Conventional wisdom says open source software providers are benefiting from the recession as businesses seek lower-cost IT solutions. But if open source is so darn hot, why are two major open source companies — GroundWork Open Source and SugarCRM — cutting prices and/or introducing lower-cost options?
First, let’s not press the panic button. The VAR Guy isn’t slamming GroundWork or SugarCRM. In fact, he respects both companies for disrupting traditional markets for network management and customer relationship management (CRM) software, respectively. And both companies were ranked near the top of The VAR Guy’s Open Source 5o survey, which tracks the most promising open source partner programs.
Still, even open source companies apparently face price sensitivity amid the recession. GroundWork is about to announce a Starter Edition that costs (US)$4000.00 for 100 monitored devices (per year) — pretty darn inexpensive compared to GroundWork’s traditional Professional Edition — priced at (US)$24,000.00 per year.
The VAR Guy wasn’t supposed to blog about GroundWork Started Edition until the official release hit the wires on April 30. However, our resident has opened his big mouth today because GroundWork is already promoting the new software on the company’s home page. Information about the Starter Edition is all over GroundWork’s web site — publicly available for all to see. The VAR Guy would have kept quiet until April 30 — if GroundWork had kept quiet, too!
Officially, GrounWork says it launched Starter Edition in response to customer demand and customer surveys. But unofficially, The VAR Guy believes GroundWork is trying to get customers to open their wallets more quickly amid the recession.
Sweet or Sour News?
Meanwhile, ZDnet reported that SugarCRM is taking the knife to prices. Before the economy went south, SugarCRM was widely expected to be the first open source application provider to pursue an IPO (initial public offering). But fast forward to the present and The VAR Guy wonders if discount prices at SugarCRM are a warning sign about the health of the open source application market.
Again, no need to panic here folks. Most indicators show that open source companies are holding up well during the recession. Heck, Red Hat’s annual revenues grew 25 percent last year.
Still, aggressive pricing from GroundWork and SugarCRM could indicate that a software industry price war looms, especially as confused, price sensitive customers try to decide between open source, closed source, on premise and SaaS (software as a service) options.
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Here is why you can’t trust conventional wisdom.. everyone is looking at Red Hat’s performance and treating it as “typical”. It’s not typical..its very much atypical. Why?
Red Hat is the only major open source pure play that is publicly traded. That makes its both very significant and extremely atypical.
It’s important to watch Red Hat, but its also important to realize that because they are the only public company in the grouping, the market and investor forces on them are completely different than all the other open source companies which are essentially still in venture capital backed start up mode. It’s apples and watermelon in terms of management and operations strategy. You simply can not hold up Red Hat as be representative of all the other privately held companies.
It could very well be that Red Hat’s management team is just head and shoulders better at executing an open source business model. Their success might not carry over to other companies who mimic what they are doing because the secret to their success maybe as much about their execution as it is about the business model. If anything it might be harder to execute the open source business model well than more traditional proprietary models…making Red Hat spectacularly atypical.
Which brings me to the other point…there’s a complete and utter lack of transparency about business performance across the entire swath of open source businesses..except Red Hat. How exactly can you talk about “most indicators” when the only financial statements under public scrutiny are Red Hat’s? Bright and shiny relative sales growth figures in press releases from CEOs don’t cut it. CEOs aren’t going to give an accurate picture of good and bad news in public statements unless they are required to do disclosures. if “most indicators” are nothing more than a series of glowing press releases from pre-IPO companies…you take them with a truck load of salt.. or better yet just ignore them and focus on getting solid financial information on par with the information Red Hat has to disclose as a public company.
-jef
Hey Jef: The VAR Guy agrees with you on most points. Red Hat is not only well-run, but they made the strategic decision to NOT be a one-trick pony. The JBoss business is growing faster than their Linux platform business. Kudos to them.
By “financial” indicates, The VAR Guy works with any info there is to find … funding, recent hires/staff expansion, start-up rates, etc. But you’re right: It’s difficult to separate fact from fiction since Red Hat is the only pure play publicly held open source company in the market. NOVL still doesn’t could since roughly 75 percent of their revenue comes from closed source technologies…
The privately held folks simply don’t disclose full financials, nor are they required to. Hopefully, as public markets improve and IPOs proceed, we’ll all gain more visibility in the health of open source companies… or lack of health, in some cases.
You really can’t look at staffing and sales rates for a start-up in the same way you can a mature company. Start-ups, with appropriate venture capital funding, run at a loss as part of capital investment strategy..including human capital. Watching staffing increase can be just a symptom of watching a management team throwing people at a project in the hopes of getting it developed faster…and not a revenue sustained staffing effort. Without the balance sheets, you can’t make the call.
And looking at venture funding levels gives you nothing more than a peak into the heads of how venture capital investors are thinking collectively. Is venture capital significantly going more towards open source compared to proprietary software development at the end of 2008?
http://blogs.the451group.com/opensource/2009/01/06/vc-funding-for-open-source-mixed-messages-from-2008/
That’s a lovely little graph there…
Record high levels of funding in 2008 Q1 and then a massive die off in VC funding by the end of 2008 and into 2009.
Fickle people those venture capitalists. There is far less VC out there now than a year ago. Not shocking. The question however is this, is that dive in VC funding for open source in proportion with the dive in proprietary software VC funding or the dive in VC funding more generally? I don’t know. Feel free to write about that. Because if VC funding for open source took less of a hit relative to the software sector on average..then that is at least an indication that VC funders are betting heavily on open development for their own ROI. And that would be significant piece of information.
-jef
The releases from Sugar are a net positive for overall revenue growth for the company and partners for two reasons. First is the release of Sugar Express, which allows Sugar, for the first time, to obtain a revenue stream for those who only need the fucntionality of the open source (Sugar CE) version, are not ready to pursue the higher Professional versions, but still want a reliable support program. They are basically taking on the non-sanctioned companies, who aren’t in the partner program, who are hosting/selling CE hosting services and generating revenue without contributing to the community. This is a good thing to protect the brand – we see so many customers who think Sugar is a bad product because they choose a ‘fly by night’, non-sanctioned company who was hosting CE.
Second, by standarding one price for each version (instead of a lower price for on-premise vs. on-demand) Sugar will actually increase it’s total revenue dramatically and get better leverage from their open cloud environment. It’s no secret that the majority of Sugar implementations are on-premise. By standardizing the pricing, giving all customers an on-demand environment (while still allowing them to go on-premise if they like which is a KEY DIFFERENCE from other SaaS vendors) they will a) generate more net revenue by capturing more hosting service revenue b) ensure a better experience for customers and c) get better cost leverage out of their hosting environment.
VAR Guy,
Roberto Galoppini of Commerical Open Source had an interesting counterpoint to your line of thought that you may wish to check out and discuss:
http://robertogaloppini.net/2009/04/30/open-source-monitoring-groundwork-on-sale-not-really/
Cheers,
David
David: The VAR Guy thanks you for the tip. Roberto makes some solid points, but even he notes that the GroundWork Starter Edition offer expires this summer. Translation: The GroundWork offer is a sale price to get buyers moving. Otherwise, why not extend the offer indefinitely?
Doug@4: You open up a bunch of key topics for discussion. Most notably: How can SugarCRM make sure web hosts — sanctioned or non-sanctioned by SugarCRM — do a good job hosting software and supporting customers…
The new program helps them get back in control of the quality of partners and services around Sugar. By giving partners Express to sell, we can easily compete with non-sanctioned providers who have to charge more because they don’t have the ability to scale to Sugar’s open cloud.
For sanctioned partners – they continue to enable our efforts to manage our customers directly in their on-demand environment with the enhanced ‘cloud console’ developed for partners. Leading partners like Levementum can also use the cloud console on our internal private cloud offerings.
Http://www.levementum.com
At first, I was very interested when I saw the $7/month per user price for Sugar. This is because I run a very small open source company and have been using the free version of Salesforce.com. I don’t want to pay $30/month just to track my contacts and prospects. However, I will pay $7/month to use and support open source, because it is the engine behind my business.
However, it turns out that you are required to by Sugar Express in a bundles. This means I cannot simply buy the $7/month version for one-person. So rather than becoming a customer, I will stay with the free version of SalesForce.
Here are the bundle prices for Sugar Express:
$499.00 for 1 – 5 users
$799.00 for 1 – 10 users
Tristan