Can open source crack the "B" barrier?

Stephen O'Grady apparently spent last week at the wrong conference. He came away from OSCON wondering if open source companies can ever reach the $1 billion mark in sales. He writes:

As stated at OSCON, I believe both that open source has reached and in fact passed the tipping point and is here to stay, and that it has a bright future. At this point, however, I do not expect any of the major pure open source firms to challenge the billion dollar threshold any time soon. The numbers - those that are available, at least - simply don't support such a conclusion. But neither do I consider that a metric for success.

What's interesting to me is that the very same numbers - at least, I assume we have access to the same data - tell me a very different story. Red Hat will hit the $1B mark in 3-5 years, and will likely do so without seriously tapping into the gold mine that is Windows territory. Other companies - JBoss ($60M this year) and MySQL ($80M) - are also on track. Heck, I'd even put SugarCRM and Alfresco up there as being on rocket ship trajectories to the $1B mark, though we're a few years behind.

Stephen is a smart guy. But he's wrong on this one. He's right on the customer benefits of open source ("[I]t does benefit customers by lowering pricing and increasing choice"), but I think he's wrong about focusing on volume over conversion rates:

The history of software, however, whether we're talking Microsoft or Linux, would seem to indicate that the best approach to wealth creation lies in volume rather than margin. So in that at least, the open source approach is sound. Were I an open source business then, and I suppose in a way we are, I'd focus on growing volume, community, and mindshare rather than the rather abstract dollar metric.

Yes, by all means focus on volume, but it is precisely that focus - with a corresponding lack of focus on improving conversion rates - that arguably does match Stephen's bleak picture for open source stuck in "M-mode" (i.e., millions mode).

To get the full story on where open source business is going, you have to look at the new business strategies the rising vendors are employing. My own company, Alfresco, is aggressively "pushing the pull," as I term it (and as I presented at OSCON). We're not taking rising download volume for granted - take a look at the JBoss download numbers in the link above, and you quickly see that the downloads for any project will largely plateau, forcing you to find ways to boost "second sales" (renewal rates) and to improve conversion rates (and conversion value - i.e., the size of the resultant deal) by raising brand awareness and product quality. So, we get involved early into the process and now have an enviable conversion rate that exceeds the numbers Stephen cites (which conversion rates we're bumping further with some added product enhancements that we learned from JBoss, Red Hat, and SugarCRM). Speaking of SugarCRM, they have also found some clever ways to turn downloads into dollars.

The point is that we should not look backward and say, "Well, I don't see any billion-dollar open source businesses in the past, ergo, I think there won't likely be any in the future." Stephen wasn't exactly saying this, but I do think he was relying on outdated data and business models. (I'm not sure how he doesn't look at Red Hat and its remarkable business model, and clearly see the $1B mark, but I'll have that conversation with him at the next conference.)

My only disappointment in all this is that I won't be the first to hit $1B. That has long been my goal: build the first $1B open source software company. But I'm happy to see the success of others', and am grateful for how much easier companies like Red Hat and MySQL have made it for new companies like mine to achieve that same level of financial success. (Having said that, ever counted the number of $1B+ proprietary software companies? There aren't many.)

Even more than the cash, however, I appreciate how they're doing it. Anyone else notice that pureplay open source seems to mint more money than the hybrid models? There's a good reason that Red Hat is banking hundreds of millions of dollars in Linux sales each year, and Novell is not. Part of that is the headstart Red Hat had, but much has to do with the message: 100% open source sells. All Red Hat had to do (and it was a stroke of absolute brilliance) was figure out how to give customers their cake (100% open source) while also providing a trigger to convince them to buy (and buy again when renewal time came around).

So, Stephen, $1B is the easy part. Doing it without becoming like the other billion-dollar players is the hard part. For that, I look to you to help keep the industry honest.