Is the OSS business model inherently monopolistic?

July 16th, 2007 by Roy Russo

Both Dave and now Matt have posted blogs on open source companies that compete amongst themselves, instead of going after the big money their proprietary competitors hold. I do agree with them, that if an OSS company is focusing on its OSS competitors, it will likely fail as a venture. Common sense dictates you follow the money, and in most markets, “the money” is in the pockets of the proprietary players.

Why does this happen? The main benefits, in my view, of adopting an OSS business model are: a/ disruption and b/ commoditization. I believe much of the OSS vs. OSS competition we see is based on fear; the fear of not being able to compete with an equally disruptive force, and losing control of the rate of commoditization in the space. After all, OSS companies typically don’t fear their proprietary competitors (they’re easy to pick on), but an OSS competitor armed with the same tools as you, can wreak havoc on a market, leading to the “race to the bottom” effect – where markets are commoditized to the point of meager profits. Hence, the goal of most OSS companies is to control the rate of a/ disruption and b/ commoditization – control those rates, and you control your market share and revenue growth. ;-)

Dave suggest a few examples of some companies that ignore other OSS vendors in their own markets and are winning:

Who does Zimbra target? Exchange, not Open-Exchange. Who does Alfresco target? Documentum and Microsoft Sharepoint, not Drupal. Who does JBoss target? BEA and Oracle, not Jonas (or Tomcat or whatever.)

Interesting set of examples… The JBoss/Jonas story proves his point: At one time, JBoss and Jonas were similar in their technological merits. JBoss, however chose to ignore Jonas and target the big fish; IBM, BEA, Oracle. Where is Jonas today? RHT bought JBoss, dropped Jonas from their distribution, and Jonas flounders about somewhere in EU with Michael Hasslehoff fans. Clear winner: Jboss. Alfresco / Drupal is not apples to apples, so I’d ask where are the viable Alfresco competitors? Alfresco has cemented its leadership as the only viable OSS DMS vendor, as new entrants would have to deal with a high barrier to entry. Clear winner: Alfresco. Open-Exchange – I’ve never heard of them, and chances are in a few years, they’ll be relegated to be a niche player thanks to Zimbra.

So what is Dave telling us with his citations? OSS companies focusing on the proprietary competition win-out in the end, but if history is a guide, they also manage to squash their own OSS competitors by doing so.

Matt expanded on Dave’s point, and inched toward the monopoly topic:

[…] if a market only has room for one open source vendor, it’s not a market worth competing in. I’m not sure why VCs don’t get this, but I refuse to believe that the first open source vendor in a market is necessarily the best/the ultimate winner. The market is, or should be, too vast for any one open source vendor to consume all of it.

I don’t believe that the “first open source vendor in a market is necessarily the best/the ultimate winner”, but I do believe that the first one in a market raises the barrier to entry, effectively closing the door behind him. Would you want to enter a market against Alfresco at this point? How about competing against JBoss? (Heck, IBM had to go and buy Geronimo, just to sick some sort of leashed dog on JBoss.) Any takers on starting a new MS Exchange competitor? I disagree with Matt here, I think the VCs have it right – they’re looking at how your new startup plans to compete against FREE, and I’d love to be a fly on the wall for that pitch.

This remains an interesting topic for me, as I’ve always wondered if OSS business models by their very nature lead to monopolies and maybe oligopolies. I’d love to hear examples where they don’t – where, as Matt claims, the markets are vast enough for everyone to play.

I’ll note that there are interesting things happening in the server/network monitoring spaces and there’s JasperSoft/Pentaho as well. It will be interesting to watch how these companies grow and compete. My guess is that a few years from now, one OSS vendor in each of those spaces will exist, relegating its OSS brother to some insignificant niche.

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