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Why No Billion-Dollar Open Source Companies? 487

Posted by Soulskill
from the free-as-in-give-us-money dept.
Glyn Moody writes "If open source is such a success, why aren't there any billion-dollar turnover open source companies? A recent briefing by Red Hat's CEO, Jim Whitehurst, to a group of journalists may provide an answer. Asked why Red Hat wasn't yet a $5 billion company, as he suggested it would be one day, he said getting Red Hat to $5 billion meant 'replacing $50 billion of revenue' currently enjoyed by traditional computer companies. If, as is likely, that's generally true for open source companies, it means they will need to displace around $10 billion of proprietary business in order to achieve a billion-dollar turnover. Few are likely to do that. Perhaps it's time for managers of open source startups to stop chasing the billion-dollar dream. If they don't, they will set unrealistic ambitions for themselves, disappoint their investors, and allow opponents of free software to paint one of its defining successes — saving money — as a failure."
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Why No Billion-Dollar Open Source Companies?

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  • Pftt (Score:5, Insightful)

    by somersault (912633) on Friday June 11, 2010 @09:32AM (#32534444) Homepage Journal

    they will [..] paint one of its defining successes — saving money — as a failure.

    Hmm.. so they're bringing in 10% of the revenue of non open source equivalents - basically meaning that their clients need to spend 90% less.. how is that not saving money?

  • by genrader (563784) <genrader@gmail. c o m> on Friday June 11, 2010 @09:34AM (#32534490) Homepage Journal
    Many businesses that reach billions of dollars in revenue often rely on government contracts and monopoly protection--patent law being the biggest of these. Without government interference in the economy businesses would probably be less likely to hit "billionaire" status. I don't doubt that there would still be some, just not as many. In the open source world this is (to some extent) playing out.
    • Exactly: it's not a bug, it's a feature. It means a healthier market were everyone can compete fairly.

    • by DarrenBaker (322210) <darrenNO@SPAMflim.net> on Friday June 11, 2010 @10:15AM (#32535046) Homepage

      Competition is thriving in the open-source market, hence the lack of massive market-cap non-specialised companies. FOSS is showing capitalism how it's done.

      • Uh... No (Score:4, Insightful)

        by DesScorp (410532) <DesScorp.Gmail@com> on Friday June 11, 2010 @10:57AM (#32535626) Homepage Journal

        Competition is thriving in the open-source market, hence the lack of massive market-cap non-specialised companies. FOSS is showing capitalism how it's done.

        I'm a huge supporter of both capitalism and the open source movement, but please, lets not pretend that the latter has much to do with the former. The reason why open source doesn't make much money is because it's essentially a volunteer effort. The vast majority of people that do FOSS work do it unpaid, and on their own time. I've yet to find a stockbroker that works for "the love of the game". Capitalists are in it for the money, first, last, and always. The open source movement is basically a bunch of voluntary communes. If they make some money, hey, that's nice, but the software is what's important to them, and they're willing to work for free to see it happen.

        The two ideas have little to nothing in common, save the idea of voluntary participation.

        • Re: (Score:3, Interesting)

          by AusIV (950840)

          I disagree. I would argue that FOSS is the pinnacle of free market capitalism.

          In a free market, price is dictated by supply and demand. With software, supply is effectively infinite, so the price should trend towards zero. Only by introducing artificial barriers are companies able to profit by selling software. If you assume that the costs of development can be covered without charging for software (which FOSS demonstrates to be the case) the per-unit price of software should fall to zero in a free market.

          A

  • by linzeal (197905) on Friday June 11, 2010 @09:35AM (#32534498) Homepage Journal
    There are almost too many to count when it comes to billion dollar companies involved in open source. They are the main motivator in new Linux kernel development and amongst 100's of other projects including Apache, Perl, MySQL etc you will find @email's from dozens of billion dollar companies in the dev-lists. O'Reilly himself squashed some of these rumors about open source [oreillynet.com] himself over 11 years ago now, so why discuss this? It is just going to turn into a flame war about licenses and corporate responsibility.
    • by NervousWreck (1399445) on Friday June 11, 2010 @09:44AM (#32534620)
      Agreed. People assume open-source means twelve-year-olds in basements and "commies." Very few think about the fact that multi-billion dollar companies are involved.
    • Re: (Score:2, Informative)

      I think the point here is that IBM, Intel, Xerox and the like did not start out as open source. Being involved in open source many years and many billions of dollars into running a company is not the same as starting out as open source, and leveraging that into a billion-dollar company.
      • Re: (Score:3, Informative)

        by Chris Mattern (191822)

        I think the point here is that IBM, Intel, Xerox and the like did not start out as open source.

        Actually, IBM pretty much did. It wasn't until the late 1970s that they started copyrighting their code and restricting distribution of the source.

        • Re: (Score:3, Informative)

          by hitmark (640295)

          i wonder tho, until the 1970s, could anyone build a IBM compatible product without being lawyer stomped?

          no need to worry about copyright, if the only hardware it can run on is a IBM.

    • The article is talking about companies that are exclusively open source. IBM, Intel and Xerox are all involved in open source products, but all of them make three of them make their money selling proprietary, closed source hardware.

      • Re: (Score:2, Insightful)

        The article is talking about companies that are exclusively open source. IBM, Intel and Xerox are all involved in open source products, but all of them make three of them make their money selling proprietary, closed source hardware.

        Okay, well, in that case there aren't any companies that are exclusively open source. Even Red Hat itself sells closed-source products. Canonical has the closed-source Ubuntu single-sign on service [kabatology.com]. You can't have a billion-dollar open source-only company if there aren't any op

    • Re: (Score:3, Informative)

      by bernywork (57298)

      Every company your talking about seems to have another business, hardware or otherwise which they derive profits from. Yes, IBM sells services for open source, they also have a HUGE mainframe business and.... actually... nope, I can't think of one industry they don't have a foot in from some angle. Intel is involved with open source, but then again, their biggest money spinner is x86 chips. Xerox makes photocopiers and printers.

    • So, in short, open source projects are supported by many companies that do not purely exist for one open source product. I think the term "Open Source Company" is therefore to blame here. Even Microsoft contributed to the Linux kernel, but hardly anyone would call them an open source company.
  • Huh? (Score:5, Insightful)

    by PopeRatzo (965947) * on Friday June 11, 2010 @09:36AM (#32534518) Homepage Journal

    Why no building dollar bicycle-pump manufacturers? Why no billion-dollar indie record labels? Why no billion-dollar oil companies that have not polluted? Why are there no billion-dollar hockey franchises?

    Asking why there are no "billion-dollar" open source companies is kind of stupid. Considering how much of the very fabric of the Internet and the web are open source, I'd suggest that if "open source" disappeared tomorrow, a lot of "billion-dollar" companies wouldn't be worth anywhere near a billion dollars.

    This story is the Slashdot equivalent of "If you're so smart, why ain't you rich?"

    • Re:Huh? (Score:4, Insightful)

      by kent_eh (543303) on Friday June 11, 2010 @09:59AM (#32534824)

      Asking why there are no "billion-dollar" open source companies is kind of stupid.

      That's kinda my reaction too.
      Why does success need to only be defined as "more profitier every quarter... to infinity".
      Small and medium sized businesses are, and always have been, the core of every economy. They are where the creativity is. That's where most jobs are. They are more agile and able to react.
      Those few billion dollar companies are almost always bureaucratic, bloated, predatory bullies, who ultimately cause more damage to the economic environment then any good they ever did. (see "big energy", "big pharma", "too big to fail", etc)

    • I think the point of the article is not to decry the lack of billion dollar Open Source companies, but rather to point out to Open Source companies that they are unlikely to ever be billion dollar companies. So stop trying to be, do what you do, do it well, and carve out your niche. Companies can kill themselves by aiming too high, as well as by aiming too low. Do your research, figure out exactly what you'll need to ship for a billion dollars in revenue. Is it realistic to expect to ship that? No? Wh

  • They get bought out (Score:5, Informative)

    by Anonymous Coward on Friday June 11, 2010 @09:37AM (#32534532)

    A quick search on the Internet revealed that a lot of them get bought out.
    http://royal.pingdom.com/2008/02/06/the-seven-largest-open-source-deals/ [pingdom.com]

    Sun buys MySQL, $1 billion, 2008
    Sun now has their hands on the world’s most widely used open source database.

    Red Hat buys Cygnus Solutions, $675 million, 1999
    Red Hat started the open source acquisition race early when they bought Cygnus Solutions, providers of open source software support.

    Citrix buys XenSource, $500 million, 2007
    Considering how hot virtualization is right now, we can see why Citrix bought XenSource, the company behind the Xen virtualization software.

    Yahoo buys Zimbra, $350 million, 2007
    Yahoo already have their own email services, and with Zimbra they got an integrated email, messaging and collaboration software.

    Red Hat buys JBoss, $350 million, 2006
    Red Hat strengthened their SOA offerings by buying the JBoss Java application server.

    Novell buys SUSE, $210 million, 2003
    Novell got their own Linux distribution by buying SUSE.

    Nokia buys Trolltech, $153 million, 2008
    Trolltech is the company behind the Qt GUI framework which is used by the popular Linux desktop environment KDE.

  • by number6x (626555) on Friday June 11, 2010 @09:37AM (#32534534)

    Just ask Google.

    Why should your profits go to Adobe, Microsoft, IBM, Oracle and all those other closed source companies? Look at the .com companies that survived the 'dot bomb' era. They used open source.

    Using expensive proprietary solutions is a sure way to increase your expenses and decrease your profits.

    How do you become an open source billionaire? Ask Sergey Brin and Larry Page.

    • Re: (Score:3, Insightful)

      How do you become an open source billionaire? Ask Sergey Brin and Larry Page.

      You mean create a hugely successful proprietary search engine and ads platform? Sure they may have leveraged open source in creating these proprietary products but they didn't make their money through selling open source products.

  • Copyright laws and software patents make traditional closed source business models too lucrative. And while copyright and patent infringement may still occur, it is a better model to chase in the eyes of investors because a company like Microsoft will offer them reports on how much money is lost to such things and claim that as potential profit or unrealized profit or put it on the balance sheet to make investor's eyes light up. How much "theft" (don't jump on me for using it, that's what Microsoft calls it) do you think Red Hat suffers from? Not a whole lot, I'd imagine as I believe the bulk of their profit comes from support and that support is kinda hard to steal.

    Anyway, if copyright laws didn't exist for software? Well, you'd see companies like Microsoft fall apart and companies like Red Hat thrive. Because the business model would shift from protecting your source code through litigation to making it available for free since that would be the only way to effectively combat piracy. Right now, the system is so screwed up that even when the original Windows becomes public domain, no one is going to have the source code and if they do they're not going to release it. I almost wish the Library of Congress kept a proprietary source library if that didn't leave to government abuse and a multitude of problems with huge security concerns.

    As a young idealist, I once thought that open source should be welcomed by all since there's an infinite amount of code that the populations will always need written. If they don't need an operating system, they need a web server. If they don't need web server software, they'll need the specific application on a per company basis. Ad infinitum. And therefore you shouldn't fight open source when you're generating revenue from such a general purpose and widely used tool. Unfortunately I came to understand copyright, marketing and how Microsoft keeps making bank on Windows despite it being -- in my opinion -- an inferior product. And so my logic was inherently flawed--especially in the eyes of stockholders and lawmakers. Such skewing of profits between open and closed source companies reveal this.
    • by Garwulf (708651)

      "Anyway, if copyright laws didn't exist for software? Well, you'd see companies like Microsoft fall apart and companies like Red Hat thrive. Because the business model would shift from protecting your source code through litigation to making it available for free since that would be the only way to effectively combat piracy."

      You really don't understand what copyright is, do you? Copyright is a legal framework that defines how creators and distributors interact with one another. All that stuff about file s

      • by Endo13 (1000782)

        it's a lot more profitable to copy somebody's code, make it your own, and slap a bunch of protection on it to prevent somebody else using it than it is to share it

        Because protecting your code and preventing anyone else from ever seeing and using it works perfectly right?

        There's a reason he's modded up and you're not.

  • Normally you might compare one business model with another on a somewhat equal basis. When comparing open source to closed source, doesn't it make more sense to compare the performance of the open source software company with that of the close source software company that started around the same time?

    So can anyone name any large close source software companies that have started up rather recently that are billion dollar companies? I can't personally think of any. Can anyone else?

  • False Premise (Score:3, Insightful)

    by yoshi_mon (172895) on Friday June 11, 2010 @09:42AM (#32534606)

    Perhaps it's time for managers of open source startups to stop chasing the billion-dollar dream.

    I love it when authors use a false premise to setup their stories. Of course every one wants to make it big but the idea that there is some mythical number that every open source CFO is reaching for is just stupid.

    Further if they want to look for a company that uses the FOSS model and has billions: http://www.google.com/finance?q=NYSE%3AIBM [google.com]

  • Margins... (Score:4, Insightful)

    by Bert64 (520050) <bert AT slashdot DOT firenzee DOT com> on Friday June 11, 2010 @09:43AM (#32534608) Homepage

    The issue is that proprietary software allows ridiculous profit margins (close to 100% since the software costs nothing to distribute and economies of scale are pretty much linear since the upfront costs remain the same regardless of volume)... Now no industry could possibly achieve such margins if there is any competition, so proprietary vendors stifle competition through lock-in..

    Open source vendors are unable to rip their customers off by selling zero cost goods at ridiculous markups because if they did someone else could come along and offer the same code for a cheaper price, instead they must make their money selling services... Services have a constant ongoing cost to actually provide the service, and these costs increase as you provide service to more customers.

    The proprietary software market is effectively a scam, which sooner or later will come to an end... Customers will wake up and realise just how badly they're being ripped off, but until then the fraudsters will make as much as they can out of it.

    The services market on the other hand is far more reasonable and although competition may eventually result in consolidation and razor thin margins, there is a lower limit.

  • ...my response to this is "Why should I care?" The very purpose and idea behind open-source flies in the face of profits. That's not to say these companies shouldn't be trying to make money, but the purpose behind open-source is to spread knowledge and capability...not to acquire wealth.

    "It's in the fucking charter."

  • We gave VA Linux their shot... And look what happened. I'm not going to point blame but Eric S Raymond did happen to issue the most epic "who would have thought" letter to the world proclaiming how gifted he was, shortly before his share of the company dropped in value from some $40 Million to about $4 Million (and falling).

    Open source simply isn't about the money, after all. Try to muddle it up with dollars and cents, and you will end up with Windows.

  • by SpazmodeusG (1334705) on Friday June 11, 2010 @09:50AM (#32534694)

    Try asking why are there no billion-dollar companies using 100% CLOSED source software?

    The answer is simply because billion dollar companies dabble in a bit of everything. Oracle has a lot of open source products. It also has a lot of closed source products. Same with IBM, Microsoft, Google, Apple, etc etc. If you don't consider these billion dollar companies to be open source companies then you can't consider them to be a closed source companies either. They all dabble in a bit of both because they are all really big.

  • by petes_PoV (912422) on Friday June 11, 2010 @09:53AM (#32534732)
    You can make a few $Mil on the basis of your own hard and honest work. However to get to the next step requires the "entrepreneur" to start exploiting people, using coercion, marginally honest (I'm being polite here) tactics, restrictive contracts - in short no longer being a "nice person".

    Once you get into the $Bns you become responsible for causing suffering, hardship, using litigation and loopholes, throwing your weight around, metaphorically "knifing" people in the back and being a nasty PoS. By then any of the attributes that attracted you to Open Source have withered and died.

  • There may not be any "billion dollar companies" but open source allows small companies to play the big leagues. No one can play with MS - they're too big, too powerful, and too locked up. But open source allows a small firm with a single developer to put out a "best of breed" linux based widget - because that developer can leverage the work of hundreds of thousands of developers.

    So while our closed source competitors built stuff that looked like it was stuck in the 80s - 300 baud modems for communication?

  • If open source is such a success, why aren't there any billion-dollar turnover open source companies?

    Easy. Because money is not the only measure of value and success. WTF is wrong with you people?

    • by russotto (537200)

      Easy. Because money is not the only measure of value and success. WTF is wrong with you people?

      It's not ME. It's the mortgage company, the jet-rental company (travel without flying commercial is an indicator of success), the electronics companies (geek toys are indicators of success), the escort companies (being seen with attractive women is an indicator of success), the jewelry companies (another way of keeping attractive women around), the car companies, the book companies (a good personal library is a m

  • "getting Red Hat to $5 billion meant 'replacing $50 billion of revenue'"

    Cow manure. Red Hat isn't one tenth the cost of proprietary software, not even close.

    The real problems are:

    1. It's hard to scale services.

    2. You have to have the demand for the services.

    3. In nearly all cases, proprietary solutions have first mover advantages.

  • http://www.cioupdate.com/news/article.php/1574431/Can-You-Make-Money-Selling-Linux--Try-35-Billion.htm

    In 2002 HP claimed $2B in Linux revenue and IBM claimed $1.5B. I would expect that has ramped up considerably since then. I can't seem to find recent numbers perhaps they are embarrassed by the riches.

    On the server hardware side, sales are booming. You have to think there are service contracts with those.
    http://news.cnet.com/2100-1001-984010.html

  • There is a class of people who can take advantages of intellectual property rights and that class of people rarely includes programmers or even engineers. The few times it happens can be likened to the noises that casinos make whenever someone wins. That is the entire impetus behind open source.
  • - and the value of nothing.

    If open source is such a success, why aren't there any billion-dollar turnover open source companies?

    It is not a question of if - open source is a resounding success; just look at how the GNU project has become the defining standard for much of UNIX, to the extent that companies like IBM, HP etc offer the GNU toolset on their proprietary systems. And GNU is only one part of open source - GNOME and KDE are other prime examples. And of course, there is Linux; need I say more?

    Money isn't everything; it is certainly not the best measure of success.

  • One of the features of open source/software freedom, is to benefit the users, not the corporations. Red Hat often commented that they turned a multi-billion dollar industry into a multi-million dollar one. Why no billion dollar open source companies? Because users are cutting costs, competition is rising with more players, and there is less gouging going on. From a non-software corporation point of view, that's a good thing.
  • The whole point of open source is sharing the assets. Which doesn't mean "free" (except when it's FOSS).

    Red Hat isn't the only Linux corp, the way that Apple is the only Mac corp and Microsoft is the only Windows corp. Add together all the Linux OS corps, including the biggest, Red Hat, and you've got something that's bigger than, say, Sun (was), or any of the Unix corps before it.

    Linux's open source means that the corporate model is different, fundamentally. The model doesn't capture every penny in a singl

  • by Anonymous Coward

    A few things that many geeks seem to not get:
    Salesmen make the world go 'round. They are pounding the pavement every day. They are making relationships with CIOs every day. They have convinced those CIOs that the low-risk path is to buy name brand stuff. It's proven. Plus, if there's a disaster, the CIO can tell his board he bought the best stuff. That's the old IBM line: you never get fired for buying IBM.

    CIOs and other management types like the whole sales process. They like the kind of people th

  • I think BP is pretty open-source at the moment. They're sharing their good with every living thing in the Gulf right now, for free, though they might not remain a billion-dollar company for long...
  • Hmm, I wonder (Score:2, Insightful)

    by MacGyver2210 (1053110)

    Gee, I wonder how companies who give away software for free and whose software is largely maintained by the user community could ever make less money than the companies that lock their software down and charge hundreds of dollars per copy?

    It's almost like people aren't paying for it!

    Most "duh" article I have ever seen on /.

  • by Jodka (520060) on Friday June 11, 2010 @10:53AM (#32535566)

    There are a few distinct concepts which have been conflated:
    - The size of the Open Source software market as measure in dollar revenues.
    - The total number of Open Source software deployments.
    - The value of Open Source software to its users, as measure in revenues of its users (e.g. Google)
    - The size of the largest corporation operating in the Open Source software market.

    The assumption that with Open Source software those measures would be in the same relation as with closed-source software markets is probably incorrect. In particular, using the sizes of the largest corporations as a proxy for the "success" of Open Source software is bogus. The Open Source Software business might tend to fragment into multiple vendors because the license permits that, whereas in the closed source market services cohere around large corporations, the software copyright holders.

    The failure of predication here was not to overestimate the success of Open Source software. It has been a wild success. Rather, the failure was to to predict the specific forms which that success would take, which Open Source business models would succeed and particularly which corporations would be winners and which losers. Some predicted that companies which rigidly devoted themselves to vending purely Open Source solutions would prosper the most. That prediction has proven incorrect. The actual outcome seems to be the Open Source adoption is broad but the biggest winners are not strict adherents to the ideology. Significantly, Google, current market cap. 154.65B, runs on Linux. Apple is thriving and its machines run the Open Source Darwin in combination with proprietary layers on top. IBM provides Linux on its servers.

    Conclusion: Open Source software is a muti-billion dollar business but the winners in that market were not the Open Source purists.

  • I'm Pleased... (Score:3, Informative)

    by pandrijeczko (588093) on Friday June 11, 2010 @11:47AM (#32536346)

    ...because in this 21st century world of ours where just about everything is driven by money, it's great to see a huge, world-wide collaborative project confusing the hell out of accountants and marketing types who simply cannot grasp the simple concept that *sometimes* things happen just because enough people *want* to making it happen, rather than being paid to make it happen.

    And what's even better about the whole Open Source movement is that it benefits *everyone*. Nowadays, there's no justification for software piracy just because commercial software is overpriced in some parts of the world because now there are truly free alternatives that can, in most cases, give enough functionality - for example, about 10% of MS Office users use enough of its functionality to not be able to use an alternative package, but for the remaining 90% OpenOffice.org provides more than enough functionality.

    Even if you don't use or support Open Source, there's no denying that its presence means that commercial software publishers now have a benchmark that they need to be better than, and that, in turn, can only mean better quality software all-round.

  • by npsimons (32752) * on Friday June 11, 2010 @11:58AM (#32536510) Homepage Journal

    Open source solves the broken window fallacy in the software market. Seriously. Does anyone believe that Bill Gates or Steve Jobs are ridiculously rich because their companies' software is that much better? That they really earned all the money they have? Linux and other OSS has saved the world probably on the order of trillions of USD which has been put to other uses (curing cancer, researching alternative energy, feeding the poor, etc, etc). On top of that, it has made it possible for people who could never afford the outrageous prices of Microsoft or Apple to be able to use a computer.

    Coding Horror already answered the question of this article over three years ago [codinghorror.com]:

    The lack of open source software billionaires is by design. It's part of the intent of open source software -- to balance the scales by devaluing the obscene profit margins that exist in the commercial software business. Duplicating software is about as close to legally printing money as a company can get; profit margins regularly exceed 80 percent.

    To ask where the open source billionaires are is to demonstrate a profound misunderstanding of how open source software works. If you wanted to become obscenely rich by starting an open source software company, I'm sorry, but you picked the wrong industry. You'll make a living, perhaps even a lucrative one. But you won't become Bill Gates rich, or Paul Allen rich, by siphoning away the exorbitant profit margins commercial software vendors have enjoyed for so many years.

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