Sunday, December 10, 2006

Support is NOT a Software Business Model

I shudder every time I read a blog post or article by some “expert” that proclaims that open source is a “business model” predicated on providing customers “good support” and that open source is fundamentally different from proprietary software. Hogwash.

Open source is not a business model, it is a development model. The software business, open source or not, is about providing customers with a product that is better than the competing product. This concept is fundamental to business, and yet somehow a bunch of young software companies have it in their head that there is something new and magical about open source that exempts it from this fundamental truth. Maybe that is why there is only one successful software company underpinned by open source -- Red Hat. And if you look at the financials of Red Hat, it looks like a great software company, period. No “open source” modifier required.

Let’s do a quiz for the “experts” and see how much they really understand about building a great software company based on open source:

Who spends more money as a percent of revenue on “support and service”? Oracle or Red Hat? It has to be Red Hat, right? They are all about “support and service.” Wrong. Oracle spends 23% of revenue to “service” the customer while Red Hat spends only 18%. I guess open source isn’t necessarily just about selling “support and service” after all.

Who spends more money on engineering their product as a percent of revenue? Oracle or Red Hat? It has to be Oracle, right? Red Hat gets so much R&D leverage from the community. Wrong. Red Hat spends 15% of revenue on R&D while Oracle spends only 13%. I guess customers want more than just a download re-direct from redhat.com to kernel.org.

Who spends more money on sales as a percent of revenue? Oracle or Red Hat? It has to be Oracle, right? Selling really expensive proprietary software has to cost more than selling open source. Wrong. Red Hat spends 47% of revenue on SG&A while Oracle spends 25%. I guess there must be more to selling “free software” than putting up a download site and setting up a PO Box to collect the checks that roll in to turn on support.

A great software business is a great software business, independent of open source. Furthermore, customers will pay a premium for great software, if they cannot get the same great software cheaper from somewhere else. Therefore, if you have a great software business based upon high performing software that is only available from you, there is little reason to open source your product. The corollary – if you have a non-existent software business or mediocre software that cannot command a premium, you are probably a candidate for open source. This basic truth could sink open source software as a category because so many young companies are using the term “open source” like a badge of honor without paying any attention to the fundamentals of the software business.

Red Hat and Oracle are BOTH great software businesses because they invest in engineering and sales in order to deliver a premium product to their customers. Support is a bad business model for software because it misaligns the customer and the vendor. Customers don’t want to pay for support or services, they want software that works WITHOUT support. Vendors that generate revenue from support only scale their business if the software is buggy and difficult to configure – driving support calls/incidents/whatever in order to scale revenue.

The biggest problem I had while running sales for Red Hat was overcoming the customer objection that Red Hat’s software should be very cheap, or that Red Hat’s value should be based upon how much “support” the customer consumed (incidents, callers, whatever). I responded by banning the term “support” from the sales lexicon, setting high quotas and demanding million dollar deals, and requiring the reps to sell on the value of solving a difficult problem – providing Unix functionality on industry standard hardware with a 10X price performance advantage. Additionally, Red Hat moved to the RHEL model where the enterprise product was only available if you agreed to pay a premium for it.

Guess what happened? We sold the value of 10X price performance vs. Unix, and the reps took down million dollar deals and made their big quota numbers and then some. Customers stopped talking about “support” and “free software” because we convinced them that engineering is what really matters . . . . and they could only have the product if they paid for it. If you want to be successful in the software industry, go and do likewise.

2 Comments:

At 2:02 AM, Blogger Taran said...

I think what they mean is 'Open Source Software Business Model'. Of course, they don't write that...

But then, they won't let me slice and dice politicians for Open Source Politics, so...

 
At 11:38 AM, Blogger Dana said...

To a great extent you're playing games with numbers regarding Oracle and RedHat. Oracle is a much larger company. RedHat is growing more rapidly.

 

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