Subject: Re: appliance-based business models
From: "David Kaufman" <david@gigawatt.com>
Date: Tue, 25 Oct 2005 13:06:36 -0400

Jim Thompson <jim@netgate.com> wrote:
> I like the appliance model, but the margins selling hardware are
> lower than the margins selling software, and warrantee issues are
> much more expensive.

Certainly margins are slim for *commodity* hardware, sold on its *own*, 
but an "open source software appliance" provides far higher value to the 
customer than the same hardware with a blank hard drive!  At least, for 
the successful free software business person, it had better! :-)

By packaging the *whole* solution (best-of-breed software, configured 
expertly, properly installed on, and tuned for that expertly selected 
hardware) the hardware is no longer a commodity.  Its price need not be 
competitive with similar hardware sold as a stand-alone product, and 
shouldn't be priced anywhere near that low.  That's the point.

In the original post, I used the unfortunate choice of words 
"way-overpriced hardware", but is not way over-priced if, unlike its 
commodity brethren, it comes out of the box ready to immediately begin 
doing useful work, after little or no head-scratching period experienced 
by the customer.

It's way "right-priced" at ten times or more than the hardware alone, 
especially if the formula for:

  hardware + software + x hours scratching = useful box

when solved for x, equals a finite period of labor hours for you as the 
free software professional, but extremely high to infinite for potential 
customers in your market.  For those who don't want to learn (or hire 
employees who know how) to install Linux, compile apps, configure 
networks and so on (depending on what service your software performs), 
the price they'd be willing to pay for the appliance is roughly equal to 
the value of the service it provides, not the sum of the parts.

The software part may be free (as in beer) but is useless to them 
without a pro to set it up, maintain it and run it productively.  And 
the hardware maybe two (or ten) thousand dollars, but it doesn't do 
network intrusion detection, or count their beans, or sell their 
products online without, still, the software and the pro's.

An appliances must be highly engineered, and a very well planned package 
that attempts to meet the goal of *including* the professional guy they 
don't want to have to hire (or as near to that customer experience as 
possible).  Looking at it that way, the customer can 1) buy your 
appliance or 2) buy commodity hardware and hire professionals to set up, 
maintain and operate software on it, and possibly networks attached to 
it :-)

So a successful appliance will be the more attractive option for 
customers if it costs plenty less than typical software processionals' 
hourly (times the number of hours they'd bill for this service), and 
will be the more attractive option for you (than doing the labor for 
each customer individually by the hour) if it's priced way, way higher 
than the cost of the hardware, and is a well-enough engineered package 
that it actually *does* work for most customers, for the most part, out 
of the box.   If you have to manually troubleshoot, configure and/or 
customize a lot of them, that'll quickly consume all your company's time 
and resources, making you a support shop again.  But if it really meets 
the customers' need not to have to "speak to a geek", they'll love it 
(go figure why people don't like to speak to us geeks but, honest, they 
don't!), word of mouth will quickly make your appliance an unstoppable 
success, you'll be slashdotted and, because it "just works" you can 
scale up to meet the sudden demand for an 
auto-downloading-MP3-serving-refrigerator in every kitchen on the 
planet.

But seriously, if it filters spam for 100 office workers, including all 
of his bosses, the value of that has nothing to do with the cost of the 
parts, or even the labor that you expend to produce it -- in the *mind* 
of your customer, the guy who makes purchasing recommendations, say, 
your average bright, young, but only Windows-trained, IT guy in a law 
office, insurance company or government agency.

I'm still looking for other Free Software Appliance Provider pure-plays 
like Sourcefire/Snort, I've only found a couple of almosts:

Coyotepoint
http://coyotepoint.com/
which sells FreeBSD boxes running their own custom traffic-shaping, load 
balancing and failover software, but it what was only Open Source for a 
short time, though it could presumably could still be forked since it 
was, at one time, if anyone still has the old sources.

Coyotepoint's hardware is so *commodity* that their premium Equalizer 
Extreme II product sports a Dell logo on the products page, and includes 
"Dell engineering savvy" as a bullet-point on its feature list, to... I 
guess, differentiate it from their lower-priced offerings.

Sophos/Activestate
http://www.sophos.com/
Sophos, to look at their site, seems to be selling just proprietary 
shrink-wrapped software, but didn't they buy Activestate who used to 
sell what was essentially a SpamAssassin appliance?  And doesn't 
Activestate no longer sell SpamAssassin appliances?  What's up with 
that?  Would Sophos have bought them, just to kill their appliance 
business?  If so, I guess I'm not alone in thinking that free software 
appliances have some significant market potential.

The Cobalt RaQ
Bought out by Sun a few years ago.  Was a rackmountable Linux Web Server 
appliance that, IIRC had a Cobalt Cube cousin which was a desktop-like 
Mail/Firewall solution for corporate office use.

Maybe I can't find successful free software appliance businesses because 
they always get bought by the big players in the markets that they 
threaten to disrupt :-)

-dave