The Yin and Yang of Open Source Commerce, Part 4

By: John Terpstra
Friday, November 4, 2005 01:33:23 PM EST
URL: http://www.linuxplanet.com/linuxplanet/reports/6066/1/

The Competitive Situation

So far in this series of articles, it has been demonstrated that there is a large and growing global IT market. The bulk of Linux business opportunity is demonstrably in the SMB/SME marketplace, a market that is presently under-serviced by Linux companies. The nature of the market as a whole has been discussed, and in this concluding part of the series, the competitive situation is briefly mentioned so as to round out the argument that it is time for seriously profitable Linux business activity from businesses that know the rules for success.

A business that earnestly wants to gain market share will choose those segments that offer rapid product uptake, economy of scale, short repurchase cycles, and a diverse distribution channel that can offer a suitable defense against retaliatory action from incumbent competitors. Beyond the 50,000 global enterprise businesses there are some 30+ million SMB/SME businesses. An incumbent competitor can mobilize a small team to defend themselves in 50,000 customer sites, but even the largest company in the world cannot long afford to retaliate in a large customer base.

Could it be possible that Microsoft customers are not happy with the products they have been sold? Perhaps virii, worms, and spam are taking their toll on the established market for MS Windows based products. If this is correct, then Microsoft is caught in a race against time to bring out a product that can be used to shoehorn customers and to lock them into a long term software service commitment.

Additionally, we may observe that Microsoft's sensitivities in respect of Linux are well founded. It is possible that Microsoft's attempts to counter Linux in the enterprise market is nothing more than a plan that serves to buy more time in the SMB/SME market, where the vast bulk of the company's profits are obtained. If this is true, they may be using the anti-Linux "Get the Facts" strategy as a smokescreen while they dig deeper trenches in which to embed their business before the Linux vendors wake up to markets outside the enterprise.

Microsoft's presence in the enterprise market is not as strong as it is in the SMB/SME market. The enterprise market is the stronghold of the UNIX players. Microsoft's foothold in the enterprise market is undermined by the level of technical competence of IT staff in large businesses. In the SMB market there is little to no on-site expertise; these sites depend on outside contractors and value added resellers (VARs) to provide the technical support needed to keep information systems operative. Traditional Windows VARs have not embraced Linux to the same degree that the more technical consultants have done.

Over the past two years, Novell has started to rediscover their roots. Novell rose to fame as a result of its efforts in the late 1980s and early 1990s to build a strong reseller and support network for NetWare file and print service products. Novell ran regular partner meetings at which they taught VARs how to build and manage a service business. This was a successful strategy for several years.

When NetWare 4.0 was released, Novell decided to milk the now committed VAR channel by demanding complete re-training and re-certification. At the same time, they started to enter into direct sales deals with the major hardware vendors so they could sell servers that had NetWare pre-installed. Overnight, Novell started to compete with the very channel VARs that had helped them to build their business. This competition (or more accurately--channel conflict) came at a price. VARs lost critical support revenue because the hardware vendors sought to sell support agreements to provide professional services for network installation and management.

This made many NetWare VARs very unhappy. The timing was bad for Novell because this happened just as Microsoft Windows NT4 started to gain market inertia. Microsoft saw the light and moved into the breach that Novell had created through channel conflict. It did not take long before Microsoft also saw opportunity to abuse the VAR channel in the same manner. They made training and certification a profit center and introduced the same style of channel conflict as Novell had done earlier.

Another example of the consequences of channel conflict can be seen in the old Santa Cruz Operation (SCO), who acted the way Novell had done by dictating to the channel in a manner that was prejudicial to their educational and reseller VARs, with the same predictable results. SCO in effect undermined their own business and then blamed to loss of business on Linux. It is no wonder that SCO VARs actively embraced Linux in the wake of the damage done to them by the company they had helped from its earliest days.

When SCO introduced UnixWare 2 to the reseller channel, they advised VARs they would need to complete re-training and re-certification to remain authorized. This practice of coercing resellers is not unique to the companies mentioned, it is a practice that has been far too common in industry.

Distribution Channels

As channel VARs and service providers lost business to the software houses and major hardware vendors, original equipment manufacturers (OEMs) also started to play the channel conflict game. Rumors started that VARs are like snakes in the grass and can not be trusted. This brought about a high level of competition with VARs that drove down prices and continues to do so to this day.

Consumers generally approve of lower prices, and I am not advocating a proposition that prices should remain high through protectionist means. Prices (costs) should in general come down as a necessary consequence of the learning-curve effect. My objection is to the undermining of the channel by predatory behavior in the market place.

The distribution channels created in the 1980s through large distributors, second-level distribution houses, and resellers was thrown into disarray. VARs were made aware in the late 1990s that resale margins on hardware and software would not be able to sustain traditional resale-only businesses. They learned quickly that survival meant provision of installation and maintenance services.

Channel conflict had stripped the reseller of most larger customers (the medium businesses and upwards). This meant that the resellers who survived learned to provide a higher level of service to a large pool of smaller customers. This situation persists to this day. It takes a great deal of entrepreneurship to build and maintain a profitable support operation. Most that are profitable have more than five employees.

The VAR (reseller and service provider channel) has to pay companies, like Microsoft, for most support calls made to obtain resolution to technical problems. Their capacity to pay is diminished, therefore many struggle by, making only essential calls for assistance. At times customers feel let down by Microsoft products, complain at having to pay Microsoft license fees, and at having to pay for support services. The result is that many VARs, who are not sharp about collecting monies owed have a business that is continually challenged and subject to cash crunch.

In 1999-2000 TurboLinux commenced an initiative to leverage Linux through the US VAR channel. It was soon discovered that the VARs that serviced the 5-150 user customers were hungry to embrace an alternative to Microsoft Windows, SCO OpenServer, and NetWare. Unfortunately, even though a significant number of resellers signed up for a VAR program, TurboLinux made a belated decision to pursue business through the OEMs that targeted the enterprise market.

The 2004 Novell BrainShare conference, in Salt Lake City, Utah, brought home to Novell the message that the VAR channel is hungry for products and services that they can offer customers as alternatives to Microsoft Small Business Server and related products. Novell responded, but they have a challenge ahead to regain the confidence and commitment of long-standing VAR partners. They must also deliver a customer- and VAR channel-friendly product together with appropriate services. From recent feedback, it would appear that Novell are well on track to regain this vital part of the market. Novell are well aware that a significant staff reduction can undo the progress that has been made.

A key challenge Novell has is to turn the company from selling technology, rather to selling of business solutions. Customers are seeking an end-to-end business solutions platform, in packaged form, and without unnecessary hype and mumbo-jumbo. The solutions have to be simple to understand, quick and easy to deploy, and cost effective to maintain.

By opening up the development process of the desktop Linux product and establishing the OpenSUSE initiative, Novell haa shown great understanding of the marketplace. They recognize that in the absence of a sound and effective desktop Linux offering is fundamental to being able to provide the end-to-end business solution framework that is needed in the SMB/SME segment. Novell must now rediscover the heart of the consumer and create new ways of delivering the business enhancing solutions that SMB/SME's want and need, and that consumers in general require. One wonders if they gave the fortitude to do that without tripping over their own boot-laces. Novell's shareholders are understandably uncomfortable and are pressuring them to show greater market leadership and entrepreneurship.

Nervous shareholders can unsettle a business into actions that are antagonistic to its long-term goals and objectives. It is to be hoped that Novell do not make such a lamentable move. The desktop is as important to the SMB/SME market as is the server. Remember, the customer wants a complete solution that works reliably. Microsoft know that is what the customer wants, they too had best ensure that the next product shipped into this market does not repeat errors of the past. The SMB/SME market is apprehensive of all who offer a business solution and therefore Microsoft, Novell, Red Hat, and any other potential solution provider must act with confidence and with precision. In every respect the market is wide open for catalytic change. We live in exciting times.

The Importance of Customers

Our world is full of clichés, one of which says: Business is all about making money. The presuppositions that underlie this simple cliché are truly revealing. It is often used in a context that implies justification for treating people as less than human, and as if ethics do not matter. Business should be most concerned about serving customers to enrich their world, and the measure of how well this is achieved is the profit (money) made out of doing it well. You see, the question is one of what or who is central to a business. If the sole purpose of a business is self-enrichment, and if ethics and morals do not count, then why not just rob a bank?

So, reflecting back on the earlier discussion regarding channel conflict, it must be recognized that business involves relationships and trust. Any company that wishes to build a long-term stable and profitable business must protect its business relationships. This means that a hardware manufacturer, or a software development house, must respect and protect the relationships it has with its VARs, as well as those of the VAR with its customers. Anything that undermines that trust is ultimately destructive of the market as a whole.

Linux has not failed in the market at which it has been directed, it has performed like a star! But it can not be denied that Linux has failed to address the most significant market from which it could have grown exponentially.

The market for Linux-based business solutions has not gone away. The market has changed over the past decade, but it is still abundantly to be found in the breadbasket of a nations' productivity--the major contributor to its Gross Domestic Product, the SMB/SME market.

There is a saying, that the more things change, the more they stay the same. Another way this is sometimes expressed is, that with every change in the market there is a reaction that seeks to cancel out the net effect of the change. There is no substitute for clear perception, action with conviction, persistence and determination to succeed. There is also no-one who can catapult a business towards stardom than willing and committed customers and consumers.

It must be recognized that in the entirely unlikely and unreasonable event that Linux might totally replace all competitors in the enterprise segment of the market, in the grand scheme of things, it would still be a minority player. If any Linux or OSS business wants to stand a chance to succeed in the larger market it must tackle the opportunity as close as possible to where the tap-root of its greater financial well-being is found.

Nothing can be gained by whining and complaining about the problems of doing business in particular market segments. Even if the whole IT industry and many power-brokers within it are diametrically opposed to everything it will take to be successful, the business that moves forward with dedication, determination and self-discipline will find the road to success. Every great journey begins with the first step.

Conclusion

The question is not: “Will Linux make it in the SMB/SME market?”, but rather “Who will be the successful entrepreneur who takes Linux into this market with a total business solution package that will capture the mind of the a needy and demanding market place that is keen to buy and willing to commit to the company that can deliver the goods?”

The bigger question is: “Do honesty and integrity in business pay dividends? Do customers care?” Too many business managers today compromise in this vital area and act as if unethical behavior, and callousness towards the customer are the most effective means of building a profitable business. I believe that we reap what we sow.

Open Source Software and Linux developers have delivered a technological wonder. The market is more than ready for the next step--that of taking the undeniably phenomenal business solutions that have been developed to the market that wants then in force. The problem does not rest with the technically brilliant people who have brought OSS technologies into being, they have made (and continue to make) their contribution to society. The challenge to create a viable business that can benefit from these great things rests with business entrepreneurs.

A self-perception that Linux is not ready for the SMB market is defeatist. If you believe that a small business can not compete with a large one, or that Linux businesses are too insignificant to compete with Microsoft (or any other large established vendor) this perception is self-fulfilling. It is tantamount to surrender before the battle has begun.

In every market, a new entrant who has a cunning new solution to an old problem will be resisted by existing players who view the encroachment on their turf with vitriol and disgust. The old guard will use every means available to resist change and to eliminate the offense of change. They will buy loyalties from anyone who is willing to surrender ethics and integrity to help stamp out the new kid on the block.

Every bully eventually poisons his own well, and eventually the customer/consumer will be motivated to resist coercion. Buyer's revenge is a sweet victory indeed.

Who will step up to the bar to change the market completely?

Do you have what it takes to match the needs of the moment?