Subject: FSB support businesses through history
From: Tom Lord <lord@regexps.com>
Date: Wed, 3 Oct 2001 14:47:45 -0700 (PDT)



       Tom Lord wrote:
       > Stephen Turnbull wrote:
       > > And inherent financial weakness is going to restrict where FSBs
       > > can be competitive.
       >
       > There's nothing inherent about it.

       Ben Tilly write:
       I think that Stephen's point is fundamentally accurate.  An FSB
       is by nature working in a market where a primary revenue stream
       (sales) is hard to come by, and the primary barrier to entry
       (the need to produce a product) is likewise gone.

Historically, Ben is write, but as a description of the "inherent"
nature of FSBs, he is not.

The classical, FS support business, implemented as a very small
company, has a product that is hard to sell at first -- I'd guess you
have to get cut a few breaks.

Aside from the sales problem, the barrier to entry for competitors
(beyond the skills of the founders), is low.

However...

As a classical FSB support business matures, the sales process gets a
lot more regular (if the supported product serves a thriving market).
The "skills of the founders" is replaced by a lot of state in an
internal engineering organization.  So, already at that point,
potential revenues are much more visible, and the barrier to
competitors has gotten a bit higher.


Unfortunately...

The mature FSB support business has its own inherent financial
weakness, when compared to proprietary competition.  It is this
weakness that I think Stephen was pointing to.

A mature support business has revenues that tend to be low compared to
the costs of providing the service.  Low, that is, compared to the
margins on a popular, proprietary, shrink-wrap box or pre-installed
system.  The latter kinds of products give windfall profits to the
proprietary competition; FSBs haven't come anywhere close to
implementing a business model that can do the same thing.

Much of those windfall profits get plowed into R&D, helping
proprietary vendors lock mature FSB support businesses out of some
markets;  helping proprietary vendors squeeze FSB support businesses
out of their home markets.  

One of the insidious threats for squeezing FSB support businesses out
of their home markets are mixed-mode vendors: big companies who mix
Free and proprietary software.  Those companies can duplicate the FSBs
support service, but then add in lots of other stuff the FSBs can't
touch.  When a large company does this, they have a good chance to
duplicate the FSBs support product at lower cost.

Another insidious threat is "leap-frogging" by proprietary vendors.
Sure -- a linux web server looks great, today, compared to crappy
proprietary competition.  But I doubt the competition is standing
still.  The linux tools got a lot of momentum from their flexibility
-- the ability to improvise while keeping pace with the invention of
web infrastructure.  But now the web is stabilizing -- the
infrastructures are being built out of commodity design patterns.
Proprietary vendors will (mark my words) capture those patterns in
highly-automated, plug-and-play products; proprietary vendors will
shake out the bugs and performance problems of their underlying
technology.  They'll lower prices.  They'll provide convincing
services for semi-automatically fixing any security problems that
later show up.  Whatever it takes.  They've got money to burn.

Another threat is "in-sourcing": for example, big IT customers who buy
support from FSBs today, in part because they want more control over
their technology, aren't going to remain particularly dependent on
out-sourced support.


So...

All in all, the mature FSB support business is a tactical play, with a
limited strategic future, owing to, as Stephen said, "inherent
financial weakness".


Luckily....

Stephen overgeneralized.  The mature support business isn't the only
potential FS game in town.  Much higher revenue businesses are
achievable.  The tactical plays of the support business can provide
bootstrap capital to implement those higher revenue businesses.

Now, if only someone would send some of that bootstrap capital my
way.... ;-)

-t