The Open Source Software Threat – Wait, It Gets Worse!

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The direct threat of open source software (OSS) to the flagship products of the major commercial software vendors is accelerating with the growing maturity of the open source movement, even as the impending move to the cloud opens another broad avenue for OSS incursion.  We believe that this will be a substantial challenge for commercial software vendors, particularly those whose primary business is in infrastructure, tools and/or middleware software where the threat from OSS is most acute.  Applications are less threatened by OSS, except where products are reaching maturity.  Successful cloud hosts will be the biggest beneficiaries, with opportunities to drive their own applications as differentiated SaaS offerings.

OSS, which is defined by open licensing with rights to adapt the underlying source code, is not synonymous with “freeware”.  Many open source platforms, such as Android and JAVA, are owned and licensed by commercial entities.  Others – Linux, SQL, OpenFlow, etc. – may be available in the public domain, but require commercial support to make them viable enterprise solutions for any but the most sophisticated organizations.  Typically, OSS-based solutions are brought to market with licensing and maintenance fees, but at significant savings vs. closed proprietary commercial software.

Historically, closed software vendors have sold their products on the basis of proprietary functionality and performance advantages vs. open source.  Over the past decade, OSS has closed those gaps in many categories, as time yields product maturity.  As such, OSS is extending its appeal to less sophisticated IT shops and gaining credibility for mission critical systems.  Some large organizations are implementing hybrid solutions and shunting growth to OSS platforms to avoid exceeding seat limits for their expensive closed systems.  While not a sea change shift, these subtle changes siphon off growth opportunities and create price pressure for many software companies.

The impact is heaviest on infrastructure, tools and middleware software, where switching has lower costs on end users and where focus on virtualization and the cloud puts a premium on flexibility.  A Gartner survey of 547 global IT organizations showed that nearly 80% were using OSS solutions in at least some areas, with a third using them comprehensively or as a strategic tool to gain competitive advantage.  The biggest reason for adoption was to achieve strategic IT goals, such as flexibility, openness, and speed of implementation, followed by cost considerations.  The top five areas of OSS use were Data Base Management Systems, Server Operating Systems, Office Suites, Client/Desktop Operating Systems, and Application Development.

Many leading commercial software vendors have acceded to enterprise demand for OSS by offering open source solutions of their own.  For example, Oracle offers MySQL as an alternative data base solution, IBM offers Xen OSS virtualization, and even noted open source hold out Microsoft has pledged support for the emerging Hadoop open standard for business intelligence data analysis software.  This strategy allows large enterprise software companies to broaden their product lines to retain business that might otherwise be at risk, but also to use OSS to lever into new areas where they lacked differentiated proprietary products.  However, smaller enterprise software vendors may lack the resources to extend into open source and will be all the more vulnerable for it.

The cloud – software-as-a-service (SaaS) and infrastructure-as-a-service (IaaS) is a further catalyst, as the big potential benefits to enterprises drives re-evaluation of software strategies and since cloud hosts, like Amazon, IBM and Google, are inclined to base their own services on self-customized open source platforms.  These big, ambitious cloud players are amongst the most sophisticated IT managers in the world, looking to gain competitive advantage via differentiated, internally developed implementations of open source solutions for major infrastructure software categories – SQL data case, Linux OS, Xen virtualization, Hadoop data mining, OpenFlow IP routing, etc.  As such, the substantial scale and access benefits of the cloud will greatly squeeze opportunities for both closed and open software sales by independent vendors.  As the pendulum swings to the cloud, look for increased concentration of the software market value into the hands of integrated players winning in the cloud hosting and SaaS game.

As cloud-hosted systems become a prevalent model, the cutting edge technical expertise of these organizations will likely pressure software beyond servers.  Modern internet architecture derives performance advantage from distributed data centers that deliver data from the closest possible location.  Managing the substantial networking and storage assets that enable this architecture is a substantial point of differentiation for these providers, raising the profile of open source projects for IP networking (OpenFlow) and storage management (OpenFiler).  Internal solutions built on OSS threaten integrated software solutions from the likes of Cisco, Juniper, EMC, NetApp and others.

The winners – companies that have already established strong bona fides in the cloud business, e.g. Amazon, IBM, Google, Microsoft, Salesforce.com, etc..  The losers – focused infrastructure, middleware, and tools players, e.g. BMC Software, VMware, CA, etc…  At risk, long term – OSS vendors that could be squeezed by the cloud, e.g. Red Hat, Citrix, etc. and integrated software, e.g. Cisco, Juniper, EMC, NetApp, etc..  On the bubble – broad software players that have not yet established a strong cloud presence, e.g. Oracle, HP, etc…  Unaffected – differentiated applications vendors, e.g. SAP, Concur, etc.

For the full research note, please visit our published research page.

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