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Does Open Source Suffer From A Glass Ceiling?

Some say open source software sucks so much money out of the software acquisition equation that it becomes its own worst enemy, depriving open source based commercial entities from reaching the heights of the software market

Does open source software suck so much money out of the software acquisition equation that the result is open source based companies struggle to break through the billion dollar business level? Think about it, the very model of open source creates a glass ceiling which open source companies cannot break through. That is what Glynn Moody of ComputerWorld UK says based on the remarks of Red Hat CEO Jim Whitehurst.

In a nutshell, Whitehurst says that in order for Red Hat to touch the 5 billion revenue number, it would have to displace about 50 billion dollars in current software sales. That means that open source software represents a 90% savings over proprietary software models.  That is a staggering number! A cost savings of 90% using one type of software over another.  Sounds too good to be true, doesn't it.

I hate to be one to burst a bubble, but my life experience has taught me that if something sounds too good to be true, it usually is. I think that is the case here. If there was really that type of disparity there would not be a non-open source software business. You can't exist in a market when your competition beats your price by 90%. I think open source companies reach their revenue potential and the equation is evened out a bit not purely on software licensing, but primarily on services, customizations and additional software sales. 

Moody has a different view. He says:

That open source solutions save money for customers by doing away with the fat margins for existing computer companies – and thus shrink the overall market. Opponents of open source like to paint this as “value destruction” that takes money “out of the economy” - as if free software went around burning down offices and warehouses.

What they fail to grasp is that the 90% savings do not just vanish like the smoke from those supposed conflagrations. That money is still in the economy, it's just spent on other items: free software allows people to use their hard-won money for things other than operating systems, office suites and applications. In developing countries, for example, it might mean more funds available for education or health.

I don't think Mr. Moody is right. I don't think organizations take the money they save using Linux and give their workers raises, better health insurance or spend more on R&D.  I think where Moody's logic is faulty is there is more to total cost of ownership than software licensing. Training, services, support, custom development and premium modules are the bread and butter of the commercial open source software company.  When you add this to the equation, open source business models generate more than enough revenue to crash through any perceived glass ceilings. 

Unfortunately they also make the decision to go open or not a bit more difficult.  Any dolt could make the easy choice of saving 90%, the real world doesn't work like that though.

I should also point out that Sam Dean, over on the OStatic blog has a follow up on this where he says this is all cyclical and one day Red Hat will return to its IPO era market cap.  I think Mr Dean is confusing revenue levels with market caps.  Red Hat never had a 5 billion dollar revenue period, however it did have a 5 billion dollar market cap back then. But looking up today's market cap shows Red Hat with a 5.9B market cap. Not too bad for a company that is doing 750 million in revenue.

So all of you open source entrepreneurs who were ready to throw in the towel because you would never reach over a billion in revenue, don't give up hope, keep the dream alive.  You may not get there on software licenses, but your business will see you to the promised land! 

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