Buying open source companies

A few days ago the first rumors surfaced that Oracle might buy open source vendors Sleepycat, Zend and JBoss. Given the likely price (cheap), the technology (embedded), and the dual-license approach, buying Sleepcat didn’t seem like such a bad idea to me. Neither does Zend who builds licensable “closed source” tools to work with the open source PHP. But I thought Oracle would be in-freaking-sane to pay $400 million for JBoss. Sadly, Oracle might not be as crazy as everyone thinks (sigh). With each day, it looks more likely that Oracle could pass on JBoss, meaning there are still a few sound minds floating around Redwood Shores.

For those who don’t know, JBoss is the leading open source J2EE application server company. Application servers are currently a billion dollar market for IBM, BEA, Oracle and others.

JBoss is, by objective standards, not a successful software business. Its application server is heavily downloaded, but JBoss never seems to make any money from it. We’ll never get objective figures on this because Mark Fleury’s reality distortion field is even more powerful than Larry’s, but the word is JBoss’ revenues from support contracts for their app server (i.e. revenue tied to product) are somewhere in the low single digit millions. JBoss’ total revenues are somewhere in the double digits, but the rest is just consulting and training revenues, the same as hundreds of other J2EE VAR’s in our industry typically valued at 1.5x sales.

Perhaps this is why JBoss has been rumored to be shopping itself around. BEA says they took a gander a year ago and passed when the price was $100 million. This article indicates JBoss was also in talks with Novell, IBM and HP.

Meanwhile it’s been 2 years since JBoss raised its last venture round. Given JBoss’ penchant for expensive self-promotion, it’s not hard to imagine them running through $10 million in the past 24 months.

Despite its business failings, according to most reviews, JBoss is a fairly successful product.

Pretty good, plus free, has resulted in 16 million downloads (according to JBoss). All that free software floating around had started to shrink the app server market (down 8% in 2003 according to Gartner). I think lightweight alternatives to J2EE like Spring, Rails and PHP are also partly to blame here.

So JBoss triggered a phenomenon that they can’t seem to profit from. What to do? Well, one strategy might be to rely on the greater fool theory: get someone to buy you before anyone’s the wiser that there isn’t a business here. So far, BEA, Novell, HP, IBM and Oracle seem unwilling to play that role. Doing this professional open source stuff is harder than it initially looks!

In related news, Xensource announced it was hiring a new CEO and doing a few layoffs. Xen is an open source virtualization software that competes with VMware. Xen has had enormous industry attention, blue chip VC backers and a 3.0 version product; but we’re still waiting for some visible market momentum (e.g. customer announcements) from the company. Meanwhile VMware did $100 million last quarter. Who’s in the better business here folks?

I’m not trying to say that all open source related businesses are destined to be failures.

1. I think there’s likely a great business in stack certification like SpikeSource and Sourcelabs.
2. Open source code inspection like Black Duck and Palamida seems to be a real business too.
3. Paid-for tools to “enterprise-ify” open source technology like Zend make sense to me as well.

But this “professional open source” phenomenon where companies take an established product paradigm (like database, app servers, virtualization, CRM) and try giving it away makes no sense to me. If JBoss withers on the vine along with Xensource, I’ll be very gratified to see some data back up my hunch.