Open Source Systems: The Pandemic Route to Global Markets

by Scott Goddin, director, Portland US Export Assistance Center

The challenge of writing an article on the state of global market opportunities for open source system (OSS) software is akin to tracking down different outbreaks of the Asian Bird Flu. The use of Linux and other OSS applications is growing rapidly, but the collaborative nature of its business models makes quantification of hard sales numbers (itself a constant challenge with any software) elusive. As companies such as IBM and Xerox offer themselves increasingly as “global solutions providers” and large and small companies alike collaborate across global teams for their software development and customization, both providers and consumers are becoming familiar with the “open source” collaborative process and its benefits. Profits will derive from relationships within this collaborative process from licensing, after-sales service, training and product enhancement and customization, but the business model is constantly evolving. At this stage of the market, the issue will be less “how much money there is to be spent” and more “who’s in the game” and has caught the fever.

How much money is out there?
Despite the challenge in getting a handle on the numbers, there exist some estimates of the scope of market value associated with OSS systems deployment. According to an analysis prepared by IDC – the technology research firm – for the Open Source Development Labs (OSDL, headquartered in Beaverton), the overall Linux marketplace revenues for servers, PC hardware and packaged software on Linux is expected to reach $35.7 billion by 2008; an annual growth rate of twenty-six percent. Expanding deployment of Linux on servers along with redeployment on existing systems will contribute significantly to this growth curve.

In addition, packaged software is expected to be the fastest-growing market segment, growing annually at forty-four percent to an estimated $14 billion in 2008. Key packaged software markets on Linux will include database, application server software, applications and management tools. These software revenues are expected to dwarf revenues for Linux distributions. In addition, these estimates may be low end since sales activities from training, service and increased customization will add to supplier revenues.

The IDC report goes on to predict that while still a minority player on the desktop/PC, Linux penetration is expected to reach $10 billion in annual revenue on seventeen million units shipped globally by 2008. Increasingly, however, the reality is that more commercial and government organizations may encourage a move toward paid, supported copies of Linux and related applications to encourage expanded indigenous development and application of community-based software methodologies. As telling examples, this reality has already manifested itself in procurement legislation in China and Brazil.

Who’s in the game?
The membership of the OSDL is indicative of the global reach of OSS and recognition of its importance. From the US, local high-tech players – HP, Intel, IBM – are all active members. The US Who’s Who continues with names such as AMD, EMC, Google, Motorola and Unisysm, among others. Japan’s tech giants are represented by Fujitsu, Hitachi, Mitsubishi Electric, NEC, NTT, and Toshiba. European participants include Alcatel, BT Global Services, Bull, Nokia and Siemens. Both China and Korea have representation as well. These companies demonstrate the broad application of OSS across industrial and communications technologies and applications.

The interdisciplinary nature of OSS is also demonstrated with OSDL by the industry segments that include: end users, academia, equipment suppliers, system integrators and service providers, application and middleware vendors, systems vendors and silicon suppliers. The competitive challenge that OSS represents is stated directly by John Cherry, initiative manager for the Desktop Linux working group at OSDL, quoted in a recent article, “For those market segments where the Linux-based applications exist to solve user problems, Linux cannot only hold its own but provide a more reliable and less expensive alternative to a Windows desktop.” [1]

Bill Weinberg, a senior technology analyst at OSDL, has written “Today, Linux is a large, even dominant force at the core and edge of the enterprise, ubiquitous in the data center and in infrastructure, and it’s making inroads on the corporate desktop and in phones, handhelds and other clients. As OSDL and community projects continue to close technical gaps and remove barriers to deployment, Linux will increasingly provide a viable platform for business-critical, end-to-end enterprise applications.”[2]

Weinberg’s remarks are substantiated in an article written with Jon Masters in Linux User & Developer, in which the authors describe how OSS is being increasing integrated into embedded applications in consumer electronics. “Manufacturers of equipment in all of these segments and applications types are building current and next-generation devices with Linux. In fact, VDC (Venture Development Corporation, the leading embedded market research firm in Natick, Massachusetts) reports that CE is the number one application area for embedded Linux. Summing together consumer electronics, office automation, automotive and home automation, a whopping 43 percent of all embedded Linux applications fall, broadly speaking, into consumer electronics.”[3] The article continues with an analysis of how OSS can help manufacturers and developers reduce costs by accelerating design and deploy times, sharing complex workloads among a broader community, broadening functionality and reducing IP costs and dependency, among others.

A global business strategy?
Success for Oregon firms in a this expanding OSS environment will require integration of either OSS-based applications into their product or service offerings along with consideration of how the OSS process and relationships can fit into their business strategy. In this regard, there will be no clear dividing line between a domestic and global business strategy as OSS collaboration will require a collaborative working relationship to assure that customer needs are met. This new approach will pose significant challenges for business strategies.

In their book, Innovation Happens Elsewhere – Open Source as a Business Strategy, authors Ron Goldman and Richard Gabriel discuss major elements of integrating OSS into a business plan. One of their key passages describes how a company might position itself with an OSS product: “When a company has a proprietary product built on top of a free, open source version, the free version will bring in customers and increase the company’s market share. Users of the free version can be persuaded to upgrade to the for-sale version to get new features, better support, training, or consulting services. It also makes it more difficult for competitors to enter the market because they will need to compete with a free product.” [4] While this type of market position may seem beyond the reach of smaller Oregon software firms, the passage does describe the type of relationships that will need to be considered for a successful OSS-based business model. Goldman and Gabriel concede that it is not an easy transition.

Oregon’s largest high-tech firms are gradually embracing OSS and smaller SAO member firms from Versalogic (embedded computers) to Instantiations (software development tools) are integrating OSS into product and service offerings. As larger international markets such as China, India and Brazil look to OSS to help them diversify from legacy systems and reduce costs, business opportunities will present themselves for Oregon firms that have figured out how to collaborate in an OSS environment and profit in the new (and challenging) business model. OSDL represents a unique resource for Oregon companies to start (or move further along) the learning curve and fellow SAO members can also serve as a crucial resource for getting caught up in this coming (and not necessarily unwelcome) pandemic.

About the author
Scott Goddin is director of the Portland US Export Assistance Center (www.buyusa.gov/oregon) and has been working in international trade with the US Department of Commerce for more than 20 years. Goddin has served as a US trade negotiator working on Asian market access and standards issues for US high-tech and communications companies and intellectual-property rights issues in Korea, Taiwan and China. Goddin also has served in temporary assignments as a commercial attaché at American Embassies in Seoul, Taipei and Nairobi and has managed the office in Portland supporting local Oregon firms since 1997. You can learn more about export assistance by visiting www.export.gov or by contacting Goddin directly at scott.goddin@mail.doc.gov