Open source’s commodity conundrum

Matt Asay’s recent article in The Register If you open source an old market, are you doomed to fail? highlights the need for open source specialist vendors to innovate, as well as commoditize.

This is an issue that has been discussed regularly by CAOS practice – most recently in our Control and Community report into open source software-related business strategies.

This is how we discussed the issue in that report:

“Perhaps the biggest problem facing open source distributors… is the commoditizing impact of open source software, and the fact that they are attempting to generate revenue at a stage of the value chain that has been commoditized with that very product. Red Hat’s [CEO Jim] Whitehurst put this into perspective when he described how in order to generate $5bn in revenue, Red Hat would need to displace software that currently costs $50bn.

In his 2003 book The Innovator’s Solution, Clayton Christensen noted that when one stage of the value chain becomes commoditized, the ability to earn attractive profits from proprietary products emerges at an adjacent stage in the value chain. In that context, it can be observed that the biggest beneficiaries of the adoption of Linux were not the Linux distributors, but rather server vendors including IBM, Hewlett-Packard and Dell, which exploited interest in Linux and industry-standard server and processor architectures to rapidly displace Sun Microsystems’ more expensive Unix and Sparc machines.

Like many other application server vendors, IBM also enjoyed the benefits of widespread adoption of the Apache HTTP server, redistributing the software as part of its WebSphere Application Server, and enabling the company to build a revenue stream that was complementary to Apache HTTP. IBM repeated the trick in 2005 when it acquired Gluecode Software and adopted its distribution of Apache Geronimo as WebSphere Application Server Community Edition. While this approach of generating revenue from other products and services was common in the early stages of commercial open source… it has come to the fore in recent years as part of the multi-vendor open source approach…

That the open source distributor approach will survive is not in dispute. We also do not doubt that Red Hat will be able to maintain its position as the leading open source distributor for as long as it remains independent. The question is whether any other vendors will achieve or better the scale achieved by Red Hat. As covered in our 2009 report, Open to Investment, there is a case to be made that a 100% open source software-licensing strategy is incompatible with the demands and requirements of private investors, and that the template for future open source distributors is not the venture-backed high growth and profile of Red Hat, but smaller, more modest open source support, service and consulting providers.”

See also: Why there are no billion-dollar open source companies

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