Software Pluralism

Software Pluralism

Business Strategies

Abstract

This article discusses some of the business strategies used by firms engaged in open source activities.

Business Strategies

From a value chain standpoint, faster development and cheaper marketing are two key reasons for tech firms to adopt the open source model. From a business strategy standpoint, there are four primary reasons for firms to engage in open source activities and endorse the open source movement: to drive up hardware sales, to generate revenue from support and services, to cater to diverse product lines, and to fend off competitors.

Linux became a viable program when Linus Torvalds added a Kernel to GNU, a Unix-like operating system for a 386-based PC. The GNU Project had been started by Richard Stallman and the Free Software Foundation in the 1980s. The commoditization of the personal computer brought economics of scale to the Linux operating system, driving Linux-based applications up the software stack. The availability of the Linux-based applications and no or low costs of the software, in turn, helped sell more hardware. These are compelling reasons for companies like Intel, IBM, and HP to embrace the open source movement. Intel's efforts in promoting Linux have been historically in the server market. Beginning in 2005, Intel also started to work with sales partners in China and India to boost Linux in the desktop PC market where Microsoft Windows dominates. With the efforts to make it easier for sales partners to install Linux operating systems, Intel expects to sell more hardware in the third-world price-sensitive markets.

Although open source systems and applications are spread across the software stack and are reliable and robust enough to fulfill mission-critical implementations, the lack of in-house experts and in-time support from the volunteer-based open source community is one of the primary reasons for the reluctance of corporate IT departments to enthusiastically embrace open source solutions. This gap opens up opportunities to generate support and services revenue. Firms may package and distribute open source operating systems and general-purpose software, provide training, documentation, upgrades and other support to customers. This is the strategy taken by Red Hat and Novell. Alternatively, firms may participate in a specific open source development up the software stack, while generating revenue from customizing the software to meet customers' specific needs. Firms may also provide system integration, testing, maintenance, and other services. This strategy is the most active and growing segment in the open source area. Many established firms, like IBM and HP, see their open source-related revenue growing significantly these past years. Take IBM, for example. After spending more than $1 billion to promote Linux,IBM sells more hardware and services. HP's performance in the open source field is also phenomenal. By 2004, HP, with a No. 1 position in worldwide Linux server market share for 27 consecutive quarters in both revenue and shipments, had achieved a tenfold increase in its Linux support services and subscription revenue. Moreover, as open source enters into the mainstream IT arena, consulting firms such as EDS, CSC, and Cap Gemini Ernst & Young have expanded into offering support and services for open source migration, integration and maintenance.

Participation and involvement in the open source movement benefits for-profit organizations in many ways. Proprietary software firms, like Oracle and BEA, also offer limited open source versions of their products. With a mix of proprietary and open source software in the product lines, these firms intend to follow the trend that more and more corporate customers maintain a hybrid of systems in the IT department. With various applications freely available in the open source development communities, customization and enhancement of a specific application is much easier with limited up-front investments, and software firms ship products to market faster. Take BEA System Inc., an e-commerce transactions company providing application infrastructure software to its customers. BEA donates its Beehive open source tools to the Apache Software Foundation in the hopes of attracting developers worldwide to build applications for the company's WebLogic Server platform. With more applications running on the platform, the source of revenue expands.

Open source has been viewed as a strategically valuable weapon to compete in the IT industry. For example, IBM's aggressive open source strategy puts HP and Sun on the defensive, and Microsoft might find it tough to win in the enterprise software market. In August 2004, IBM donated more than half a million lines of code, valued at $85 million, from one of its leading database products to the Apache Software Foundation. It is one of the largest transfers of proprietary code to the open source community, with the intention of attracting more software developers to write applications in the Java programming language. This code contribution from IBM is viewed as a tactical move to make more applications available to IBM's software platform, known as WebSphere. In the software platform arena, WebSphere competes with Microsoft's .NET. IBM also succeeds in building a vibrant open source community around the Eclipse programming tools, which were originally IBM's proprietary software. It is a fact that the more applications running on a platform, the more viable the platform to the customers. In this sense, one of IBM's open source strategies falls into the forth category: aggressively fending off competitors.

In another high-profile move in January 2005, IBM gave away 500 software patents to the open source community. These patents ranged from data storage to networking to electronic commence. Moreover, IBM has teamed up with Red Hat for a range of initiatives, aimed at winning users of Sun's Solaris operating system over to Red Hat Linux. As incentive, IBM's System and Technology group offers free migration assessments to Solaris users on costs and benefits of using Red Hat Linux. Riding on the timing that much of Sun hardware acquired during the boom years is depreciated and replaced, IBM bundles its free assessment services with its own hardware. There is little doubt that the Solaris-to-Linux migration brings a string of revenue (hardware and after-sales support) to IBM and further erodes Sun's share of the market.

To protect its ground, Sun Microsystems released more than 5 million lines of Solaris code at www.opensolaris.org, a move to regain lost relevance and fend off IBM and Microsoft. However, without making Java open source, the open source community still holds conservative opinions toward Sun and its involvements in the open source movement.

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Conclusion

From a business strategy standpoint, there are four primary reasons for firms to engage in open source activities and endorse the open source movement: (1) to drive up hardware sales, (2) to generate revenue from support and services, (3) to cater diverse product lines, and (4) to fend off competitors.

References

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