Subject: RE: Nessus 3.0's failed community
From: Federico Lucifredi <flucifredi@acm.org>
Date: Wed, 30 Nov 2005 13:44:01 -0500

Hello Larry,

> I wasn't referring to the end user's benefits, but rather to the competitive
> benefits that a company like Nessus might enjoy by releasing their product
> Open Source.
> 
> The discussion seemed to be focusing around community contributions to the
> code.  I don't see that as the main benefit in many high-profile Open Source
> businesses today.  To further clarify, my measure of "benefit" is to place
> the P&L of the Open Source business side-by-side with the P&L of the
> proprietary software business and look for some inherent advantage for the
> Open Source business.  For example, lower development costs in the Open
> Source business could mean lower total expenses allowing the Open Source
> company to charge less to customers and undercut the competition on price.

even as a member of the F/OSS community, I must say that I still have my
doubts on the profitability of a *software* Open Source business model -
lets look at a few numbers: RH holds 80% of Linux sales&services today,
and the comapny has revenues of ~250M$. It's competitor Novell holds the
remaining 20% of the market, yet Novell as a company makes ~1B$ in
revenues, mostly from its higher-profit proprietary products.

Even with a desire to root for companies in purely in Open Source, I
face the fact that proprietary software is, well, more profitable -
period. The increased market size that Open Source promises has failed
to deliver any "big" software player (in the corporate sense), and
that's the bottmo line. The greatest success stories I can think of are
Red Hat and Trolltech, and they are puny if compared to their
proprietary compatitors...

it looks like, even when you have a large market, the margins you make
*per customer* are considerably lower than a proprietary vendor make,
and with the added burden to have to support so many more customers with
lower per-customer revenues to show for it. 


> This arguably makes sense if you compare a proprietary software company's
> P&L verses and Open Source company's P&L.  On the revenue side, the Open
> Source company makes little or no (depending on the Open Source model)
> revenue due to license fees.  That's typically about 30% of a proprietary
> software company's revenue.  If we eliminate 30% of revenue, and revenue
> that is 90%+ gross margin to boot, we need to eliminate nearly 50% of the
> proprietary software company's expenses as well.  (Lot's of assumptions in
> that number, but for a typical proprietary software business the gross
> margin contribution of license revenue is in the 40% to 50% range.  That's
> the dollars you need to cut from expenses.)  My point being that lower
> development costs are not going to make up the difference.

I like your thinking, and your figures seem to support what I am saying
-- that an Open Source *software* company cannot just make up the loss
of revenue in reduced development (personnel) costs. Of course, software
is or is becoming a commodity right now so building any new proprietary
software empire is not as directly feasible as it was years ago -- and
your commercial sales base will likely be rapidly (a couple of years)
eroded by a Free/Open Source competitor if you came up with something
really new and worthwile.


> I'm going to repeat that because I've been rather long-winded here and it's
> my major point.  Lower development costs are not going to make up the
> difference.  You need to look at other expense lines to make the numbers
> work.  In particular, proprietary software companies spend a lot more on
> sales & marketing than they spend on development.  As a result there's a lot
> of opportunity to make a difference there.  If you can cut sales & marketing
> costs relative to your proprietary competition, then you can create big
> business model advantages.


Perhaps there are more savings to be capitalized on -- but even so, from
a business point of view the objective is to turn a profit, and selling
"updates" as Red Hat Network does is not enough to create one (or more)
billion-plus cap publicly traded company, which would be the measure of
a *software* FSB's "big" success... and so far I don't see it happening.

Of course, services are another story entirely -- and while wearing my
businessman hat I wonder how much will the GPL 3 make a dent in those
models... I cannot shake the feeling that there is something
"cannibalistic" about Free/Open Software models when taken in relation
to businesses - and I don't mean that the way MS does, I mean in a sense
of *inherently* limiting a company's final size -- which exposes them to
the "small fish" set of problems.

</digression> -f