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Hark: The Software Paradox


Stephen O'Grady at RedMonk has launched a new Podcast called Hark. In his second episode, he and Agile programming guru Kent Beck have a thoughtful discussion around the ideas in O'Grady's book "The Software Paradox."  Even though software is "eating the world" and become more widespread and strategic, its economic value appears to be declining rapidly. Certainly, we've seen a shift in the industry from traditional on-premise software commercialization to distribution models like open source, and software-as-a-service, with vastly different business models.

Simply put, the software industry is undergoing a significant disruption that is reshaping the economics of the industry and rendering older "tried and true" business models obsolete. And at a level that strikes closer to home for many, it's also reshaping employment models and careers. Although the parallels are not perfect, the software industry is going through a transformation much like the publishing industry or the music industry. (And we all know how well that turned out for writers and musicians!)

I would argue this has transformation has been going on for at least ten years already since the emergence of successful open source companies. In the early days of MySQL, Marten Mickos regularly talked about how his goal was to disrupt the database industry taking it from $9 billion in revenue to $3 billion, and then capturing a third of that. While this was possibly more bravado than business plan, it was based on the fact that MySQL was 90% cheaper than Oracle. (And for many, MySQL was 100% cheaper --after all, it was under a GPL license and free for most users.)

While we built a solid business with MySQL, growing it to just short of $100m in revenue and selling it to Sun for $1 billion cash in 2008, the long term impact of MySQL was far higher outside the database industry. MySQL, Linux and other open source infrastructure software spawned thousands of businesses that simply would not have been economically possible under traditional commercial licensing fees. We routinely met founders of companies that said their business was enabled in part because of the dramatically lower cost of building an IT infrastructure. So at least some of the value that MySQL disrupted was captured not by traditional software companies, but by newer companies like Facebook, Google, Skype, Craigslist, Priceline and the like. And many of those businesses also happened to be disruptive, which is why software is eating the world. 

Not surprisingly, there have been very few home runs in the open source business, at least as measured by revenues or exits. Red Hat, JBoss, Pentaho have all been successful as businesses and have had good payouts for their investors. But many more open source projects have had widespread popularity with remarkably little economic value generated. And that is precisely the nature of the Paradox. 

And as Mickos has recently noted "The bad news is: it's almost impossible to make money on open source. The good news: it has happened many times."  But at this point it's hard to say what the future successful models for software commercialization might be, but it's certainly not going to be the traditional on-premise up-front license model. And I don't think open source, in all its various forms, is likely to generate a large number of economic home runs. There are definitely a handful of promising companies like Acquia, CloudEraDataStax, MuleSoftPuppetLabsSugarCRM and the like, but they may be more the exception than the rule. (If I missed other rapidly growing open source companies, let me know in the comments below.)

Likely we will see more divergence over time with more value realized in other forms, whether it's service-based models, cloud-based businesses, advertising, data aggregation or perhaps something as-of-yet to be invented.

It's a fascinating topic with more questions than answers at this point.  And I'm sure we'll see more discussion on this topic at the Monktoberfest conference in October. 

The Hark podcast is available on iTunes, SoundCloud or wherever you get your downloads.