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My employer, Novell, posted its earnings yesterday, resulting in a nice up-tick in our stock price. Press and commentary has been favorable for the most part, but I feel compelled to respond to Matt Asay’s two posts on our earnings.
Now, I am an employee of Novell, so to some extent my fortunes rise and fall with those of my employer (although there are always other options in a free labor market.) But I am not in PR, and I try to make my comments on this blog objective and fairly independent. I do self-censor along the lines of “if you can’t say something nice about your employer, don’t say anything at all”, but I’d like to believe I’m able to see all sides of Novell’s position relative to competitors, peers and partners.
But I’m afraid to say that Matt Asay, a one-time Novell employee, has lost the ability to view Novell through any lens other than his distaste of the Microsoft deal. Novell had a pretty nice quarter, with our stock up over 8% today as I write, but this is what Matt says regarding our Linux business:
The numbers are still relatively small ($21 million), but any progress is progress. Importantly, the word on the street is that Microsoft is not proving to be a great distribution partner (go figure!). This means that (gasp!) Novell is actually managing to sell its Linux value, not just making silly patent deals.
Sure, the patent deal between Microsoft and Novell was a deal winner at Wal-Mart Stores and undoubtedly a few others. But I would argue that Microsoft has done more harm than good to Novell’s Linux business. Why not cut it adrift?
Matt would argue that the MS deal has done more harm than good, but he doesn’t — he just asserts that this is the case, while linking to a nine-month old article. The actual evidence provides a different picture: as Matt himself quotes from Credit Suisse, $14M in Linux revenues were from the MS deal, while $24M were “organic”. “Word on the street” may be that Microsoft isn’t a good partner, but the quarterly results tell a different story altogether.
Matt excerpts Jason Maynard’s take on the earnings report, which says in part:
Although we acknowledge the improvements to the business, we continue to believe there are better relative investments within the group….we are maintaining our Underperform rating….
So CSFB has been pretty bearish on the stock, and they’re not willing to change their rating after one or two good quarters. Fair enough. Maynard makes various arguments for his view, some of which I think are valid, and some off-base. Of course Maynard is just one analyst, and others have been more bullish, but none of them make suggestions as far out as Matt does:
Now you just need to ditch the ballast that you call Systems and Resource Management and Identity and Security Management, and really grow…
Interesting…so Matt advises getting rid of almost $100M in quarterly revenue and about $35 in quarterly operating income, as well as divesting the customers that own SRM and ISM products but not Linux, because…why?
In most businesses, 2 percent and 4 percent increases are embarrassments.
Matt’s background in hi-tech start-ups is showing. Start-ups can’t survive without rapid growth, but the rest of the business world is hardly embarrassed by a slow growing but profitable business. While start-ups can’t worry about profits at the expense of growth, for the rest of us, profits are a good thing. Novell has a stated goal of growing these business more rapidly, which would be good, but in the meantime they’re not exactly a millstone around our neck.
I’ve heard analysts argue that Novell should shed everything but Linux so that it will have the same business model as Red Hat, a view Matt seems to be alluding to. Sure, Novell could remake itself to look just like Red Hat, but then Novell would throw away most of its revenue and income as well as any chance it has to differentiate itself from Red Hat. The world doesn’t need another Red Hat, and Novell doesn’t need a “me-too” strategy. It needs to find ways to deliver more value in ways that Red Hat can’t. One way to do this is with a broader, integrated product portfolio. I think the chances are better that Red Hat will look more like Novell down the road rather than the reverse.
Matt finishes with the comment “Novell needs a new trick”, by which I assume he means something besides our deal with Microsoft, even though only $14M of our Linux revenue was from Microsoft certificates, leaving $229M in revenue from other “tricks”. We’ve announced a string of partnership deals, an acquisition, and several new product releases in the last quarter, but Matt overlooks all of that due to his over-riding obsession with the MS deal. How many more tricks does he want?
Matt and other open source commentators should feel free to criticize Novell’s MS deal on its merits, or lack thereof. I think they are wrong, though, to view all of Novell through that single lens. They also are wrong to think that Novell, a complex multi-business unit company, must look like Red Hat to succeed.
None of us at Novell know how this wild ride is going to turn out. We may succeed fabulously, or we may crash and burn. Either way, I’d like to see a higher quality of kibbitzing from industry observers than Matt has displayed.
§ August 17th, 2007 § Filed under Industry, Open Source Comments Off
IBM and Sun have announced an agreement for IBM to resell Solaris on its x Series servers. Mark Webbink believes (and Matt Asay concurs) that this is a Machiavellian move on IBM’s part to keep other OS vendors on the defensive:
For IBM it provides another Unix-based operating system vendor with which to challenge Microsoft and with which to keep pressure on the other Unix-based operating system vendors, Red Hat and Novell.
Mark Webbink has been Red Hat’s top lawyer, so he clearly has had far more exposure to the top dogs in the software industry than I have, but I have a much simpler explanation for this move.
IBM wants to sell hardware.
I mean, jeez, we can read all kinds of portents from the entrails, but I’m with William of Ockham on this one. Sun is getting out of the hardware business, they have ported Solaris to the x86 platform, they have a very large user base with servers coming off warranty, their customers don’t want to have to port their applications, and IBM sells x86 servers. What could be simpler?
From the slashdotted article on the news:
Left out of the mix here is Hewlett-Packard, which is locked in a battle with IBM for leadership in the worldwide server market. IBM and HP each had 29 percent share in the most recent figures compiled by market tracker IDC, while Sun and Dell Inc. were tied for third with 11 percent each.
That’s the real news here. This raises lots of interesting questions — who has the upper hand competitively here? Did IBM get an exclusive, or are they only getting first-mover advantage? Could Sun say no to IBM’s demand for an exclusive reseller agreement? Could IBM afford to say no if Sun refused an exclusive? Did the negotiations come down to a term for an exclusivity deal? Was Sun shuttling back and forth between HP and IBM to get a better deal, or are there strategic reasons why they preferred IBM? And what about Dell? Not enough Unix experience?
These are the interesting aspects to this announcement, not its impact on Microsoft, Red Hat and Novell, in my arm’s length view. As much as we’d like to think the OS wars are the center of the universe, others have their own businesses to run.
§ August 14th, 2007 § Filed under Open Source Comments Off
So I go on vacation, and look what happens — Novell owns the Unix IP after all, leaving SCO a dead man walking.
There is quite a bit of commentary out there, to which I will merely add this thought: this is one more example of a severely broken patent system. As I’ve said before, I don’t buy in to the FSF’s free software ideology for a second, but I do not think software requires patent protection for a very pragmatic reason: software patents are harming innovation, and the only rationale for patents is to spur innovation. There are no fundamental property rights in question here, just as there is no fundamental right to software freedom. This is a question of balancing society’s ability to take and build upon others’ inventions versus the desire to provide innovators financial rewards to incentivize invention. Nothing more.
And with regards to software, this balance is clearly out of whack, as shown by the lawsuit masquerading as a public company that was SCO. For quite a few years, SCO’s only viable business has been its extortion racket based on spurious legal claims. Of course this extortion scheme has impeded others’ ability to create business value, thereby subverting the whole purpose of the patent system. And while we all knew how this would ultimately end up, it’s taken many years already, and probably will drag out for several more.
This is a case study in why software patent protection should be eliminated.
§ July 27th, 2007 § Filed under Open Source Comments Off
I had to laugh…I took a look at Microsoft’s new open source web page, and decided to tag it for future reference. When the del.icio.us window came up, there was an interesting tag on its list of both recommended and popular tags.
Apparently del.icio.us users see quite a bit of “humor” here (and understandably so).
(Click on the image to expand.)
Updated below. Updated again.
There’s been some conflict regarding commercial open source, aka the SugarCRM model, and whether it is truly open source. Last month, Michael Tiemann, President of the Open Source Initiative, said on his blog:
…THESE LICENSES [SugarCRM, SplendidCRM, Centric] ARE NOT OPEN SOURCE LICENSES. This flagrant abuse of labeling is not unlike sweetening a mild abrasive with ethylene glycol and calling the substance Toothpaste. If the market is clamouring for open source CRM solutions, why are some companies delivering open source in name only and not in substance? I think the answer is simple: they think they can get away with it.
I don’t think it’s fair to say that these companies are just trying to get away with something, but I’ll let that go for now. Tiemann continues with a call to action:
So here’s what I propose: let’s all agree–vendors, press, analysts, and others who identify themselves as community members–to use the term ‘open source’ to refer to software licensed under an OSI-approved license. If no company can be successful by selling a CRM solution licensed under an OSI-approved license, then OSI (and the open source movement) should take the heat for promoting a model that is not sustainable in a free market economy. We can treat that case as a bug, and together we can work (with many eyes) to discern what it is about the existing open source definition or open source licenses made CRM a failure when so many other applications are flourishing.
So fair enough. Let’s take the many “open source-lite” companies like SugarCRM and ask why they (and their VCs) feel a pure OSI-approved license won’t work for them as it has for Red Hat, mySQL, Apache and so many others.
The first “bug”, if you will, in the OSI approved model is that it doesn’t reflect in any way the natural lifecycle of application development. Getting from release 0.0 to 1.0 requires a significant capital outlay, much more so than to get from release 1.0 to 2.0. There are several reasons for this. First, building on top of and refining a stable, working application, as OpenOffice has done for example, is far less work than creating a stable, working application to start with. Developing the initial application architecture and getting it to the point that it can be used by a naive end-user is a huge step. Secondly, this initial development has to be done in the absence of any paying customers, so none of the effort can be funded out of revenues. And lastly, it is much harder to get community participation in a fledgling project, especially when it is not an application that hackers have any use for themselves. Community contributors typically scratch their own itches, and not many of them have a CRM itch.
Compare SugarCRM’s situation with a typical mature open source project. More often than not, successful open source projects were building on top of an existing and fairly large code base. These code bases were made available under varying circumstances: Linux reached version 1.0 through academic interest and participation, and OpenOffice was the commercially failed StarOffice system donated by Sun, just as Firefox inherited the (albeit ugly) code base from Netscape. Regardless of how the initial code bases were open-sourced, they allowed the project to start with a stable release and to avoid the big upfront capital outlays required to get there.
SendMail, Apache, mySQL Samba and Linux are all applications hackers use themselves, and they therefore have an incentive to help extend them to meet their own needs. Corporate contributors like Red Hat, IBM and Novell have huge, strategic stakes in seeing Linux stacks succeed, so they are willing to pay the salaries of community developers, and to fund organization such as the Linux Foundation. But individual and corporate contributors have no such stake in the success of open source end-user applications. Without them, development all falls to the start-up itself.
Given the size of the required capital outlay, and the lack of corporate funding, start-up open source companies have to rely on private capital, particularly VCs. The VCs invest for only one reason: so that their equity position will grow and become liquid so they can exit in seven years. We can decry VCs for being short-sighted capitalists (although I certainly wouldn’t) but the fact is they are the only source for capital for start-ups, and so they get to set the terms under which they will agree to invest. Don’t like VCs? Find someone else willing to invest $20 million in a software start-up.
The fact that these CRM start-ups have elected to go with a hybrid open source/proprietary licensing scheme demonstrates that OSI-approved licenses would not provide the financial results they (or their VCs) require. Given that customers and the open source community would, to some extent, prefer to license software under an OSI-approved license, there must be a reason these companies have chosen a different license. I can only assume they have determined that an OSI license would not allow them to generate the revenue required to obtain financing for the application’s initial development.
Once a stable, usable version of an end-user application has been released and achieved some measure of market acceptance, this picture changes however. Customer IT departments and third party software vendors now have an incentive to develop extensions to the initial release and contribute them back to the project. Even individual hackers would find it far more enticing to contribute.
While initial revenues would be consumed just to grow the software start-up to keep pace with demand, eventually revenues will turn into net income and market value. Through the maturing of the application and the contribution of community members, the investment required by the software company itself drops. It’s at this point that the VCs are able to exit, and the public equity markets are able to meet any ongoing needs for capital.
In a competitive market, an OSI-approved license would not only be feasible for a maturing project, but most likely required for the sponsoring software company to maintain market leadership. Customer and community members would be able to demand a more open licensing scheme, where they weren’t able to before. In this maturing phase, the software start-up would become what we all recognize as a true open source software company.
The “bug” in the OSI licensing model is that it does not account for this lifecycle view of software development, and does not provide a viable way for start-ups, particularly start-ups developing end-user applications without an existing code based to build upon, to attract the capital required to reach maturity. I would like to see the OSI talk to start-ups and VCs and find a way to accommodate the needs of start-ups. My concern is that, if they stick to their current stance, the current wave of software start-ups will end up reinforcing the view that open source is not economically viable for end-user applications, but only applies to commodity OSes and middleware.
Update: Events have put a lie to much of my thesis here. SugarCRM has announced they will be adopting GPLv3 for the community edition of their CRM software. They will still have a two-tiered licensing system (well, actually, three-tiered), with paying customers getting a richer, more functional application than the GPLed application. Perhaps that’s the important monetizing strategy here, not whether the community version is released under GPL vs. a Mozilla type license.
What’s interesting is that the change is attributed to pressure from customers. Although I assume we’re talking about customers of the free (as in beer) community edition, not the paying customers of the fuller versions, since they won’t be affected by this change. Makes me think it’s really because good standing in the eyes of the broader open source community really does matter to SugarCRM, and they see this as a small price to pay.
Regardless, the OSI and Michael Tiemann have won the battle — congrats!
Update 2: What’s more, Microsoft is now jumping on the OSI bandwagon:
Microsoft will submit its Shared Source licenses to the Open Source Initiative for review and approval as open-source licenses.
Bill Hilf, general manager of platform strategy at Microsoft, used his keynote address at the annual O’Reilly Open Source Conference in Portland, Ore. on July 26 to discuss Microsoft’s evolving open-source strategy.
As part of that, he highlighted a new Microsoft Web site designed to provide additional transparency into the company’s position on open source, and announced the company’s intent to submit its Shared Source licenses to the OSI for approval.
“Microsoft and the OSI are currently in active discussion on this and additional details will be made available in the coming weeks,” Hilf said.
A Microsoft spokesperson declined to give any additional specifics and, when asked what had changed to make this the right time for Microsoft to seek open-source approval for its licenses, the spokesperson would only say that “things continue to evolve when it comes to open source at Microsoft.”
(Emphasis mine.)
I’ll say.
A good op-ed from Steven J. Vaughan-Nichols:
I see the current uproar between those who partner with Microsoft–Novell, Linspire and Xandros–and those that swear off Microsoft partnerships—Ubuntu and Mandriva—as being just another variation on the theme of open-source pragmatism versus free software idealism.
…
Differences and all, though, the Linux companies still have more in common with each other than they do with Microsoft no matter who partners with the Windows giant or who doesn’t. One way or the other, they’re all out to carve out their own chunk from Microsoft’s territory.
…
Sure, Microsoft loves to see the Linux companies fighting with each other. Microsoft hopes that this will lead to a repeat of the Unix wars of the late ’80s and early ’90s, which made sure that the Unix businesses never mounted a successful challenge to Microsoft’s desktop operating system business and eventually lost the x86 server market to Microsoft’s own NT, which was followed by Windows 2000 and Server 2003.
Linux isn’t Unix though.
Bottom line — there’s no civil war, just healthy disagreement among companies committed to open source. Read the whole thing.
§ June 18th, 2007 § Filed under Open Source Comments Off
Steven Vaughn-Nichols quotes Kevin Carmony, CEO of Linspire (who just signed a Linux deal with Microsoft):
“In the early days of Linux, we had no choice but to bang the ‘fight Microsoft’ drum (and as you know, no one did it better than Linspire) [Linspire was first known as Lindows and eventually reached an out of court settlement with Microsoft], because we needed to get everyone’s attention, including Microsoft’s, and to be honest, back then, Linux didn’t work very well on the desktop, so it was pretty much the only thing we could find to say about it to get attention.”
That’s no longer the case today, said Carmony. Microsoft has a better understanding of what Linux and open source is, and how to work in a cooperative manner with Linux, and we have a lot more interesting things to talk about.”
He continued, “It’s time to move past all of the idea that for Linux to succeed, Microsoft must fail. We need to let it go, and start working with ALL the players in the PC ecosystem, and that certainly includes Microsoft. I can’t speak for the rest of the Linux and open source community, but from Linspire, you can expect less fighting and name calling, and more attention to partnering to build a better Linux. We will certainly still compete, just like Apple and Microsoft still compete aggressively, but we’ve also [got to] build a bridge to work together when necessary.”
“There are those who want to isolate Linux from the other 99 percent of the desktop computing world, and if they succeed, Linux will never grow past 1 percent of the desktop market,” added Carmony. “I want to see Linux move in the opposite direction, and rather than be exclusive, more inclusive.”
§ June 16th, 2007 § Filed under Open Source Comments Off
Today I heard Steve Shreeve, founder and former CTO of Medsphere, speak at a local event on open source here in Pasadena. Shreeve and his brother founded Medsphere and were leading the effort to develop an open stack implementation of VistA (the VA health care software, not the proprietary desktop OS) until they were sued by Larry Augustin and the Medsphere board under the provisions of the DMCA.
Steve is an incredibly passionate guy, and has quite a story to tell of how Medsphere was founded and grew. He comes across as a very sympathetic person, as well as very bright (he has an undergrad EE degree with minors in Mathematics and Physics, then went to med school where he pursued a joint MD/MBA program). It’s hard not to like the guy.
But I’ve also heard Larry Augustin speak, and I was impressed with his grasp of the underlying economics of the open source software business. Medsphere is releasing its OpenVista in a two-tiered model, keeping much of the non-VA enhancements proprietary. I imagine their intent is to monetize the hell out of their development efforts, and I can’t blame them. It’s easy to see how Shreeve’s enthusiastic embrace of open source ran afoul of the Board’s desire for revenue.
So this is a cautionary tale: bright entrepreneur starts up company, and his VC-led Board ends up suing him for $50 million over an apparent mis-understanding regarding what was to be released under the GPL and what was to remain proprietary. Bottom line — get the details regarding what is to be released under which license nailed down before anything gets posted to SourceForge.
During his OSBC keynote, Eben Moglen said that “Science must be free. Knowledge must be free. Let freedom ring.” This parallels the argument he’s made in the past that patent software is akin to patenting math.
This is compelling rhetoric, and demonstrates Moglen’s abilities as a lawyer. But rhetoric is a double-edged sword, in that it can be put in the service of logic and truth — JFK or Martin Luther King come to mind — or in opposition to logic and truth. I believe Moglen’s rhetoric falls in the latter category.
There are two main flaws in Moglen’s arguments. First, he confuses knowledge with invention. My undergrad degree is in Physics, so I know first-hand the huge difference between Physics and Engineering. Our purposes were different, our training was different, our culture was different than the Engineering students down the hill at UCLA. The goal of the physicist is to further knowledge without any thought to its immediate usefulness. It’s rare that any new discovery in Physics has any commercial application within the twenty-year period of patent protection. Engineering’s goal, on the other hand, is to make things that solve an immediate problem, often a commercial one. They couldn’t be more different.
The same difference is found between theoretical and applied mathematics. When Calculus was invented by Isaac Newton, it had no commercial application. On the other hand, figuring out how to perform real-time Fourier transforms to compute 3D distance readings from sound echoes hardly advanced the state of mathematical knowledge, but it did make sonar possible.
Invention, and knowledge, two entirely different things that Moglen lumps together. Knowledge is free, always has been, and that didn’t change with software patents. Invention, a commercial activity, has historically been protected for a short period of time. I don’t know if Moglen deliberately confuses these two categories, or just doesn’t understand the difference, but either way, it’s a shame.
As a result of his confusion of knowledge and invention, Moglen implies that true invention must be instantiated in a physical invention, since any innovation instantiated digitally, according to Moglen, is not invention but knowledge. He is selling software short. Is invention any less deserving of protection because it results in software rather than a physical contraption? Software engineers should take offense at that implication. They are no less inventors, or innovators, than someone building a new hybrid engine or a nano drug delivery device. His artificial conflation of invention and knowledge leads to a necessary short-changing of digital invention.
What’s a shame is that Moglen doesn’t need to use these rhetorical excesses to make his case. His view is, at bottom, an ethical argument based on “the way things ought to be†rather than a utilitarian argument. But patent law isn’t meant to instantiate any moral construct; it is solely a pragmatic balancing act between the need for society to incentivize invention while allowing invention to be utilized broadly by society. Property fundamentalists on both the right and left argue for or against patents from moral principles, but the law does not.
Ultimately, the question regarding software patents is a utilitarian one: do they benefit the common good? This is where software patents fail miserably. The big software vendors, my employer included, file for software patents in a bizarre process of patent proliferation to make sure that their competitors infringe on as many patents as they infringe of theirs. Everyone is infringing someone else’s patents. Patents impose a financial burden on innovation rather than a financial incentive to innovate. They don’t work.
This is why software patents are a bad idea: in a strictly utilitarian analysis, they are not only unnecessary, but counter-productive.
It’s a shame that Moglen, Stallman and the FSF argue against software patents on moral grounds using inapt analogies like “knowledge = invention” and “software = math†when the utilitarian arguments are much more compelling and easily embraced. But the FSF is an ideological movement, and not a practical one. As a result, they hurt their cause as much as help it.
§ May 24th, 2007 § Filed under Open Source Comments Off
I spent the last couple days at the Open Source Business Conference, along with Gary Ardito. Unlike Gary and Matt Asay, I am not much of a live blogger, so here’s a recap of some of my thoughts a day after the fact.
I was struck by the stark contrast between the free software and the commercial open source crowds. While many of the keynotes advocated a free software ideology (and I don’t mean that word in a negative sense), the enterprise IT, open source start-up and VC speakers were very pragmatic. While Eben Moglen argued for the virtue of the GPL, SugarCRM was unapologetic about their use of their SugarCRM Public License. While Linux and Gnu have been developed by broad communities, the commercial open source companies have very little code developed by anyone not on their payroll. For them, open source isn’t a movement, or an ideology, or a moral and ethical imperative — it’s a strategy to build successful software businesses.
And it works.
Larry Augustin shared some software company P&L numbers from the golden years of the 1990s, the not-so-golden years of the late 90s to now, and the hopefully-new-golden-years of commercial open source. During the late 90s, sales and marketing expenses for software companies shot up, coming at the expense of R&D. The market tightened, and buyers could make vendors go through lengthy and expensive sales processes with RFIs, RFPs, POCs etc. The cost of generating leads by buying lists and cold calling became too expensive. The push model no longer was financially viable.
The advantage of open source isn’t so much in the development end, although there’s some benefit there. According to Augustin, the benefit is in moving to a pull sales and marketing model. Vendors don’t have to explain their software to prospects, because they already have it installed, are already playing with it. Trade shows have been replaced by Google, with a much lower cost way to educate the market and generate leads. The software financial model has returned to balance.
Not that there’s no advantage on the development side, but it’s not necessily in developing the core product. Community involvement helps with enhancements around the product, such as localizations, interfaces, integration etc. Danese Cooper of Intel, and formerly of Sun, talked about community involvement with OpenOffice. Microsoft has localized MS Office to 13 languages, which isn’t enough to cover the world. When OpenOffice was open-sourced, Sun saw this localization gap. They made it easy for contributors to localize OO, and the community got excited. For the first time they could have an office suite in Estonian, Malay or Swahili. And now they do.
So in spite of the moral and ethical dimensions to open source, for the majority of the OSBC attendees it’s all business. And that’s a good thing.
There were other highlights, such as a session on the MS-Novell agreement, but I’ll save those for other posts. It was two very well-spent days, so thanks to Matt and all the other organizers for a great conference.
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