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Software Refuges

Software developers are being hammered. At one end, the Microsofts, Oracles, IBMs, BEAs and other software behemoths are engaged in free giveaway wars as each Brobadingnang seeks to establish breacheads in the others markets. Thus the 5 year “free” giveaway of an increasingly complete BI Stack by Microsoft while it charged for its database (also increasingly, the only database software that works best with the Microsft free BI stack – this is the proprietary lock). The key to this offer is that onetime Redmond partners among the pureplay BI vendors simply do not have a database to go head to head with Microsoft(although recently MySQL and PostgreSQL are being used by some BI vendors to that end). So Oracle and IBM, seeing their database markets threatened have followed with their own set of free BI goodies. Call this the Behemth Hammer.

The same phenomenon is occuring in the Application Server market (Oracle is leading the free-giveaway while BEA, IBM and others are following suit). And recently IBM unleashed a huge salvo giving away for free its DB2 Express-C database for use with up to 2 dual core chips per server with no limits on the number of users and just a 4GB memory limit. Let me tell you that spec is able to support scores if not low hundreds of users. Also IBM has ready a bevy of support options including fee-based direct support. Now DB2 Express-C database is a very potent database and IBM has promised to update it with many of the new DB2 Viper edition capabilities. This offering from IBM has been tripped off by the other hammer bludgeoning software developers – free Open Source software.

Borlands IDE business got hammered into a fire sale by this dual headed battering. Oracle, Sun and IBM are essentially giving away free trial development software and tools to developers while Eclipse and NetBeans added more and more functionality and features to their Java and C/C++ products such that Borlands top end premium prices could not withstand the hammering. Even Microsoft, a long hold out from the freebie game in development tools, is now giving away for ever longer periods of time starter editions of Visual Studio and SQL Server development tools. Call this the Open-Source Hammer.

So what is a software firm to do in this new pricing reality ? Both startups and existing software players have some hard choices to make.

New Software Pricing Reality

In effect, these two “hammer” factors have created a new software pricing reality. The new software pricing model may be seen as a series of decision rules that look something like this:
1)Consumer impulse software for new novelty programs: $20-50 per package assuming immediate download and easy install/getting started. Classic recent examples are Anti-spyware software, photo album tools, and PDA/mobile phone games and utilities. Market half-life before bundles, freebies and giveaways dominate the segment => 6-24 months depending on the comlexity of the software and the presence of major players willing and able to bundle and giveaway.
2)Novel single user software on desktop, PDA, or Mobile (no networking dependency). On the desktop – this is a closed market. Apple and Microsoft want 90% of any $200MM or greater software market on their platforms. Linux simply does not have enough desktop presence. PDAs and mobiles present greatest opportunity but diverse, fractured hardware and software markets make it a minefield of which is the right segments to play in. There is one exception – a hardware/software device pluggable into desktop, handheld, or mobile device and able to understand speech with no training and only 1 word in 200 error rate(and converses with the user -“I did not understand hack precisely, can you define it for me”) or a pluggable handwriting plus gestures recognizer again with a 1 in 200 symbols error rate with color or sound cue when a symbol is ambiguous and clickable spoken readback. These patentable devices might be able to capture a $1B++ hardsoft markets.
3)Group use programs that synch with network connections but reside on a processor system(desktop, PDA, mobile): $50-250 per seat depending on value-add utility of software (ROI in 3 months justification price) and security, reliability, and performance profile. If market potential is about $250MM or more or impacts on larger $1B or greater market expect new entrants to giveaway and knock-off within 6-9 months of market take off. Again complexity of software and/or patent protection may slow down entrants.
All other software must be “free”.

All Other Software is “Free”

“Free” in the quoted sense means “free” like in either the Google model or the evolving Open Source sense. Now existing application, game, and desktop software is protected from “free” if it belongs to Microsoft, Apple or one of the dwindling number of software behemoths that can protect their software portfolios from the other software Behemoth Hammer blows with their own Behemoth Hammer. No software vendor is protected against the Open Source Hammer. So eventually most software will “devolve” to one or the other “free” models.

The Google “free” model is based on giving away for free some Web-based software service or add-on program to the desktop (or handhel/mobile markets) for free. During this Google free period, Google refines the product or Web service while gaining enough users to etablish charges/fees for the service or program. But the charging mechanism may be somewhat novel. The search engine and Gmail services charge by carrying advertising. Google Earth has a basic level free service and then annual renewal fees at higher rates depending on the network scope and/or the number of APIs = functions/services used. Google is looking at other Web services and add-on programs to be paid for by third parties either in providing the basic data in return for Google effectively acting as hosting and distribution agent or other quid-pro-quo mechanisms.

Now Google is not the first to this model as Web-based financial services from Yahoo, Hoover, Edgar, Intuit/Quicken and an ever widening group of providers are just one example. Weather, group workplaces, and vacation info are other examples. The innovative add-on for Google is their extremely powerful Hundreds-of -Thousands-of-Servers distribution mechanism and the ability to add key and often complex functionality before anyone else over the Web. So though Google is not unique they have been first to drive the “free for a time or functional level” model, and especially the Web based SaaS-Software as a Service, to its natural limits fastest. Note also much of Google software is not like Open Source – that is the Google source is frequently not open; the APIs and access to them may be free and open, but not often the source code. Finally, Google is different from many vendors because it is Web standards based (little or no use of Apple, Mac or other proprietary standards); so that users will be able to access Google services or programs from just about any OS platform.

Open Source Free Software

Open Source “Free” means all the source code code is free, documentation on how to produce an executable and run the software is free, a pre-compiled executable with the source may be subject to a small distribution fee (generally this is adhered to), and modification/extension of the source code for use within an organization is free. But use of the modified/extended code outside the organization is NOT free – rather it is subject to the particular license associated with the Open Source code when and where it was originally acquired.

Open Source code sets the price of acquiring, learning how to use, and fix or modify a program as close to zero as possible but inevitably rising in cost for each of these steps. This fact will be important later. Why the Open Source phenomenon ? We can think of 4 major reasons. First, educational altruism. Many college, university and research institute projects produce software and programs whose purpose is to test and verify research directions. Why not have a common, shared, and openly fixable but then shared again set of routines and programs ? It has happened massively for dozens of years. And then some inventors of software dont want to be bothered with comercializing but want to guarantee that a programs use and benefits will be desseminated as widely as possible – hence the Open Source route.

Second, there are areas of computing where the following conditions exist: 1)the optimum method to compute or program the functions are well understood; 2)no single vendor can get a distinct competitive advantage by using the code; and 3)but all vendors can get roughly equal or proportional savings by using standard, open and free code. Examples are the FORTRAN Scientific Subroutime Libraries and several (but not nearly all) XML standards.

The third reason is that 40 years into computing and the roller coaster that is IT project success rates is still taking a terrible toll. In the mid 1990s the Standish Groups “CHAOS Reports” were showing a 50% chance of failing for any-size IT project. By 2003 this percentage had dropped just below 25% but the percentage of projects having “the twenties” – 20% or more cost over-runs, 20% or more over-budget and 20 or more major error fixes required was starting to move upward again. Meanwhile the reliability and availability problems plaguing OS desktop software was now replaced by security and persistent performance problems. So what were CEOs and CIOs to do ? EULA and other contractual agreements gave them little legal recovery recourse, so they started downsizing, outsourcing and investing in free Open Source for the much lower risk exposure of low initial cost software with a better reliability, security, maintainability profile.

The fourth reason for adopting Open Source is as means of battering down the barriers to entry in various software markets. What is the best way to gain entry into markets dominated by major players like IBM, Microsoft, Oracle , SAP and othermajor players? Give away your software for free. Also what is the best protection against Microsoft bundling a knock-off duplicate of your software for free as part of its operating system or its database? Beat them to it by offering your software at a price they can match but not beat. Then establish a reputation for service and support that EULA-infested major players dont deign to match.

Microsofts bundling for zero is an anti-competitive ploy that Redmond “sort of got reprimanded for” in the Great DOJ-Antitrust Spectacle of 1998-2000. But Redmond are out doing the same deeds – testing legal limits yet again. For example, Redmond is giving away a free and complete BI stack with their SQL Server database knowing full well that the BI pureplay vendors do not have a database to bundle and respond with. Microsoft product managers have freely stated they want to dominate the BI marketplace and this is their “entry ticket” against existing BI players. The problem is that major competitors like IBM, Oracle and others cannot leave their database products exposed – and since the DOJ does nothing, they have to counter with their own bundled BI freebies as well. In sum, in major markets, a “free” strategy – be it Open Source “free” or Google-like “free” may be necessary to a companys survival. Hence, “Free” in either the Google or Open Source sense has become a Software Refuge.

The Nature of “Free” Software

“Free” software whether Google-like or Open Source type, reduces risk in some common ways. First the getting acquainted/learning and initial cost of the software is reduced substantially. These days with large learning curves and software investments on projects this is no small reward to IT shops and VARs. Second, by having free source and/or open APIs both free types of software can attract 3rd party developers to add to their solution sets. Finally, because both types of “free” software have a high commitment to reliable and secure systems (no software before its time), both have appeal to VARs, service providers and IT shops.

However, Open Source software may have an advantage in the reliability, availability and maintainability arenas by virtue of its multiple options for developers. First, Open Source users not only have the source code and descriptions of how to compile it to working code; but often also a community of users/supporters of the software. And more Open Source projects are geared to financing their operations by offering training , service and support operations at high levels – Redhat and Novell/Suse for Linux, MySQL and PostgreSQL for database plus JBoss and Resin for application servers are a few examples. In effect, Open Source software vendors are more clearly saying to their customers – “our success is measured by and dependent on your success.” In a complex, tough and ever changing software world that is a remarkably good offer.

But Microsoft and other packaged software vendors argue that “Free” software vendors cannot make the big investments in R&D to come up with the new versions of existing software or new breakthrough applications. Well Google has put “lie” to the notion that Google-like “free” software cant make the investments to come up with new innovations. And the likes of Apache, JBoss, Linux, and many others have shown as much or more innovations as Microsoft and the other lions of packaged software. In fact, some would argue that many packaged software vendors have become Schumpeter-like conservers, more protective of their market dominating positions than innovators in the market. In that spirit, name 3 pioneering, large-scale innovations made by Microsoft in IT over the past 10 years.

However, it also is worthwhile to note that both Google-like and Open Source “free” software are still innovating internally on their own business models. One can see such innovations as giving partners a piece of the action in high growth settings in exchange for support, delivery, or local capital investments. Likewise there are pragmatic innovations like letting customers invest in new functionality or modifications and extensions with design, development, and/or testing dollars, personnel, IP, or other services in exchange for priority, access, and/or other accruals. Getting the balance between free and open versus charge on a subscription basis for service, support and/or new features and functionality is being actively explored by both Google-like and Open Source vendors. Take a look at Actuate/BIRT, Xara/Xara Xtreme for Linux, and JBoss in general for some examples of “free” innovation in business models. In sum, as a Software Refuge, “free” software has become some of the most innovative both externally in delivering new technologies to the IT market and internally in perfecting new business models for the hyper-dynamics that is the IT marketplace.

(c)JBSurveyer 2006

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