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Beware OSS propaganda when researching investments

Posted on November 6, 2007

Investors beware: there is an increasing drumbeat of propaganda in the software blogosphere about providers of open source software (OSS) such as Linux overtaking the leaders in the software and information technology (IT) markets. Like all good propaganda, there is a hint of truth to it but those hints have only minimal or secondary implications to investing in the software industry. This recent CNet blog post is a good example; it cherry picks Saugatuck, Gartner/Dataquest and IDC data to imply that OSS pure plays are a major growth opportunity for investors. It was—surprise/surprise—written by an “OSS pure play” marketing executive. A recent press release from a group called the Federal Open Source Alliance is another example; it touts a U.S. Government “referendum” in favor of OSS. The survey was conducted by the ad agency of the pro-OSS group that—surprise/surprise—discovered the favorable pro-OSS results.

OSS bloggers such as IBM (IBM) software executive Savio Rodrigues at InfoWorld have tried to counter the propaganda. But of course, he’s an IBM guy so what do you expect? I, on the other hand, have no dog in the fight and have been analyzing the kind of data that underlies the OSS propaganda for 20 years. I have done extensive research into the OSS development model and market dynamics for IDC, Research 2.0, and ebizQ.net. Before that, I successfully helped create IT propaganda. I know how the game is played from both sides and I think Savio is right.

First, I have found that OSS is having a major effect on reducing the R&D expense budgets of existing leading software suppliers such as IBM (IBM), HP (HP) and Oracle (ORCL). So OSS is a good thing for those investing in these leading software suppliers.

Second, I think there is a 50/50 chance that one supplier that began as an OSS pure play will make it into the ranks of the leading software suppliers. Research 2.0 will be happy to consult with you about which OSS supplier we think it might be.

Third, I think OSS will possibly (less than 50/50 chance) be a major driver in populating services repositories. Tens of thousands are needed to make the service oriented architecture (SOA) concept favored by Novell (NOVL) and Red Hat (RHT)—as well as the suppliers mentioned above and below—succeed. This possibility, including the OSS implications, must be watched by anyone investing in SOA.

Fourth, the jury is still totally out on whether OSS will disrupt the very large revenue flow associated with subscription maintenance of software. This might happen if OSS is of such high quality that it doesn’t need such maintenance. But it would only affect smaller software suppliers because the leading software suppliers are now also the leading OSS suppliers. IBM, Oracle, and so forth have become hybrids that offer OSS terms and conditions relative to source availability and distribution rights right along with their traditional Ts&Cs.

Fifth, if OSS does disrupt the subscription maintenance revenue flow, it might also hasten a trend in which IT is more about enabling business and consumer services than a major subject for investment research in its own right. But a “back to the future” movement to such services will happen with or without OSS. Microsoft (MSFT), SAP (SAP) and many others are actively pursuing that opportunity and are only peripherally interested in the OSS drama.

OSS is really about a culture and how software is developed. The above five points summarize the important but basically peripheral implications of OSS in investment research. Although Savio’s too nice a guy to say it, I can tell you the rest of the OSS pure play propaganda about its investment implications is outrageous claptrap (I don’t think I can say b——t on a family Web site). Before you angel invest or venture fund an “OSS IPO” or before you bet your company’s treasury on an “OSS acquisition” remember that you are being claptrapped.

–Dennis Byron

Tags: Oracle, open source software, OSS, IBM, Linux, HP, SAP, Microsoft, Red Hat, Novell

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