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The Yin and Yang of Open Source Commerce - page 2

Introduction

  • November 1, 2005
  • By John Terpstra

The development of OSS-based businesses, their growth, profitability, and their potential for commercial developer investment depends on how well they perform over time.

Business school graduates can talk until the cows come home about the well-observed rate of failure of new business ventures, and that statistically only one out of every 54 new ventures is successful, but often this is a smoke-screen that hides incompetence. They must realize that the very purpose of the business school is to educate people so as to reduce the risk of failure, and thereby to provide a greater degree of certainty that an investment will succeed.

During 1998-2000 many OSS businesses received funding. What remains today is a mere skeleton of the early days. Companies that were in the forefront of this heady period include names such as: Red Hat, SuSE, Caldera, TurboLinux, Mandrake, VA Linux, LinuxCare, Olliance, Lutris Technologies, BEA, Silverstream, Ximian, and many more. All have undergone significant changes. The ones that stand out, and that are successful today, comprise a small list indeed.

Red Hat, Inc. and BEA are strong and still operating under their original names. Caldera is no longer a Linux company and has changed its name to The SCO Group. It has reverted to selling UNIX. Many OSS supporters see The SCO Group as significantly anti-Linux and anti-OSS.

Many of the remaining OSS companies have been acquired by others and are now a part of different businesses.

Why did so many fail to become established profitable businesses? Perhaps there was no market for the products they produced. Maybe they aimed at the wrong market, or the wrong segment of the market. Perhaps it was because they did not know what they were doing. It is also possible that these companies were too early to enter the market. Maybe they were not organized so they could succeed.

A business that experiences prolonged operating costs in excess of gross contribution, which is the income that remains after direct (variable) costs have been met, eventually depletes its financial resources. A successful business must gain rapid market traction. It must quickly learn the rules by which customer needs can be found, satisfied, and sustained in a financially rewarding way.

Adding to the mix are the investors, who expect rapid results from their initiatives. A failure to live up to investor expectations will result in immense pressure to frequently alter the course of the business. Such alterations cause transient knee-jerk behavior in the marketplace that can cause customers to withdraw or to delay their commitment to evaluate or purchase a company's goods and services. Such delays exacerbate the fragility of the new business.

One of the lessons that can be learned from the dot com investment craze of 1998-2000 is that if a company does not have a clear understanding of the market, the competitive landscape, and of customer wants and needs it is less likely to come to a clear realization of these after it has gained funding, and the probability of its failure is very high. Immediately following the arrival of early investment funding, investors generally look to the business to scale up and grow rapidly. This places incredible strain and stress on the management team because they must hire and train new staff, learn subtle and fickle market demands, anticipate the buying needs of customers with whom they have no experience, develop products, goods and services, and learn to deliver these through distribution channels that often need to be cut out of new terrain.

The rules for success are age-old and unchanging:

  • Understand the total market
  • Focus on the right target market (a viable sub-set of the whole)
  • Understand competitors strengths and weaknesses
  • Clearly understand customer needs and how they may be satisfied in a sustainable manner

These four rules of success are easy to articulate, but incredibly difficult to achieve. If it was easy to do there would be fewer failures.

This article considers key points that led to the failure of Linux businesses. It makes sense to look for key areas of opportunity that are open to potential commercial exploitation. Ideally, some obvious and not-so-obvious factors will be uncovered that may be the key to the success of an appropriately structured new market entrant.

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