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Open Source Forming a Dot Com Bubble? 222

Posted by ScuttleMonkey
from the ride-the-wave-while-it-is-here dept.
sebFlyte writes "ZDNet is running an interesting look at the sudden upswing of investment in open source products and the ensuing debate as to whether the open source business model has given us a bubble (akin to the dot-com bubble) that is about to burst. The counter-argument is that the increase in investment is just the natural progression of a robust business model whose time has come. One point that few people, whatever their viewpoint, could disagree with is that the key to a financially successful open source project rests with the community, rather than just the technology."
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Open Source Forming a Dot Com Bubble?

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  • by Nos. (179609) <andrew@theker r s . ca> on Monday November 07, 2005 @03:56PM (#13972435) Homepage
    Lets face it, if venture capitalists are investing money in companies because of buzz words (is open source a buzz word now?), then the problem isn't with the product, but with the investors. Linux, Apache, and countless other OSS didn't start with a big investment by venture capitalists. It was started by a person or group that recognized and need and thought they could fill it. OSS will live on, with or without VC.
  • by penguin_asylum (822967) on Monday November 07, 2005 @03:59PM (#13972455)
    Looks to me like an overreaction. Not everything that increases in value like this is necessarily a bubble. (though it does sound more exciting this way)
  • The main question (Score:5, Insightful)

    by xappax (876447) on Monday November 07, 2005 @04:01PM (#13972474)
    The main question that you have to ask when determining whether a particular market is a bubble is "Are investors over-valuing it?"

    I would argue that open-source, as it is today, is actually undervalued, and had a huge amount of economic potential that hasn't even begun to be tapped. This is not true of, say, the housing market, which many say is a bubble.

    I think rather than an insubstantial bubble, what we're seeing is a whole bunch of investors realizing the very real value of open source business models all at once.
  • Key difference (Score:5, Insightful)

    by itwerx (165526) <itwerx@gmail.com> on Monday November 07, 2005 @04:03PM (#13972488) Homepage
    The key difference between OSS investment and any other investment is that there can never be a true "loss" in value. I'm probably not going to explain this very well but I'll try anyway.
          What I am getting at is that every dollar invested in OSS which leads to publicly released code is a dollar whose benefit will last long beyond any potential demise of the original VC group and/or development team.
          This is the ultimate difference between OSS and CSS...
  • Times have changed (Score:5, Insightful)

    by jav1231 (539129) on Monday November 07, 2005 @04:04PM (#13972509)
    The financial world has grown a lot from the days of the first bubble. That bubble was building over a five year period and was due in large part to ignorance. People were being paid with what amounted to an ignorance tax. The less a company knew about the technology, the more they were willing to pay for it. OSS has been slowly moving along and there are more people with a good understanding of what is happening with it in the larger tech sector. You don't have the mindset of "who cares what it costs or what it does, we need it!" Rather, you have "what is it that we have now that we can leverage more value from by going with OSS!"
  • by ylikone (589264) on Monday November 07, 2005 @04:05PM (#13972520) Homepage
    What you say is certainly true... yet we keep hearing over and over about how opensource projects need to consalidate, opensource projects need more money, opensource projects need support from big players, and on and on.... That is all completely untrue and misses the whole point of opensource! So, messages such as yours need to be kept being said to combat the other wrong messages that keep being said.
  • Re:DRM (Score:3, Insightful)

    by Skowronek (795408) <skylark@ u n a l i g n e d . org> on Monday November 07, 2005 @04:08PM (#13972556) Homepage
    The problem isn't with Open Source. The problem is with DRM; all DRM schemes, namely, assume storage of keys on user's computer at some point (if it's pay-per-view, in which case the keys are sent to the user from a remote location). This means that given the full source of the DRM implementation it is possible to circumvent it. This is a design flaw in DRM.

    DRM is the idea of storing keys with the encrypted content and hoping that nobody will find the keys.
  • by UR30 (603039) on Monday November 07, 2005 @04:10PM (#13972577) Homepage
    The question of a "bubble" is as relevant for open source as for science. Is there a bubble in science? Both open source and science are based on openness and peer review. It there is a bubble, long term it does not matter.
  • Re:Key difference (Score:3, Insightful)

    by LWATCDR (28044) on Monday November 07, 2005 @04:11PM (#13972588) Homepage Journal
    Or you can look at it another way. OSS never has any value to the investor.
    OSS may end up being a charity at best. I have seen all sorts of "models" like support or customization but those can not be "locked in".
    I can see the value of traditional OSS development. I.E. a company paying people to work on a project they use like Postgres, GCC, Apache, or even Perl. I do not see how VC investment works for OSS. I could be wrong but we will have see.
  • by bitspotter (455598) on Monday November 07, 2005 @04:12PM (#13972596) Journal
    There may well be a bubble forming. That's business.

    The difference is this: At the end of the dotcom bubble burst, there was a lot of proprietary code floating around, locked up in asset portfolios that would never see the light of day. At the end of an alleged OSS bubble, there will be a lot of open source code floating around *in the open*, where people can actually make use of it and build upon it, regardless of the solvency of the company that originally authored or contributed to it.

    This may well actually give the supposed "bubble" more floating power, since one company that might not be able to properly handle an open source project might have their fumbles recovered by another company that can. This could happen immediately, rather than waiting for the former company's death march to complete, drying up the VC and selling off the company's copyrights to the code.
  • by electroniceric (468976) on Monday November 07, 2005 @04:16PM (#13972635)
    Open source may be garnerning more investment than it merits, but it's still a very small fraction of the software development market, much less the overall enterprise IT sales and service markets. So if OSS investment overheats, it will just lead to VC's being wary of investing in OSS companies for a while. Given that OSS is more a process than a particular sector or a business model, this will have limited effect on the overall march of open source, and especially open standards. In concrete terms, it would suck for JasperSoft to lose funding because hype around OSS' profit potential turns out to be overrated, but it wouldn't really stop people like Sun or IBM from moving towards open source, nor will it stop the commoditization of a variety of products by open source equivalents.
  • by Red Flayer (890720) on Monday November 07, 2005 @04:17PM (#13972644) Journal
    "Not everything that increases in value like this is necessarily a bubble"

    Actually, an increase in value doesn't make a bubble -- an increase in invested capital without a corresponding increase in value is what creates a bubble.

    The second part of creating a bubble is speculation; people investing in something not because of value, but because of expected ROI due to speculation. I know (well, believe) that the P/E ratio of Google was too high for me to get a good return on my investment through long-term investing -- but I also knew that the perceived value of Google shares would net me a good ROI when I sold. I wasn't investing in Google; I was investing in the public perception of Google as a good investment.
  • by spike2131 (468840) on Monday November 07, 2005 @04:17PM (#13972649) Homepage
    So what if its a bubble. Bubbles take a long time to burst. Alan Greenspan noticed there was "Irrational Exuberance" in the stock market in 1996 - but the bubble didn't pop until 2001. The real estate bubble is supossed to pop in the US any day now.... but it hasn't yet. While I have no doubt it will pop one day - probably soon - its a fools game to try and time the thing. The thing about economic bubbles is that they last a lot longer than anyone expects they will.

    So, open source is a bubble.... fine. But to say its "about to burst" is a reach. If its like other bubbles of late, now that its been declared a bubble, it won't burst for a few years yet. My advice, then, is get on that train and make some money while the getting is good.

  • Size of bubble. (Score:3, Insightful)

    by NumberOneFan (811608) on Monday November 07, 2005 @04:24PM (#13972719)
    To quote from the article:

    Until the end of September this year, the amount of venture money that went to companies with "open source" in their business description was $144m (£81.8m). That's more than double the total for the whole of last year, according to research from the National Venture Capital Association, PriceWaterhouseCoopers and Thomson Venture Economics.

    In addition, a conservative estimate is that there have been at least 18 open source companies funded in the first three quarters of 2005, compared with 12 last year, a NVCA representative said. Among this year's top investment recipients were XenSource, which landed $23m, and SugarCRM, which got third-round funding of $18.7m last month.


    What's the size of the "bubble" we're talking about here? $144M? That's like a spit bubble, heh. I bet if you take MS, Oracle, and Dell's yearly complimentary food, drink, and party budgets, they'd be more than that. Ok well, that's probably not true, but I mean, $144M as far as business investments go is a peanuts. Whether or not this is bad for the OSS/FS community, I don't know. How much OSS/FS software is developed by employees of IBM and other friendly companies versus how much software is developed by some little startup on VC funding? That to me, would be a larger indicator on how "volatile" this is becoming.
  • by RAMMS+EIN (578166) on Monday November 07, 2005 @04:29PM (#13972775) Homepage Journal
    The key difference between open source and everything else is that everyone gets equal access. This means a product can never fail while there is interest in keeping it alive. Even if the party producing it quits, the product continues to be available (through the right to redistribute), maintainable (through the right to read and modify the source), and even improvable (nothing stops you from making a new, better version).

    Whether businesses that try to make money off open source can fail is another matter. I see it this way: open source exerts a downward pressure on software prices. This means that it tends to make businesses that try making money by selling software fail, but it provides businesses using software (and what business isn't?) with financial benefits. This, and the properties mentioned in the previous paragraph, is where the business benefit of open source is.

    TFA seems to be asking whether venture capitalists can expect to see returns on the money they invest in open source startups, or that it's a bubble that will burst. That depends on how you see it. If they want these businesses to generate money that flows back to them, it's probably a bubble, because these businesses are trying to make money exactly in the way that is likely to fail (see previous paragraph). However, the open source software these companies make will be around, no matter if the company persists. So the invested capital is never really lost, as it would be if the company had been making closed source software (and failed to pass on the rights before closing down, as too often happens).
  • Re:DRM (Score:5, Insightful)

    by salesgeek (263995) on Monday November 07, 2005 @04:29PM (#13972777) Homepage
    I think one of the arguments for an open source "burst" would be the reluctance of the open source mentality to accept things such as DRM. While I am very much with the typical slashdot mindset that thinks of DRM as bunch of BS, the corporate world is still heading in that direction.

    DRM: Let's all erase nearly 10 years of incredible growth by closing and locking things down. DRM has ALWAYS been around. From the lousy copy protected floppies of the 80s to the parallel port dongles of the 90s to todays public key technology. It doesn't matter - it's all the same, and it is and always has been an utter and complete failure. A failure of customer service, a technical failure, a financial failure and ultimately a corporate failure. And despite everyone's best efforts, DRM will fail again.

    There's no such thing as an open source bubble, BTW. Why? Because open source software, or at least the free variety, doesn't die when it's creator dies. What would happen if Mozilla.org, Apache.org, the MySQL guys went belly up or blew u Hint - development would slow for a while and would fork and then the strongest tines of the fork would continue. Open source software exists outside corporate control, and that is something that open source advocates need to explain clearly. An open source company is not about building a widget and selling it like proprietary software. It's about helping customers apply technology to their business exactly the way it should be instead of adapting to what someone working out of your industry, for a technology company thinks you should do.

  • by salesgeek (263995) on Monday November 07, 2005 @04:40PM (#13972881) Homepage
    Three very simple rules will help you:

    1. Invest in companies that know how to make money by being paid by a customer to perform a service.
    2. There are usually minimal or no barriers to entry in the open source universe.
    3. Check community involvement. A small community or lack of one indicates a lack of mastery of the open source model.

    BTW: coming out with a closed source derivative product can be risky: sometimes you get forked and out developed.
  • by mrcparker (469158) on Monday November 07, 2005 @04:44PM (#13972919)
    As long as you don't sell the software, you are in good shape. Offering value-added support, or using FOSS as a part of a larger contract seem to be the trend.

    As an owner of a consulting firm, I can compete with a good deal more companies using FOSS. We get paid for solutions, not products. If I can grab some code, make some quick improvements, and have a quick turnaround, then I can make my clients happy.
  • by T-Ranger (10520) <jeffwNO@SPAMchebucto.ns.ca> on Monday November 07, 2005 @04:44PM (#13972924) Homepage
    What kind of long term viability does one/should one desire in an employer? Conventional wisdom is that these days one is going to have many employers over their working life. If you accept that, then does it matter if you leave a place after 4 years because its simply time to move on, or if you leave a place after 4 years because it no longer exists? And if you are working on OSS projects, does your exact employer matter, if that project lives on and someone else picks up developement (and developers)?

    There are some OSS projects that are very large and have (paid) developers from many companies (the Linux kernel being the biggest example), I suppose if you were a very valuable kernel hacker and your employer went belly up, one might easily find work - the exact same work - with someone else. OTOH, there are OSS projects that are dominated by one company (JBoss comes to mind) where it might take a fairly long time for the project to recover if its one major commercial sponsor evaporates, let alone another financial benafactor to materialize. Then there are companies who simply use OSS, and if you were an OSS developer there, you might never contribute anything large to any one project, or possibly anything at all that was accepted upstreem, as you would be responsible for little fixes for a wide range of projects.

  • by khasim (1285) <brandioch.conner@gmail.com> on Monday November 07, 2005 @04:47PM (#13972950)
    Or can it exist as a robust business model that can compete with commercial competitors?
    Open Source is a software development model. It is not a business model.

    A business model can be based upon selling items/services/etc related to systems developed via the Open Source model, but they are not the same.
    I agree with you that Open Source will live on regardless of money invested by venture capitalists. The question is, at what level. Hobbyists? Tinkerers?
    Given that Linux advanced to it's current state almost 100% via the "hobbyist" and "tinkerers", is that a bad thing?

    More funding is always nice. It allows people to devote more time to it. But it won't make or break a project. The community is what decides that.
    I've been seeing more and more paid programming positions advertised on my campus' job site for open source projects. As cool as I think it would be to take a job like this when I get out of school, I don't want to go somewhere where the floor will fall out from underneath me.
    Again, if that happens, it is because of a failure of the business model, not the Open Source development model.

    History is littered with failed software companies that used closed source. Why should Open Source guarantee success? It's all about the business model.
    Anyway, I'm not trying to predict doom for OSS, I'm just saying that this is a valid discussion, and I'm curious to hear what people have to say.
    And here is what I say ... don't look to Open Source as a substitute for a valid business plan.

    Look at the business plan. That is what will make or break the business.
  • by hansreiser (6963) on Monday November 07, 2005 @04:47PM (#13972951) Homepage
    Considering the impact of free software on the industry, $144 million is pretty small stuff. If a bubble that size bursts, will anyone notice? People will notice if Google goes under with their $15 billion dollar valuation based on a free service, or if the "network" television companies go under as a result of the Internet. Calling $144 million a bubble of significance is just headline hunting.

    Free software is maturing and growing still. In ten years....

    Hans
  • Maybe... (Score:3, Insightful)

    by EXTomar (78739) on Monday November 07, 2005 @05:08PM (#13973175)
    Bubbles happen when people oversell something. The key thing everyone needs to realize is that Open Source isn't a 'magic bullet' or a 'plentacia'. Work, time, and money, in short capital, needs to be spent to use Open Source right along with every other closed source solution. I believe in the long run for various problems Open Source is easily better investment. There are other problems where Open Source will have a hard time showing return on investment. In either event, one should never oversell the technology.

    So here is the queston: Is any other vendor out there creating a Dot Com bubble? Or could they have created the previous Dot Com bubble?? Yes I'm thinking about Microsoft: Did MS oversell its technology in the 90s which allowed people to believe they could build anything cheaply, securely, etc?
  • by bmh129 (928163) on Monday November 07, 2005 @05:11PM (#13973201)
    Ideologies don't matter. Business models don't matter. There is only one rule. Buy low; sell high. People that pay more for something than they should because of a particular ideology are what the rest of us call fools. Don't get me wrong. I think Novell is going to surprise everybody. But I'm not going to buy Novell stock because of Suse. I'm going to buy it because Suse is going to make them a ton of money.
  • Twice? (Score:3, Insightful)

    by Nethead (1563) <joe@nethead.com> on Monday November 07, 2005 @06:10PM (#13973847) Homepage Journal
    They wouldn't do a .bomb twice, would they? They had to have learned the first time! Oh, yeah... G.W.Bush. Never mind.
  • by PaxTech (103481) on Monday November 07, 2005 @06:34PM (#13974138) Homepage
    Especially since Open Source companies have an additional financial leg kicked out from under them... sales of the product itself.

    This is made up for by not having to sink the development costs to create the product from scratch in the first place. If you want to sell a product, you have to build it first, and if no one buys it you're still out all the money it cost to develop.

    Open source businesses make their money from support and customization. It's certainly not as possible to hit a home run that way, but it's certainly possible to build a successful business around that and it entails less risk than creating a product from scratch and attempting to sell it.
  • by Nail (1195) on Monday November 07, 2005 @06:35PM (#13974154) Homepage
    Why would you NEED to sell software? Does that have to be part of your business model? Is eliminating the requirements of software sales, especially if it is NOT central to your business plan, such a heavy weight? Listen, I am not an expert, but from what I have gleened from business folks I know is that you should do one thing (or a limited amount of closely related things) and do it exceedingly well to succeed in business. So if selling software is not your main focus, it could provide a distraction large enough to sabotage your business. If selling software is your focus, perhaps FOSS isn't your bag, man.
  • Re:What if... (Score:3, Insightful)

    by marcosdumay (620877) <marcosdumay.gmail@com> on Monday November 07, 2005 @06:50PM (#13974321) Homepage Journal

    At economics, it's called a "self fullfiling profecy" and is very well known and described (as far as an aconomical model can be). It differs from the measurement modifying the result of a quantum experiment because its results determinable, while at the quantic case, they are not.

    That said, the funny part is that it makes no difference if the readers realise or not the it is BS, even if they know that it is not a bubble, they may think that other ones are convinced that the bubble exists, so they'll not invest for a while.

    That happens unless everybody knows that everybody knows that it is BS, and everybody knows that everybody knows that everybody knows that it is BS, and so on...

  • by sfurious (111612) on Monday November 07, 2005 @07:39PM (#13974766)
    Similar things can be said about communications equipment. People investing because of buzzwords fuelled the dotcom bubble, but even though the investors could be blamed for this, the industry suffered.

    Yes, that's simplified, and part of it was the fault of the industry talking things up. But even if OSS is an excellent concept, and is sustainable without venture capital, it can still get hurt. If investors start getting into it, resulting in OSS companies becoming overvalued, a bubble burst is inevitable. If that happens, OSS will very quickly get a bad name. And we'll only begin to realise how much a bad name will affect OSS when it actually happens.
  • by rtb61 (674572) on Tuesday November 08, 2005 @01:04AM (#13976634) Homepage
    Computer hardware manfacturers are also freed from the burden of licence fees giving them an incetive to invest a portion of what they would have paid in licence fees to ensure OSS survives and grows.

    A lot of the venture funding relating to OSS could simple be the money freed up from the sell off of investments in proprietary software companies looking for some other place to go (the shares of proprietary software companies is currently being propped up by stock buy backs, mug punters who still believe the marketing and pension funds with managers whose own personal fiscal futures will suffer no harm while the funds they manage takes yet another massive hit).

    As the amount of money going to the large proprietary software vendors drys up, investors are expecting that money to get distributed to other sectors of the tech economy. Picking the loser (M$) is often a lot easier than trying to pick the winners (IBM to date as for the others ?).

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