Open source and software licensing

It seems that SCO is making another attempt to hurt the open source movement by claiming that the GPL is unconstitutional and violates federal patent and copyright laws.  While many are not concerned and call this a publicity stunt by SCO, the discussion of open source software licenses does remind me of a panel that I recently saw at the Goldman Sachs Software Retreat 2 weeks ago.

On the panel you had representatives of RedHat, MySQl, and JBoss combined with the perspective of a large IT buyer, the CTO of Goldman Sachs.  While I will not fill you in on all of the gory details, one thread did stand out in my mind.  It goes like this:

It seems that many of the bigger open source players are building out their own stacks ala Microsoft and others in the pursuit of growth and profits like traditional closed-sourced software companies.  Isn’t this the antithesis of what open source stands for?  Rick Sherlund, Goldman’s software analyst, says that it makes sense from a financial perspective since it allows vendors to cross-sell and lock-in the customer – customer retention is a good thing after all, isn’t it?  While all of the open source players did their best to dodge this question and claim that they are really open, MySQl was the only company that really seemed credible here as its goal was to be part of everyone’s stack, including the Microsoft .NET one.  JBoss and RHAT clearly seemed to be building their own middleware and open source stacks while at the same time claiming an open architecture. 

The interesting point was served up by Michael Dubno, CTO of Goldman Sachs.  He specifically told the vendors that the danger of the open source stacks is that it does create lock-in and that open-interoperability is what is most important to him.  He will go somewhere else if the open source guys end up limiting his options-he needs great service not extra features.  Moving on, he points out that the biggest gaiting factor for him in terms of adopting open source is making sure the legal issues will not come back to haunt him.  Goldman reviews every license agreement and makes a determination of which licenses make sense and which do not.  What Michael wants is integration from a legal perspective, not a feature perspective.  He claims the biggest cost to Goldman is not 2 products, but the cost in service and supporting 2 different contracts-he wants more standardization of contracts.

I found this to be an interesting point. I have seen a number of open source related software plays and it seems that many are trying to create their own unique twists on licensing.  While Goldman’s CTO is one data point, I would encourage companies looking to open source some of their software to try not to be too cute and design their own unique open source license but rather look to leverage existing ones like GPL.  One of the biggest barriers to a large enterprise using your software will be the software license itself.  The other point is to not forget why lots of companies are using your product in the first place – be open!

Innovation is not dead

Here is another example of why commoditization is not killing innovation. In fact, it can and has given a number of companies a leg up in terms of developing and deploying new products in record time and at low costs. Using so-called commodity software and hardware actually does not kill innovation but speeds it up.

For example, Metapa, one of my portfolio companies, has begun shipping a software product (Metapa clustered database) that enables customers to deploy terabyte scale data warehouses on clusters of commodity computers running open source software. To that end, the company just announced a joint customer win and partnership with Sun.

In the press release, Jeff Mayzurk, VP of technology for E! Networks, says:

“Deploying a unified data warehouse has always been a strategic goal of E!, but with the total cost of ownership associated with traditional solutions, it hasn’t been practical. Metapa and Sun provided a truly unique solution allowing us to implement an enterprise class data warehouse with the price/performance level that makes our initiative possible.”

Dave Powell, CEO of Metapa, goes on to say:

Metapa and Sun are excited to announce E! Networks as a joint customer and a flagship example of how companies can capitalize on the performance advantages and operational returns of open source and commodity computing for data warehousing,” said Dave Powell, president and CEO of Metapa. “CDB leverages commodity computing, open source database technologies and breakthrough parallel processing algorithms to deliver unprecedented price/performance when compared to traditional, proprietary database solutions.”

To reiterate, commodity computing and open source software can enable breakthrough solutions such as what Metapa is delivering with Sun X-86 hardware. My hats off to the team at Metapa for making this happen. In addition, I love having an early customer win that is referenceable and with a partner that can help replicate this win in a big way.

On technology commoditization

If you ever wondered how Sun monetizes Java, I suggest reading Jonathan Schwartz’s (President of Sun) post on commoditization, standards, and Java. The crux of his discussion is that standardization and commoditization is not terrible as it inevitably opens up new market opportunities for industry players (just look at the railroad industry as an example). On the tech side, Jonathan believes it is mainly bandwidth that has been commoditized as opposed to a broader trend in software.

So I’d like to answer once and for all the question, “how does Sun monetize Java?” with a historical reference: the same way GE and General Motors have monetized standard rails, Vodafone monetizes GSM, banks monetize ATM networks, and oil and gas companies monetize the fact that my car can use “gas.”

The Java community, which we steward, drives a broad array of platform standards, among an even broader array of industry participants. That activity levels a playing field, that just so happens to be the single biggest playing field the technology industry has ever seen. The network is a commodity. We should all be celebrating.

In some respects, one could view commoditization as a bad thing as it is difficult to differentiate one product from another as they are easily replaceable based on price alone. However, what Jonathan is saying and what I agree with is that it is what you do with the commodity bandwidth, standards, and platforms that separates the winners from the losers. Sure, companies are all on a level playing field due to advancing technology and platforms. For example, with standardization, building new software and technology products and integrating them with existing solutions takes much less time and costs way less than ever before. Despite that, we continue to see innovation and new business models. The value just resides in a different layer. While Jonathan would like to believe that the creation and promotion of Java would soley benefit Sun, his argument is that it makes the market bigger for everyone, including Sun, so that is a great thing.

The one thought that could cause worries is that if you buy into Jonathan’s story of commoditization, the inevitable result is that the industry will consolidate leaving only those with scale and monopoly power to survive. Just look at the examples from his post – GE, GM, Vodaphone, and banks have benefited from standardization. Well, those are all big guys. In my mind that’s ok, as consolidation will be a long time coming as we are in the very beginning of this commodity movement in the technology space. Sure certain markets are in more advanced stages, but overall as an entrepreneur and venture investor you will have plenty of chances to make your impact. Remember, as markets commoditize, new opportunities will continue to arise, huge ones that we never even thought of today.

Has the individual investor learned a lesson?

There have been a number of IPO fillings recently, but the one that intrigues me most is the filing by Lindows. As many of you have read, Lindows/Linspire just filed an S-1 to raise $57 million in an IPO. WR Hambrecht is the lead underwriter and will utilize its dutch auction methodology to raise money from individual investors. In my mind, what happens with Lindows will be a barometer of the psyche of the individual investor. It well tell us whether or not the individual investor learned a lesson from the bubble. It will tell us whether or not speculation will run rampant again. As you know, I do find Linux on the desktop intriguing. That does not mean that I believe this is the year and that you should go public now on $2.1 million of revenue in 2003 with a net loss of $4.1 million. On top of that, of the $57 million they are raising, $10 million is going to pay off Michael Robertson, the CEO, for a line of credit he extended the company over the past couple of years. As per the filing,

The approximately $10,400,000 of net proceeds that we intend to use to repay outstanding debt obligations will be paid to Michael L. Robertson, our founder, Chairman and Chief Executive Officer, as payment in full of all remaining outstanding amounts under a revolving line of credit. Mr. Robertson has advanced us funds under the line of credit since July 2002, including advances of $5,600,000 during 2004. Amounts borrowed under this loan are used for our operating expenses. The loan bears interest at the rate of 10% simple interest per year and matures on June 30, 2005.

So not only is this a speculative offering, but also one where the largest shareholder gets paid back $10 million off the top. Michael did pay $4.5 million for the shares that he currently owns but 2/3 of his total capital will be off the table. So how much skin in the game will Michael really have to make this company work? Does this sound like a good investment to you? I am not opposed to the dutch auction and do believe that the methodology has a place in some deals. My big fear is that if this deal does happen, it will only confirm my belief that the individual investor never learned a lesson from the bubble. For the individual investor to forget so quickly about all of the pain and suffering we just went through really scares me.

Linux on the desktop (Continued)

I have written about linux on the desktop in the past (here and here). Today, my partners and I installed the latest version of Xandros 2.0, and I have to admit we were blown away. It installed in about 10-15 minutes with a couple clicks of the mouse, and we had a full working version of a linux desktop which looked and felt like a Windows machine. It partitioned our hard drive so Windows and Linux could run on the same machine (if you really want it to) and allowed the Linux desktop to seamlessly interoperate with my Windows network. The file manager was just like Windows Explorer, and I could easily find, use, and set permissions on my old files. If you have not tried it yet, I encourage you to go to Xandros to buy a copy of the deluxe version ($89). The great news is that we were able to take an old laptop with a P133mhz chip and substantially improve the performance of the machine, extending its useful life. I am definitely going to install this on one of my old laptops at home. What is even more interesting is that with an integrated version of Codeweaver’s Crossover office, you can run many windows-based application seamlessly on your Linux desktop. Unfortunately iTunes does not work yet. Go to the site if you want to learn more about what other applications work. So the Linux desktop is here and much improved, and what is important is that it interoperates with Windows from a networking and management perspective, all very necessary when any enterprise looks at TCO (total cost of ownership). While I do not anticipate huge enterprise adoption this year, I definitely see less barriers to its adoption in the years to come.

Software co-op/software reuse

Lee Gomes from the Wall Street Journal wrote an interesting piece (sorry, not a free site) in his Portals Column about Project Avalanche which is essentially a software co-op for businesses to share their applications and code. Current members include Jostens, BestBuy, and Cargill. According to Lee, the Avalanche Project was started because the founders kept asking themselves the following questions:

“Why were they writing such big checks to their software companies, but getting so little in return? Why were their in-house programming staffs writing the same sorts of custom programs written at thousands of other companies? If Detroit car makers can collaborate on research, why couldn’t U.S. technology users?”

The project is in its early stages but has grand ambitions. One of the founding members discusses what would happen if the group banded together to create their own CRM system or their own Linux-based desktop environment, saving all of the participants lots of dollars on licensing fees. While the idea of software reuse is not new, as developers have talked about this for years, the implementation via a co-op is what’s unique. In addition, most of the other companies or sites that I have seen specialize in sharing snippets of code versus full applications.

If you are interested about software reuse, I encourage you to read up on a company I met with early last year, Artifact Software. Artifact Software has a tool that allows developers to collaborate and create a code sharing community. Its initial target market will be selling to enterprises, allowing their developers to collaborate internally to become more productive. However, its business model is to seed the target market with its tools by allowing users to download its product for free and share code via an open website at www.codejack.com. The website currently lists 33k artifacts of code with over 23k users. Leveraging the open source philosophy, Codejack is not only about searching and finding code, but also about testing, rating, and reviewing code. Other companies to keep an eye on include Component Source and Logic Library which is more enterprise-focused. While developers have been talking about software reuse and its ancillary benefits for years, I have no doubt that given a tough climate for IT spending and the acceptance of open source, that the idea for software reuse and collaborative development will become a big topic again. In the long run, I am sure that the members of Project Avalanche will contribute and develop some interesting software.

Thoughts on the Microsoft settlement with Sun

If you are wondering about why Microsoft settled with Sun, I suggest reading David Kirkpatrick’s excellent piece on the deal. In the article, David surmises that the power of the open source movement is really the driver behind the deal.

Open source’s influence is far greater than its current market share in software might suggest. The open-source model increasingly defines what’s possible in technology. What matters now is not where a technology comes from but how it works with everything else. Open-source software can be made to play well with others more readily than any technology we’ve ever seen. Even more than its low price, that’s why companies like it so much—they can modify its guts to their specific requirements.

Right on. This is not a story of free versus paid, but a story of freedom. If you talk to CIOs, you will consistently hear that they favor open systems and architecture, and that they do not want to be a victim of proprietarty vendor lock-in. While Windows still has a larger share of the server pie, what open source is doing is giving the customer choice, which ultimately gives them power, the power to demand interoperability or turn to another non-proprietary solution. Yes, there are other drivers behind the deal but as David points out now Microsoft and Sun can focus efforts to fight a more common enemy, IBM and the open source movement, which threatens their very existence and dependence on proprietary software.

Open source Router? Open source moves up the stack?

I finally got a chance to catch up on some trade rags and came across this interesting blurb from Network Magazine about XORP, the Linux of Routing. While an early project from UC Berkeley, I encourage you to take a look and keep it on your radar. This is yet another example of the potential commoditization of high-end products. Here is an excerpt:

“Since the routing code and the OS are free, the biggest expense will be the hardware. Commodity PCs make notoriously poor routing platforms, so they’ll need a sufficiently gast bus structure to boost their total processing and throughput. The recently standardized PCI-X 2.0 fits that billing, providing bus sppeds reaching 700,000 64-byte Ethernet packets per second. That’s good news not only on the performance front, but for the price tag as well. “A machine with 1GByte of RAM could easily be assembled today for less than $1,500,” says Orion Hodson, a XORP developer. By comparison, a Cisco 7304-Cisco Systems’ highest-grade enterprise router with software forwarding-runs $22,000.”

It is still early days for XORP and the platform still needs to address performance and security issues, but the point is that any software product with a large enough installed base can be vulnerable to open source competition.

Speaking of open source software, MySQL just announced a new version of its database which has built in load-balancing and automated failover so it can be deployed in large transactional environments. This is a big deal and grealy expands the market opportunity for MySQL and will better position it against Oracle and IBM. One other open opportunity for attack in the database market is the reporting and analytics end. One of my portfolio companies which I have written about before, Metapa, is leveraging open souce technology, mainly Linux and PostgreSQL, to deliver terabyte-scale data warehousing on a cluster of commodity hardware. The secret sauce is its proprietary Linux database clustering software which is “purpose-built” for Business Intelligence. In early benchmark tests, the product has shown up to 10-50x performance improvements over existing data warehouses run on traditional enterprise systems. So if I were an incumbent, I would be concerned about these developments.

Novell in Microsoft’s crosshairs?

Novell to buy Suse

“This is not about competing with Microsoft. This is about addressing the impediments holding Linux back,” says Chris Stone, Novell’s Vice Chairman in the office of the CEO. What a great quote! I have worked with Chris in the past having invested in his prior company, Tilion. Chris is a smart guy and thinks big. Who in their right mind will tell Microsoft that they are competing directly with them? But let’s face it, Novell’s strategy is to ride the Linux wave by offering a complete enterprise stack which includes server, messaging, access control and eventually desktop. Yes their desktop products acquired from Ximian and SuSE are immature and resemble a server trying to become a desktop OS. However, with time, I do believe that Novell’s ultimate goal is to get on the desktop of corporations. As for IBM’s $50mm investment in the company, who knows, but that could be a stepping stone for a possible acquisition if Novell is able to pull off its amibitious plans. At Tilion, Chris tried to revolutionize the supply chain industry by creating an on-demand view of the supply chain leveraging new technologies like XML. Backing Tilion’s vision in a December 2000 article from Internet.com, Eric Schmidt, now CEO of Google, commented, “Tilion finally allows large enterprises and exchanges to go beyond the simple enablement or automation of B2B transactions. Tilion allows you see into systems which were designed to be closed. This kind of net service will be what justifies the huge investments in B2B infrastructures and technologies such as XML.” We did not get very far with that vision as the supply chain market dissolved along with the rest of the software industry in 2001. It will be interesting to watch Novell during the next couple of years because we all know that it is about execution, and if Chris and Novell pull it off, it will be a big play. Of course the odds are stacked against them.

Linux on the Desktop (continued)

In an earlier post, I talk about 2004 as a year where Linux begins to make inroads on the desktop. Here is a recent article from Infoworld suggesting the same. In the article Nat Friedman, cofounder of Ximian which was recently sold to Novell, makes some interesting points.

1. It is not a David vs. Goliath battle where Linux fells Microsoft with one swift blow;
2. Desktops for Linux shouldn’t try to look like Windows.

To dive deeper into point #2, Friedman says, “What you’re doing is lying to the user. What you want to say from the outset is, ‘this is a different desktop experience, but it’s going to be easy.” On the one hand he seems to be saying this because the user experience on Linux should be better, more reliable, and more secure. On the other hand, I disagree because from a business perspective corporations usually pursue the path of least resistance. If a Linux desktop acts and feels like Windows it means that corporations will not have to train their employees on a new OS. This saves a company potentially lots of hours and $$$ and lowers the Total Cost of Ownership of the product.