Open Source’s Reality Distortion Field

Last week I had the pleasure to participate at the Open Source Business Conference in San Francisco (thank you Matt Asay). I ran into a lot of very smart and very committed people and had some deep and meaningful conversations about the future of open source. Regardless, I was left with a deep impression that the thinking around open source software in Silicon Valley is on a whole different wavelength than the rest of the world.

The audience at OSBC seemed most comprised of software vendors – either the established vendors like Microsoft, SAP and Adobe or the smaller open source-specific startups.

As expected, each group was positioning open source in their own way. For the established vendors, open source was was being position as basically an extension to their existing business model. That’s entirely predictable and a bit boring. After all, these vendors are always co-opting the shifting IT landscape in order to say “ya, we do that too.” But in the context of open source this is a huge breakthrough. For years most of these vendors saw it as something that would disrupt their business. Now they’re comfortable enough to be able to say about open source, “ya, we do that too.”

On the other hand the open source-specific startups, particularly the denizens of Silicon Valley, were pushing the point that open source was much more than a simple extension to existing software vendor business models. Their view was that open source required a different approach. The predominate model being advocated was “open-core.” But what really struck me is that this commitment to a “new approach” seemed largely based on obtain financing. Their focus was on appealing to venture capitalists – not end users.

That wouldn’t be a problem in and of itself if it weren’t for the fact that there’s a yawning gap between the value open source provides a venture capitalist (VC) and what it provides an end user.

The VC communities’ interest in open source, as I see it, is based on the view that a project’s associated community will lower development and sales costs. That allows them to build an attractive proposition when selling the company. And their current thinking on the best way to do this is through open-core business models.The net result is a certain open source groupthink. First there are open source startups that want to get financing. They’re the ones trying to apply open-core licensing to their business strategy in order to attract VCs. Then there are the group that already have their funding. They’re the ones who are trying to convince everyone, especially themselves and their VC partners, that open-core is all it’s cracked up to be.

But there a couple of problems. The first is that open-core is a largely a re-tread of tired, old SMB packaging strategies which have almost universally failed in the market. Business don’t blindly jump into a free open source offering and then upgrade to a full-cost, proprietary product like it was some stimulus-response behaviour. From my experience they assess these products, from day one, based on the full version. That eliminates any sales benefit from the open source component of the overall strategy which, in turn, makes these open-core vendors just like any other small software provider slugging it out in a crowded market space. Strike one! Furthermore, I’m not sure most open-core business models have been successful in building large external code contributions. Strike two!

But at the end of the day these flaws will be mostly borne by the open source-specific startups, not their VC partners. As we know, the venture capital model accepts a certain failure rate. They really only need a handful of their investments to pay off. Those lucky few that can get a license run rate off the back of a community (which I heard described as partners, customers, and some mysterious non-aligned code contributors – basically just an extension of a good old software ecosystem) will be sold off for a handsome profit. And who are those likely buyers? Increasingly it appears to be the very same established vendor community that are saying “ya, I do open source too!”

So much for a compelling new business model! Strike three, you’re outta here.

So strong is this apparent pull for funding that founders of these open source-specific startups are willing participants in this open source crap shoot. They’re all hoping to be the one that makes it big when odds are they’ll be one of losers – and losing along with it their time, energy, and youth.

This, of course, is the reality distortion field that Silicon Valley is so famous for. It’s being brought to you by the same people who, a decade ago, were telling us about the riches that would flow from commercializing eyeballs. That this reality distortion field has extended to open source is not surprising. But that it’s being wrapped up with so much sanctimonious debate is what’s disappointing.

But it’s not all bad. There are a number of open source providers that neither are, nor are planning to, ingratiate themselves with Sand HIll Road. They tend to be located outside Silicon Valley and have been largely growing organically. When I speak to these guys they’re far less dogmatic about the inherent value of open source because dogma doesn’t wash with business users. If open source is going to disrupt the business models of the established software vendors I think it’s going to be this group that figures out how.