code is closed off but part is open. I call it the “shareware” model where some of the functionality it open but you have to buy a commercial closed license to get all of the features.

I won’t rehash all of the reasons why I hate this model being referred to as “open source software” but I would like to focus on the term “open core software”. In my mind it is more descriptive of what the hybrid companies are doing than “open source” and it doesn’t have the negative connotation that “shareware” brings to mind.

So I plan to steal it.

I don’t think that you’ll see “open core network management” any time soon in the marketing literature of these companies. “Open source” is a much more valuable term, but “open core” is at least a more honest approach, meant to represent a company that releases the core of their product under an open source license but generates revenue as a vendor of proprietary additions to that core.

Jay asked me how our business was doing in the wake of the worldwide recession, and I said that on the whole things were okay. Fourth quarter is usually strong for us, and this year is no exception, but currently we have a lot of projects sitting in limbo. Everything has been approved but most of the large companies we are dealing with are holding their breath on spending in any form. We’re still seeing 40% to 45% year over year growth, which is a lot less than some of the open core companies are reporting, but then again we’ve been seeing that for four years now and they just haven’t been around that long.

He also asked what I thought about the business prospects for the open core guys and I had to admit that they don’t look that great from where I sit. Since they tend to compete on cost, there are at least three main pressures that are going to be bearing down on them in the next few months.

First, pressure from the established commercial players. Sure, the open source part of their product is free, and it is hard to beat free, but what about their commercial part – the part that they sell to keep the doors open? A small OpenNMS customer has a network of 1000 devices. Some of the open core vendors charge per device, on the order of US$250 to US$500. So this translates to US$250K to US$500K per year. One can usually get a Tivoli or OpenView solution for 1000 nodes at much less than that. Will someone go with the newcomer or the established player when the established player costs less?

Now, everyone realizes that there is no one out there paying those prices for the new guys. If you have a 1000 node network you can easily negotiate them down to a fraction of the list price as they are desperate to get new clients. And for some people getting 90% off of a price that was made up in the first place is a deal. But if what they are buying are “ease of use” features the second source of pressure will be from the smaller commercial players like Solarwinds. Why pay US$25K a year when you can get a complete out of the box solution for slightly less than that and only pay for it once? Orion runs on Windows, it is very pretty and it is reasonably priced. And you don’t have to deal with that pesky open source stuff.

The third source of pressure comes from the pure-play open source guys. A couple of years ago I had dinner with Peter Fenton, a smart VC with Benchmark. He told me that a product really needs to “own the bottom”. I didn’t agree with him and pointed out things like Mercedes Benz that sell to the top. I was told by others that I wasn’t supposed to argue with the VC, but I did anyway and in the end he convinced me he was right. After all, Mercedes had to seriously reinvent itself when Lexus came to market with a similar product at a lower price.

By having a totally free alternative, users of other products will constantly question their need to pay for commercial software. In many cases, like the small and medium businesses that use Orion, something like OpenNMS isn’t quite for them. But for others, products like OpenNMS provide a real alternative to their current solutions.

Most of the open core players are VC funded, and eventually those VCs will want to cash out. To do that they need to increase revenue. Thus you can expect those low, low, introductory prices to go away, and when companies find out the real cost for the open core software they will be looking for alternatives. They will be looking toward the bottom.

In the meantime we plan to keep running OpenNMS profitably. This means that year after year it will keep getting better, and slowly but surely the pressure on those other solutions will just keep building.

For those companies it is a race; a race to build themselves up and get acquired before they lose their customer base. It is hard to compete against the bottom, which was the point Peter was trying to make. I think Sun’s current lack of success with MySQL has made everyone a bit cautious about open source acquisitions, and with the current economic climate I don’t expect that to change any time soon. In that context the prospects for open core companies don’t look so rosy to me.