SugarCRM vs. Salesforce.com

I'll say one thing for SugarCRM, they certainly have generated a lot of buzz. I don't know anyone actually using their system, but there are a lot of people talking about them. Now the question is whether they can turn buzz into commercial success.

One thing the company has going for it is its choice of markets. Since Low Price x Low Quantity is not a recipe for success, the key for Sugar, and all Open Source companies, is volume, volume, volume. Like Open Source success stories RedHat and JBoss, Sugar is playing in a market with enormous opportunity. At an average of $350 per user per year and 20 users per customer (Salesforce.com's average), the company will reach the IPO escape velocity as it closes in on 10,000 customers. Since the number of potential businesses that can use CRM is measured in the millions, that certainly seems possible.

However, one key difference for Sugar vs. other Open Source successes is its competition. From our interviews with Open Source users, the vast majority are attracted to Open Source because of price. Linux/RedHat was able to offer Unix functionality at lower than Microsoft prices - something Sun, IBM, and HP couldn't match. JBoss could comfortably undercut BEA and IBM without fear that those companies would respond with price cuts of their own. Their cost structures couldn't support it.

To be sure, Sugar is underpricing Salesforce.com - $40 per year list price for an OnDemand user vs. $65 for Salesforce.com. However, even if that relatively small price differential is enough to sway people to choose a company other than the market leader, it isn't clear that it is sustainable. A quick look at Salesforce.com's income statement shows a company with 10% net profits. For Sugar to be break even at a price 39% lower than Salesforce.com's, the company would need to have much lower cost structure. Given that Salesforce.com is already lean and mean, I'm not sure how that is possible.

That leaves Sugar with precious little to differentiate their business.

• Alternative Delivery Methods: Sugar offers an installed version and an appliance. The success of Salesforce.com has already shown that the market has voted against installed. As for appliance, if it really takes off, expect Salesforce.com to follow suit.
• Code Customization: This is a relatively small segment of the market. Few Open Source users ever touch the code.

Ultimately, the biggest argument for their success is that they can be the AMD to Salesforce.com's Intel, the Sybase to their Oracle - a distant number two who does reasonably well simply because the market is so big. In the meantime, don't sell your Salesforce.com stock.

Another Look at Open Source

In an earlier post, I argued that Open Source had devolved into a brand name for low cost software because the vast majority of users never touched the source code or contributed code back to the project. 

However, Billy Marshall, the CEO of rPath, rightly pointed out to me that there is a second segment of companies using Open Source who do modify the source code - ISVs.  The traditional paradigm of developing commercial software products is to build and test the product on multiple, specific hardware and software configurations.  That approach is now changing as virtualization technology matures. With virtualization, ISVs now have the option of writing and testing their software on a single configuration and then wrapping their code in a container that can be seamlessly deployed on a wide variety of hardware and software platforms.  Using this alternative approach, ISVs can redeploy a large portion of their engineering resources from porting and testing to building value-added features.

One of the offshoots of the virtualization is that the end user is isolated from the infrastructure decisions of the ISV. If an ISV decides to deploy their solution on customized versions of Open Source packages that are optimized for their specific needs, it has no impact on the end user. All the end users see is the virtual container. This ability for ISVs to customize the infrastructure is what creates this second segment of Open Source users.

When you start considering the business opportunities that will be created by the emergence of ISVs using customized Open Source products, it quickly becomes clear that the beneficiaries will not be companies using the standard model of commercial Open Source like RedHat.  Those companies' businesses are built on standardization - supporting very specific configurations across a large number of users. In contrast, this second segment is defined by variety - each ISV customizing Open Source products to meet their specific needs.

In our view, this creates the opportunity for a new set of companies to emerge who offer ISVs solutions for handling the complexity of managing and deploying software built on customized infrastructure.   If you know any companies that fit that bill, this would be a good time to invest.

Is Open Source Just a Brand Name for Cheap Software?

I recently attended the Red Herring East conference and sat in on a panel discussion on Open Source.  Most of the panelists and many of the audience were critical of Open Source companies for their failure to deliver against many of the promises of Open Source.  The two top complaints were:

• Open Source companies that incorporate little or no code from the community. JBoss was held up as an extreme example of this behavior.
• Open Source companies do not provide support to customers who modify the source code.

I can certainly see how these types of behaviors could be seen as troubling.  Open Source code was going to be better than traditional software because it would be enhanced by the collective wisdom of the community.  It would also offer its users the flexibility to customize and modify it as they needed.  Shutting out external developers and eliminating support for people who modify it flies in the face of those ideals.  I'd like to take these criticisms one step further and make the following claim:  What Open Source has evolved into is just a brand name for cheap software. 

In our interviews with hundreds of users of Open Source, we consistently hear the same feedback:

• "I didn't have a big budget so I took a look at what was available in Open Source."
• "I have never modified the source code."
• "I have never contributed anything back to a project."

The net net: the overwhelming majority of Open Source users are interested in Open Source software just because it is cheap.

Is this a problem?  No! 

The history of the technology industry is replete with examples of technology movements that fell short of their original goals.  Unix was going to enable applications to be easily ported from hardware platform to hardware platform and free companies from vendor lock in.  XML was going to make integration quick and easy.  Object oriented programming was going to make software development into a snap by creating libraries of reusable objects.  While all of these technology movements fell short of their original visions, they all have created tremendous value. 

Open Source is the same.  While Open Source has not lived up to all of its early hype, it has reduced the cost of certain types of software by 80%, 90% or even 100% for users who do not need any value added services.  It has freed hundreds of millions or even billions of dollars in IT budgets and it has made software available to millions of users who otherwise could not have afforded it.  Instead of lamenting Open Source's shortcomings, let's celebrate its successes and move on to the next big software revolution.