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The Future of Open Source - 2010

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The 2010 Future of Open Source Survey gathered insight on the opportunities and challenges of today’s open source market based on 551 executive respondents from customer and vendor organizations.

The study found increasing confidence in open source’s ability to drive business value and signs that the technology may have passed its “tipping point” and be on its way to mainstream enterprise adoption.

In a recent interview, Michael Skok, General Partner at North Bridge and founder of the survey, explains the new role of innovation as an adoption driver, the power of the White House as a customer, the new money-making strategies being used by vendors and investors, and an outlook on the future of open source.

SandHill.com: What factors are driving the usage of open source today?

Michael Skok: We started the survey four years ago because of the lack of understanding of open source – both in the industry and in the marketplace. It’s fair to say that while people now recognize the importance of open source software, many still wrestle with where to use it and how to derive value and make money from it.

Certainly low cost has helped open source endure the economic downturn and emerge even healthier.

For the third year, survey respondents said that low costs are the most attractive aspect of open source technology. And more than 95 percent of respondents say the turbulent economy was actually good for open source vendors.

To me what’s interesting is that you can actually measure it in both big and small companies. For example, Red Hat reported annual revenue of $748 million for its fiscal year ending in February – a 15 percent increase over the prior year.

The same recession-era expansion took place in private companies: in North Bridge’s five open source portfolio companies, top line revenue doubled last year, as did the number of employees. This year, revenue is on track to double yet again after a strong Q1.

There are also new drivers of open source software adoption. Enterprise buyers now recognize open source as a high quality solution. Respondents cite better quality, superior security, freedom from vendor lock-in and rapid innovation as key factors which are driving open source adoption (see graphic).

To me, “rapid innovation” is perhaps the most exciting new driver we identified. Buyers now specifically recognize that open source delivers innovation faster than proprietary software – a significant competitive advantage in a today’s challenging business environment.

The not so “secret sauce” at work is that open source users are the developers. This creates a fundamental difference in terms of both the philosophy, pace and process that makes it impossible for traditional software companies to keep up. Without the burden of a long product development cycle, open source software can create and release new features immediately by the people and organizations that need them.

SH.com: Do you think open source has reached its “tipping point”?

Michael Skok: We’ve seen increasing usage in the enterprise in recent surveys, but in the past year, the government and public sector became major open source adopters. Many agencies had to figure out how to “do more with less” – and quickly – as the new U.S. presidential administration looked to establish leadership.

I think the “tipping point” came when Whitehouse.gov went live on Acquia Drupal. A North Bridge investment, Drupal commercialized a highly popular open source project in a very business-driven way.

Because the White House chose an open source solution, many other federal agencies followed suit. It felt as though we’d cracked the public sector code by not only raising Acquia’s awareness but also giving tremendous credibility to open source in general within the public and private sectors around the world.

We measure usage trends with a number of questions in the survey (click here to access the full results of the study ). One example of continued momentum is that now fully 55 percent of respondents believe that more than half of their software purchases will be open source within the next 5 years.

SH.com: What are the main challenges preventing open source adoption?

Michael Skok: The survey found that the top three barriers to the selection of open source software were unfamiliarity with open source solutions, lack of internal technical skills, and lack of formal commercial vendor support.

The “unfamiliarity” obstacle is not really surprising.

I think Tim Yeaton, CEO of Black Duck software said it best when he pointed out that there were 19,000 new open source projects created in 2009. That’s an overwhelming – if not intimidating – number of projects for potential adopters to keep track of.

From an investor’s point of view, the proliferation of projects is actually a great opportunity for us to find the best projects and focus on building the kinds of organizations that can rise above the noise and provide the kind of support that enterprise and governments alike need.

Over the years, the survey has consistently highlighted that the business strategies predicted to create the most value for open source vendors include subscription based technical support and professional services and consulting.

But this isn’t new and the industry has been addressing this concern. So the good news is that “lack of formal vendor support” is no longer a top concern for buyers. In the same way that security concerns have faded, survey respondents say customers now recognize that support is becoming available and reliable for open source solutions.

The bad news is that this development has left some investors scratching their heads as to where to invest to make money in open source. Venture funding in publicly disclosed deals was down 37 percent to $375 million, as cited by one of our partners in the survey, The 451 Group.

SH.com: How is the move to the cloud impacting the outlook for open source?

Michael Skok: We carefully highlight the impact new platforms have on open source vendors. The result is a reevaluation of business models, with vendors seeking new market strategies.

SaaS and cloud computing are definitely making their mark: Three quarters of respondents feel these models will have the greatest impact on open source vendors. Yet a year ago, cloud and SaaS did not even register as drivers of open source vendor revenue generation. In 2010, these two sectors are rapidly approaching one-quarter of the revenue picture (see chart).

So when Jim Whitehurst, CEO of Red Hat, joined me on stage to present the survey results, he focused almost entirely on the role of open source software as the natural foundation for cloud computing. I not only concur, but I feel that open source is the first part of the “economy” in the economies of scale that cloud computing offers. Furthermore a lot of the cloud’s “scale” is being enabled by open projects like Memcache and Hadoop with companies like NorthScale, Cloudera and Akiban Technologies emerging to support it.

SH.com: What are the strategic opportunities for open source vendors and investors?

Michael Skok: Industry observers are always looking for the next opportunity in open source. Typically, any disruption starts at the bottom of the stack and moves upwards. Open source is no exception: Adoption began at the operating system layer, moved to databases and application servers, and now we are seeing adoption in the application layer.

Survey respondents rated content management/social software the sector most susceptible to open source disruption over the next five years, along with databases and operating systems.

Interestingly however, office productivity applications ranked no. 4 – right in the middle of the list.

We believe this is because with the adoption of things like GoogleApps and Zoho, the cloud is the bigger disrupter of the office application space, though open source can easily participate in this shift. Personally, I also believe that sometimes “free” is not enough as is the case with office productivity apps, where user familiarity with the application and prior training investments are just as important. Friction points like this are always an important part of our investment analysis when looking at new open source investment opportunities.

By far, vendors say delivering an open source solution as a complete service offering is their biggest revenue generator (see chart). The adoption of Acquia’s Drupal support and digital services is one example of how rapidly such solutions have taken off. Specifically, the pent up demand for a SaaS offering resulted in adoption of Acquia’s Drupal Gardens that was two orders of magnitude greater than we predicted it would be.

Looking at overall business strategy, respondents say that the dual licensing model – where open source products are built by the community and layers of value are added by a vendor and sold via a license model – will be increasingly valuable for open source vendors. But professional services/consulting and support remain the most lucrative business strategies for vendors according to the survey (see chart).

Personally, I believe that will shift rapidly to what I call digital services – a much more scalable and profitable model.

As an investor, we have to be careful to invest in the right elements of open source. It’s not a business model in of itself. But if we get this right it can be a winning situation all around. As you can hear, customers want vendors to provide better visibility into new open source projects along with commercial support and services.

That in turn is beneficial to the development communities behind those projects as they see greater adoption.

While investors remain discerning, those open source vendors that evolve to take advantage of shifts like cloud computing and look to provide leverage in their business model with things like electronic services can expect to attract funding. As proof of that, North Bridge has already reinvested in Acquia’s continued rapid growth and closed three new deals in open source in the last year, including Akiban Technologies, North Scale and REvolution Analytics.

SH.com: Based on the study, what is your outlook for the future of open source?

Michael Skok: Clearly the survey findings show that adoption of open source may have reached its tipping point. With customers’ increasing maturity about the reality of open source deployments, high-profile, mission-critical adoption in the public sector and major enterprises, and a shift up the stack to applications, open source usage will continue to increase significantly.

The survey found that nearly a third of respondents say that 75 percent or more of their IT deployments are open-source based. And the future looks even brighter: more than half of respondents say open source will represent more than half of their software purchases in the next five years. That’s double the portion who responded similarly last year (see chart).

The impressive economic, innovation and technological benefits associated with open source are becoming more widely known. There are many projects in today’s business computing landscape that simply could not be completed any other way. Open source thrives in the cloud and in the large development organizations of companies, universities and communities.

As it moves past the tipping point to the mainstream, open source will be increasingly known as a powerful driver of business value. Only time – and our 2011 survey – will tell if I’m right.

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