Who needs an open-source strategy? You do

Proprietary software companies need to find ways to fend off low-cost rivals. Buying them might be a great way to start.

It's no surprise that Oracle CEO Larry Ellison is on the prowl to acquire more companies, as reported by CNET, given that it gives him a chance to go shopping on the cheap.

.If times are tough, there are other opportunities...including making acquisitions that cost less... (A)cquisitions that we've been looking at for some time are less expensive for us.

Is Red Hat one of them?

I hope not, but there are plenty of good reasons for Oracle to be looking at acquiring an open-source company like Red Hat, or to be contributing significantly to various open-source projects. Open-source companies like Pentaho, Digium, and others should be attractive buys and open-source projects should be compelling strategies right now, for a few different reasons:

  1. Open source provides an efficient way to attract new customers. Oracle, IBM, SAP, and others spend huge piles of cash attracting new customers. Meanwhile, open source keeps making inroads at the departmental level of large companies and is using such beachheads to expand into enterprise-wide use. Sun is using a variant of this strategy with MySQL: MySQL gets the CIO's phone number with a free download; Sun follows to get the CIO's wallet with not-so-free systems.
  2. Open source provides a clear up-sell opportunity for proprietary software vendors. IBM for years has been acquiring (e.g., Gluecode) or building (e.g., Linux) low-cost alternatives to its high-priced proprietary offerings, both to serve as "low-end" gateways to its higher-margin proprietary offerings like Websphere.
  3. Open source provides a way to maintain existing customers by offering low-cost alternatives in case a customer plans to replace his or her products. There will be a flight to value in this recession, as in others. By keeping that low-price, open-source rival in house, proprietary vendors can ensure that customers seeking lower-priced offerings will find them...on these same vendors' price sheets.

In these ways, open source offers proprietary vendors a way to enhance, rather than to replace, their offerings.

Left to themselves, open-source vendors and projects will continue to eat away the revenue streams of proprietary competitors. It has boggled my mind lately to see proprietary vendors still hoping to compete with deficient software and price tags of $2 million or more for business problems worth $100,000 to $200,000, when the customer is fully aware of superior open-source solutions. It won't continue.

An IBM may be impervious, but most proprietary vendors are not. Not for long, anyway.

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