Open source in '08: Break-outs and consolidation

What will 2008 bring? Pleasure and pain in the open-source world.

Before I was a big-shot executive, the end of a year meant rest and relaxation. Now it's crunching fourth-quarter numbers and budgeting for 2008.

A friend in Japan read my fortune and told me that 2007 was my year of "turbulence," that 2008 is my year of "reunion," and that 2009 is my year of "wealth." Supposedly, 2010 will be "peace and stabilized," but at the rate I am going I can only hope to make it that far.

One full calendar year later, I am still happy that my company (MuleSource) gives software consumers a choice about the technology they use and ultimately, we, like the rest of the open-source vendors, bet on the fact that adoption eventually equals dollars. Having been a software consumer that felt burdened by proprietary products for most of my career, I retain a strong desire to flip the software industry on its head.

There is an inevitable flow of events in which software companies will either get on the path or be left behind. If you start a software company today that is not SaaS or open source you are betting that the market will somehow revert to 1999. And I think we all remember what happened in 2001 here in the valley.

Two years after founding this company I believe more than ever that open source is a question of when, not if.

So what happens in 2008? I think we'll see the beginning of a few major trends in open source: break-out stars (like MySQL), consolidation by big vendors (like Oracle) or stronger OSS players (like Red Hat), and fire sales at the companies that got funded but couldn't make it happen. It isn't clear yet whether these will be happy or sad trends, but I am fairly certain they will happen.

In terms of consolidation I think there is a strong likelihood that a major software vendor (SAP, Sun, IBM, HP, Microsoft, Oracle) finally goes whole-hog on open source and buys the leaders in each segment. I would expect the leaders to go at a premium, but that won't matter because the gains won't be achievable otherwise. I also expect one of the aforementioned companies to buy more than one leader--essentially becoming the open source IBM. My bet is on SAP, which despite not remotely understanding open source has a ton of cash and needs more markets outside of its core ERP and BI. Alternatively, I would love to see Cisco take software seriously.

Beyond acquisitions, I expect a number of smaller open-source companies--those that are in a cheaper investment position, maybe those in need of a B round of financing--to band together or flame out. So far these have been few and far between, but I blame most of that on a lack of business sense. Open source will not be unique from a start-up perspective: there will be lots of companies that don't make it. The smart ones will figure out their weak spots sooner and address them ASAP. The smart ones also hired the best team possible to be successful.

To that end, I anticipate we'll start to see more "business" people brought into open-source companies as investors start to get concerned about their money and proving business models. A $4 million investment in an A round is a bet; a $10 million investment in a B round means you want to make real money. Many open-source companies are still run by engineers who can drive a company to a point but need to realize when the business part takes precedent over the technology.

My biggest learning in 2007? There is no formula for success, especially when you are following a new business model. There are definitely things you glean from other companies, but no two are alike, and to think you can emulate another succesful start-up or BigCo is naive. All the me-too companies of Web 2.0 will be deservedly dead sooner rather than later.

In comparison to Web 2.0 or SaaS, open source is infinitely more valuable, simply because there is code that is accessible to the masses. When the bubbles all burst, at least open source lives on.

I'm currently reading The Halo Effect...and the Eight Other Business Delusions that Deceive Managers, which is the must-have management book of the year. And not because it gives you formulas, but because it forces you to think about your business.

Reliance on contaminated data leads to other errors, the most important of which is the widespread notion--explicit in Jim Collins's work as well as that of many other management gurus--that companies can achieve success by following a formula.

That's it for now. Best of luck to everyone in the new year. And here's a reminder to proprietary software vendors: we are out to kill you.

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