What ails commercial open source software companies?

Open source software is mainstream, open source has made (and continues to) the world (not just IT) a better place in many ways. There are many example of open source software ( Linux, android, chrome etc) to open source projects (gov data, open hardware, educational contents etc) However, we can’t say commercial vendors of the open source software have been very successful (upward of $500 million and profitable) in selling their subscription model and create a robust business – of course the most notable exception to this is Red Hat. Although, of late, there have been investments in and buyout of some of the commercial vendors and I wrote about it in my blog ‘Millions of Dollars in open source software business ..’, I feel these investments are more based on the promise than the past performance.

Why are commercial vendors struggling to grow despite being in the business for around 10 years or despite the fact that open source project has seen very high popularity (number of downloads), active contributors and deployments in large orgranisations in real projects.

Based on my experience working at Red Hat for 8 years (from 2001 to 2009) and later on 6 years dealing with many of these commercial vendors I can point out few areas that these companies are not able to address or areas that they need to improve upon. At Ashnik we deal with some of the leading names of these commercial vendors and hence I am not going to name any one in particular.

Focussing on free download or community edition deployment –

I have seen many sales executives building their business model or selling the potential of commercial success to the partner network based on these numbers. The reality is that those customers who have downloaded open source product and have deployed the community edition in real projects have tasted the joy of ‘free’ and ‘great product’. Now going forward these customers build their IT budgets attributing zero cost for these products. There is hardly any reason for them to pay for the subscription. For a sales person these are the most difficult customers to deal with. You can’t build your business based on this pipeline. Only thing is these customers act as endorsement for quality and usefulness of the product.

Distributor / reseller model in the initial phase –

Many of the commercial open source software vendors appoint traditional software distributors and resellers. It looks great on the paper that you have a reach in the market and now you can sit back and watch your cash register ticking. But this has not worked at all. The reason is for the open source product you need to go out and create a strong demand for buying subscription along with the awareness of the product. Many vendors that I have seen have tried to piggy back on the success of the open source project and assumed that customers would buy subscription through resellers. But without on-the-ground engagement with customers there is not going be a demand for subscription. This needs a ‘push’ strategy. Whereas reseller network is (in general) geared up to address ‘pull’ demand – which means customers calling and asking for the price of a product.

In such a scenario, it is important to appoint resellers who would go out in the market and create a demand. For this, commercial vendors need to create different margins and engagement model for the reseller. Most of the vendors have not shown understanding of this need.

There is one more reason coming in way of convincing the resellers to put in extra efforts to create pull from the market and it is about thin margins in net dollars. The open source products typically are priced much lower than proprietary products, hence even a higher %margin and promise of annual subscription does not given enough incentives to the reseller to invest in setting up sales and pre-sales team for these products.

This challenge can be addressed with innovative approach and identifying right partners. ( I can say that we have been able to guide and setup such models with the commercial vendors where they were open for discussions).

Sales and Channels team composition –

We all know that it is the people who make difference in success and failure. I believe that good sales people and people with adaptability would fit in any company, but we also need to understand that selling open source software to customers and building partner network needs additional understanding of the business. Many commercial open source vendors tend to recruit people from proprietary software vendors (typically their respective competitors). But I have seen that this approach has not worked for most. First of all the cost of these sales people is high and they have to go through steep learning curve that results in longer time to deliver. In many instances I have seen that these people have antagonized the reseller network with their approach (that comes from the business which operates on ‘pull’ model) and failed to capitalize on the goodwill of the open source project. Hence just recruiting your team from your proprietary software competitor is not a guarantee of success – rather most of the time it is counter productive.

 There are other areas that are equally applicable – whether you are open source or proprietary software company – to be successful in growing the sale and smart executives understand those things very well. What matters in case of commercial open source company is an understanding of the peculiarities of open source business and address them effectively.

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