Generating revenue with open source software

Many companies are looking to open source software to lower IT costs. We've outlined opportunities and tips within the open source world in a Channel Hot Spot Tutorial. This introductory chapter will give you an overview.

With IT budgets increasingly strained, more and more companies are looking to open source software to help lower costs. And while many people associate open source with free software, the movement provides resellers and system integrators (SIs) with significant services revenue, analysts say.

Last year, almost 30% of SIs and value-added resellers (VARs) in the U.S. generated revenue with open source software, according to Matt Lawton, director for Framingham, Mass.-based IDC's Open Source Software Business Strategies research unit. Not counting programs embedded into other products, the open source market generated $1.8 billion globally last year, Lawton said. IDC expects that number to grow to $5.8 billion in 2011.

You too can capitalize on the open source action. We've put together this Channel Hot Spot Tutorial to help you decide if and how to enter the open source market segment and start generating revenue with open source software. The first part of the guide introduces the major considerations in providing reselling and consulting services for open source software. Future articles will take a closer look at the business model that goes along with open source and some open source technologies that businesses are using.

Opening the Door

While plenty of open source applications are free and never garner support from a commercial vendor, those with vendor backing often come in two flavors: a free "community edition" and a for-fee "enterprise edition." This is the approach Novell Inc. and Red Hat Inc. take for their distributions of the Linux operating system, for instance.

"Enterprise" versions of commercially backed open source software are generally cheaper on a per-seat basis than

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comparable commercially backed, closed source software. The lower licensing costs free up customers' budgets, allowing them to spend more on the services that are SIs' bread and butter, analysts say. Even if a VAR just does straight reselling for open source products and doesn't make much money on them directly, they get the VAR in the door with more customers and allow it to do other, more profitable business with those customers, Lawton said.

Another advantage to open source software is the access to underlying code that is inherent to open source, according to Raven Zachary, research director for open source with New York-based analyst firm The 451 Group. Although closed source applications provide APIs that allow SIs to customize software for each client, having full access to the code makes that job easier, Zachary said.

Complicating Factors

But open source isn't all things to all people. Its adoption among businesses has traditionally been strongest in infrastructure technologies like the operating system, databases, service-oriented architecture (SOA) platforms and development tools. Applications higher in the stack, such as ERP, CRM or telecommunications, currently account for just about 10% of open source applications managed by IT staff, Lawton said.

Open source is also much more prevalent at large enterprises than in small and medium-sized businesses (SMBs), which might first consider Software as a Service (SaaS) over open source when looking for alternatives to traditional software. Large enterprises like that open source is a good platform for building custom applications, but that same flexibility is a deterrent for SMBs that value simplicity more than customizability. Oftentimes, SMBs can't afford much custom development, Zachary said.

"The reality of the SMB market is that Linux has greater hurdles [there] than it ever had in the large enterprise market, and I think people have a level of exuberance for Linux in the SMB that I just don't think is warranted," he said.

The technology -- and sometimes the culture that comes with it -- can also present challenges to SIs, according to Kevin Jordan, vice president of sales with RPS Technology LLC, a Cary, N.C.-based SI for open source CRM application SugarCRM.

For instance, since much of SugarCRM's code was contributed by volunteers in the open source community, its style can be inconsistent, and some sections may be hard to work with, he said.

Support concerns are some of the biggest inhibitors for open source from the end users' perspective, Lawton said. But many of the strongest open source projects have companies backing them to address that problem, he said. One such company is Covalent Technologies, which supports the open source Web server Apache.

"The Apache Web server is a very community-based project," he said. "So Covalent doesn't really own the code for the Apache Web server, but [it has] been formed to provide that enterprise level of support."

Generally speaking, that support role is one of the main values that open source vendors provide. Novell and Red Hat provide support for their distributions of Linux, not just in terms of technical support for customers, but also to certify that major applications, such as SAP's and Oracle's, run on those operating systems.

Beyond support issues, SIs need to be aware that some open source deployments are small; some companies are just "looking for a bargain" and won't spend much money for an SI's services, Jordan said. SugarCRM, for example, targets small companies; the average deployment for RPS Technology has about 15 users, he said. Such a small deployment obviously represents lower potential profits. And sometimes, Jordan said, leads come from an IT employee who has played around with the software and has a question but doesn't necessarily have much say over his company's budget.

"It's kind of the drawback of dealing with a lot of IT buyers," he said. "You have to make sure that [the lead] is qualified."

A Young Market

Still, Jordan said the benefits of open source can outweigh the challenges for SIs. The cheap licenses open up the market to companies that might otherwise be unable to buy high-end software such as CRM applications, he said. And because open source is still relatively new in that arena, there isn't yet as much competition as one would find with more established technologies.

"The good news is, from the partner perspective, this stuff is all new, so there's a lot of ground-floor opportunity," Jordan said.

But taking full advantage of open source as a partner will require more than just downloading a white paper and providing a link to the download. In our next segment, we'll take a closer look at the adjustments you might need to make to your business to get the most revenue out of open source.

This was first published in October 2007

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