The rise of open source in the enterprise IT stack

Developers, CIOs, and tech evangelists alike have fallen for open source. And rightfully so. The current development environment is one of unprecedented on-demand access to technologies that are molded, debugged, and stretched by a global community of developers around the clock.

In a time when web-based products are being delivered to millions of users at a global scale, open source companies including Docker and MuleSoft have enabled organizations to develop, secure, and distribute technology with incredible fidelity and efficiency. Differing from their main-frame and XaaS predecessors, open platforms allow organizations ranging from Facebook to the Federal Government to build faster and integrate at a deeper level without being beholden to vendor roadmaps and support tickets. What’s more, the new wave of developers has bought into the ideology of open source and its intrinsic emphasis on collaboration, community, and transparency.

The world of software development and what constitutes the enterprise IT stack have fundamentally changed in the last decade. What used to include an IBM server cluster, Oracle database, and Microsoft applications now more likely consists of AWS, Cloudera, and custom developed web apps. Almost all of which rests on the shoulders of open source frameworks that heavily rely upon a tight-knit community of active developers. Developers that have grown up knowing, using, and contributing to open source projects.

A common misconception is that open source is a business model. But in fact, open source is a licensing, development, and distribution method. With that, today’s open source companies, now commonly referred to as Open Adoption Software (OAS) are organizations built around an open source project and charge subscription fees for related tools, services, and security protocols. Take for example Cloudera, an OAS provider of Apache Hadoop-based tools and services. Originally developed as an internal algorithm by Google, Hadoop is used to distribute and quickly calculate enormous volumes of complex data. When Google released the code as an open source project in 2004, other organizations including Facebook and Yahoo adopted, deployed, and improved the code to serve their data analysis needs as well as the open community. Seeing a clear opportunity to serve the rising needs of big data analysis, Cloudera was created with the mission of making Hadoop more readily available for enterprise clients.

While open source as a concept has become ubiquitous, the first generation of software companies leveraging community-led technologies largely failed to gain commercial traction. Think of it this way: if the entire world has access to the same underlying technology and assuming everyone is of roughly equal intelligence, it’s difficult to create meaningful product differentiation that can demand a higher price point. With that, open source companies have historically struggled to generate the cash flow necessary to reinvest in proprietary technology and services to build a successful monetization strategy. Because of this, revenue levels for first generation companies including MySQL plateaued in the $20-50M range. This in turn makes them prime acquisition targets for larger players like IBM and Oracle, who have multiple revenue channels to reinvest in both the underlying free community and proprietary pay-for-use products and services.

The one exception from this early cohort was Red Hat, which went public in 1999 and currently commands a market cap of roughly $13B. Since then, Cloudera has been the only other open source company to generate annual revenue exceeding $100M. Ultimately, the future of open source in the enterprise will depend on how well OAS companies can monetize. While many signs point to accelerated adoption and open source community development, there remain industry insiders who have their doubts. “People seem to take the free stuff and work around the paid stuff,” said RedHat CEO, Jim Whitehurst. “You have to recognize that the early adopters are the people who really want free. They’re working hard to work around you.”

However, there is evidence of growing traction. Among the current generation of open providers, there has been more than a 3x increase in those generating more than $20M in annual revenue. This growth can be attributed to a number of factors, the most important being that OAS companies have been far more disciplined in developing proprietary technology in their early stages. At its core, OAS as a model is a pure upsell play. Give away the basic infrastructure for free and then create a profitable business by selling products such as security protocols, toolkits, and advanced customer support packages. The growth of this segment can also be tied to the overall increase in adoption of open source software. A study from Black Duck found that 78% of enterprises run on open source and less than 3% reported that they do not leverage open source in any way. Finally, the ever-increasing demand for faster development, deployment, and scale has created an environment where companies require agility and flexibility that last generation’s tech stacks were not necessarily made to support.

Whether Cloudera and other private players can emulate the success of Red Hat on the public stage remains to be seen. As with any other burgeoning market, there will be fierce competition, plateauing revenues, and inevitable failures. Not to mention the impending fear of public cloud companies like AWS offering competing products at a fraction of the cost. Regardless, the current generation of open source can certainly be viewed as the new wave in software development. Given the combined strength of industry adoption, strong communities of developers, and continuously improving technology, the open source movement has strong tailwinds that could lead to truly massive scale.

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