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Open-Source Trend Brings Big Challenge To Software Leaders

Posted by iNext - 2006-05-04

As more companies and government agencies use open-source software, a trend many expect will continue, traditional software companies face the wrenching decision of how much they should move toward open source, if at all.
Two companies stand out for not embracing open source at all. But then, they might have the most to lose from open source. They are Microsoft , the largest software company, and SAP, the largest maker of business software.

Many other big software vendors, most notably Oracle -- an archrival to both SAP and Microsoft -- are making moves toward at least the outskirts of the open-source camp.

This is a huge issue that could take years to resolve, and a mix of open and closed software is likely to be used by many large, so-called enterprise, users. But some analysts insist open source brings clear cost advantages that will force enterprises in that direction and present a big challenge to Microsoft and SAP.

Those who wait too long to use open source could be left behind, says Jason Maynard, an analyst with Credit Suisse First Boston. Open source is fast becoming mainstream, he says.

"I'm definitely a champion of this trend," he said. "There is a massive opportunity to build a software ecosystem around open source right now."

Open-source software is developed openly and given away for free. Any user can download and copy the source code. Software developers can make custom changes, but any such changes must be available to all.

A Much Different Business

Where closed-source vendors make money in part by charging upfront sales or licensing fees, open-source vendors make their money on support and maintenance services. By not charging upfront fees, open-source proponents expect to spur more adoption.

RedHat, for instance, freely distributes Linux, an open-source operating system that competes with Microsoft's Windows. The largest pure open-source vendor, RedHat's quarterly sales and per-share pro forma profit both have risen at least 37% year over year for the last eight quarters.

"It's much better to compete on low cost and a low barrier-to-entry with a maintenance revenue stream than it is to keep jamming perpetual licenses down the throats of customers," Maynard said.

Linux now is widely seen as a viable computing platform, just like Unix and Windows, says S. Ramadorai, chief executive of Tata Consultancy Services, the largest software outsourcer in India. But he says many customers still have performance and reliability concerns about open source.

"Open source is going to be a definite play in the enterprise," Ramadorai predicted. "But this will take time. It will evolve in terms of cost and simplicity."

The evolution has grown as more companies have developed open-source products. JBoss, which was bought by RedHat for $350 million in April, makes an open-source application server that connects data with applications. MySQL, EnterpriseDB and Ingres offer free open-source database products.

Other firms, such as SugarCRM, Compiere and Pentaho, are using open source to build applications for such units as sales, human resources and business intelligence.

Where traditional software vendors had used a large chunk of their licensing revenue to create new and better versions of their software, a large chunk now goes to pure profit, claims Dave Dargo, chief technical officer at Ingres.

"At some point, licenses went from funding new features to being a cash flow engine for software companies," said Dargo, an ex-Oracle employee. "That strengthened Microsoft and Oracle, but it did nothing for the people who paid the fees."

Ingres, The Saga

In time, he says, more software buyers will demand the savings that come with open source.

Ingres itself is an example of software's evolution. It began as a traditional database maker. But it struggled and ended up being bought by Computer Associates in 1994.

A decade later, CA retooled the unit as an open-source database maker. CA spun off Ingres as a privately held firm late last year.

Open-source systems are still in the early adopter phase, says Tom Berquist, chief financial officer at Ingres, but open source "is definitely ready for prime time."

Companies schooled by the dot-bomb downturn are watching every dollar. But what's different now is most of them have shifted into growth mode, says Berquist.

"Unlike the late 1990s, there's now cost discipline and more willingness to look at open source," he said.

Oracle Buys Sleepycat

SAP and Microsoft beg to differ. Microsoft has long claimed that total cost of ownership is no less with open source than with its software.

For its part, SAP designs business applications to run on Linux, as well as other operating systems. But at a press conference last month, SAP Chief Executive Henning Kagermann said his company does not plan to use open source to build its core business applications. "We just don't see that happening," he said.

Oracle, though, is moving the other way. It promotes the Linux operating system as the best platform for its inexpensive database clusters. By running open-source code on low-cost servers, Oracle says it helps its customers cut costs.

Oracle CEO Larry Ellison -- to a degree -- has embraced the open-source trend. At a conference in February, Ellison said Oracle would support open-source application servers. That month, Oracle bought Sleepycat Software, which makes an open-source database.

Last month, Ellison told the Financial Times that he had considered buying open-source vendor Novell. And he even hinted that Oracle might launch its own version of Linux.

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