On the way to big apps

The open-source Linux operating system now runs on about a quarter of all computer servers. That's remarkable penetration in a very short time. Does it mean we'll start seeing Linux desktop PCs catching on, as many people in the tech world keep hoping? Maybe that will happen in China and Brazil, or in low-cost environments like call centers.

But the question of how much market share Linux on desktops will gain over the next few years isn't the one to be asking right now and misses the more dramatic shift in the software business. Conquering the desktop doesn't really matter anymore. Most of the really interesting software these days runs on central servers. We access it via our PCs through the Internet or a corporate network. And on those servers is a wide range of open-source software applications that are making impressive gains. There is Linux, of course, which is already a slam dunk. But on top of Linux, open-source middleware like the MySQL database and the JBoss Web application server are beginning to get some traction. MySQL is the database that powers big chunks of Google, Travelocity, and Yahoo. JBoss has come out of nowhere to match BEA and IBM in the Web application server market. According to one survey, JBoss actually surpassed both IBM and BEA late last year in the sheer number of Web apps deployed. All the pieces are now in place for open-source applications, especially enterprise applications, to emerge.

There already exist, for instance, open-source versions of customer-relationship management software (SugarCRM), enterprise-resource planning software (Compiere), and clinical-information management software for hospitals (Medsphere's Vista), among others. These budding open-source enterprise applications -- and there are lots more in the works -- are aimed right at the heart of traditional enterprise software vendors such as Oracle and SAP. "The enterprise software model is broken," argues Medsphere CEO Larry Augustin, who in a former life was the founder of VA Linux. Enterprise software is heavy, ugly, and expensive. It requires a long sales cycle, and even longer to install, and it's out of reach for most small and medium-size businesses. Rather than being used to improve products, an astounding three-quarters of new license revenue in the enterprise software industry is instead plowed right back into sales and marketing. That means, as Augustin likes to point out, that the business model of a traditional enterprise software company is effectively to charge customers a ton of money to convince those same customers that they need the software in the first place.

The advent of open-source enterprise software promises to turn that business model on its head. Since the software is free, there are no huge, up-front licensing fees required before a customer can try it. (Open-source software companies like Medsphere and SugarCRM charge instead for ongoing maintenance and support.) Consequently, open-source software companies don't need to spend as much on sales and marketing. In fact, they tend to spend hardly anything at all on it. Customers can try the software before they buy it, and the hundreds or thousands of outside developers who contribute code to the software are also great advocates for the various products. "That community is our sales and marketing," Augustin says. There are other benefits to going the open-source route. Any business can customize the software to its own needs, the software is inherently more secure, since holes can be plugged by any programmer as soon as they're noticed, and it is not dependent on any one company being around in the future to keep supporting it. The biggest potential advantage, though, is that enterprise-class software can now be used by small and medium-size businesses that previously could not afford it. This underserved market is the last great growth opportunity for the enterprise software industry. "With zero acquisition costs, someone with only a few hundred employees can now take advantage of something that was only available to large enterprises," says Peter Kronowitt, a strategic planner and resident Linux expert at Intel. Adds Augustin, "Some people say open-source is a destroyer of markets, but lower cost means broader market availability." The trick for open-source software companies will be not only to win over those smaller customers but also to convert them into paying customers by upselling them maintenance and support contracts.

The open-source upstarts will also need to compete with other low-cost alternatives to enterprise software that do not rely on open-source. On-demand software utilities like Salesforce.com are playing on the same weaknesses of the old-school enterprise software players by offering competing software for an affordable subscription. The only thing for certain is that as open-source moves up the software stack -- from the operating system to middleware to applications -- proprietary software vendors of all stripes will need to lower their prices or offer something new and wonderful and not yet available for free. Can you imagine?