[LINK] Open source: Where the action is

brd at iimetro.com.au brd at iimetro.com.au
Mon Dec 18 14:52:59 AEDT 2006

Open source: Where the action is
Open source forecasts for 2007
Robert Mullins (IDG News Service) 18/12/2006 09:26:40

The pace of change in the open source software business is likely to accelerate
in 2007 as developers climb up the software stack from the operating system and
databases to applications.

Proposals to invest in open source-based software companies increased by a
factor of two or three in 2006 over 2005 at Index Ventures, said Bernard Dalle,
general partner at the venture capital firm.

Index Ventures invested about US$10 million in open source companies in 2006.
These include investments in MySQL, a provider of database management software,
and Pentaho, which delivers business intelligence software.

For a variety of reasons, software companies are increasingly looking to add
value on top of base open-source platforms. The main Linux distributor, Red
Hat, is a case in point.

The move in October by Oracle to undercut Linux distributor Red Hat on price for
services shows that an open source company is vulnerable if it relies primarily
on platform support for revenue.

Red Hat made its own move beyond the operating system in June with its US$350
million acquisition of Java application server vendor JBoss. Although JBoss is
considered open source software, JBoss, now division of Red Hat, has more
control over the source code for its software than Red Hat does over Linux.
With control comes a greater ability to monetize the code.

"The days of making money off the open source operating system are over," said
Cameron Lester, a general partner at Azure Capital Partners, a venture capital
firm that also has invested in several open-source startups. "These companies
have definitely responded to the evolution of the industry."

Over the course of the decade the open-source realm has become an incubator for
innovative business models. Venture capital money will continue to fuel

For example, Zend Technologies develops Web applications based on the open
source hypertext preprocessor programming language known as PHP. It has
received US$36.7 million in venture capital, including funding from Azure and

Zend has adopted a hybrid business model, participating in the PHP open source
community and improving the underlying code, while also offering proprietary
Web applications and development tools, said Andi Gutmans, the company's
co-founder and vice president of technology.

"The big benefit we get from open source is, first of all, we have a huge
community that helps us to develop (PHP). We have a very large R&D team, so to
speak," Gutmans said.

Zend's proprietary products give the company a unique value in the marketplace.
For instance, Zend Studio 5.5, launched Dec. 6, offers full lifecycle
management of PHP-based Web applications.

Members of the PHP community also are a ripe market for Zend's commercial
products, Gutmans said.

By basing applications on top of open-source software, companies get a built-in
adoption and distribution channel, according to Pradeep Tagare, an investment
manager specializing in open source at Intel Capital, which also invested in

"As the applications get more and more specialized, the community of developers
who can contribute to it becomes smaller," Tagare said. "But, by using open
source as a distribution channel, these application companies can really reduce
their sales and marketing costs and reduce the barriers to adoption."

Intel Capital has also invested in MonoSphere which uses the open source
PostgreSQL database management platform to build its Storage Horizon
storage-capacity planning software product. MonoSphere has raised US$26 million
from various venture capital sources, including US$11 million in funding Oct.
25. Building the product on open source made better economic sense than to
build it on a more expensive proprietary platform such as from Microsoft.

"We basically made a cost decision," said Ray Villeneuve, MonoSphere's president
and chief executive officer (CEO).

Open source software also helps Fonality undercut larger competitors in
telecommunications, said Chris Lyman, co-founder and CEO. In January Azure
invested US$5 million in Fonality, a provider of IP-PBX (Internet
Protocol-private branch exchange) telephone systems for small and medium-size

Lyman got the idea for the business when he first launched Fonality. The company
was originally intended to be a residential VOIP (voice over Internet Protocol)
service provider. He balked at receiving a quote for US$15,000 for a mere
5-phone office IP-PBX from Avaya Inc.

"I said, 'That's our new business,'" said Lyman, and changed Fonality's business
model to selling IP-PBX systems.

Fonality's IP-PBX offering is based on the Asterisk open source program for
telephony management. Developing proprietary call management products on top of
Asterisk enables Fonality to offer IP-PBX systems for smaller companies at about
a quarter of the cost for systems from companies like Cisco Systems Inc. and

Asked whether he's worried that they will also develop open source products,
Lyman responded, "They better hurry because open source is about to eat their

Red Hat sees the open source trend as not simply moving up the software stack,
but growing in all directions, said Scott Crenshaw, general manager of
Enterprise Linux at Red Hat.

Crenshaw sees a second wave of open source innovation in 2007 as virtualization
and service-oriented architecture, which enable operation of an IT
infrastructure dynamically, become open sourced.

"The goal isn't just to move up the stack," he said. "The real goal is to
fundamentally change the economics of IT once again."


Bernard Robertson-Dunn
Sydney Australia
brd at iimetro.com.au

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