Enterprise Software Market Consolidation and the Effect of Open Source Terms and Conditions


In the process of finishing an upcoming IT Business Edge article on software-market consolidation and beginning a similar article on the ERP market at year-end, I hit a two-fer interview affecting both subjects. I talked with Ned Lilly, CEO of ERP provider XTuple. More on the ERP side in the article, but he made some interesting points about how choosing software suppliers that offer open source terms and conditions (Ts&Cs) is a major protective move for IT users against having to figure out all of the intricacies of mergers and acquisitions, which are typically more relevant to investors in IT than IT users. xTuple makes some of its ERP products available open source.

I do not recommend that anyone choose open source solely for that reason, and in my research I find that you choose open source for the same reason you choose any other types of software: functionality. But Lilly points out how these Ts&Cs protect an IT manager from having a favored supplier purchased by another company, particularly if the acquisition is because the supplier was on a distressed-provider list (sort of like the U.S. Treasury's TARP list for the software industry), meaning it was probably acquired simply for the subscription maintenance revenue stream it would gain from you.

It was an interesting point and got me thinking of some other open source Ts&Cs implications for software market consolidation. Although there are no signs of it yet from an IT market research point of view, open source Ts&Cs could eventually cause the overall software market to shrink as measured by revenue (which is the major driver of the mergers and acquisitions that underlie software market consolidation).

This is the case because many "open source companies" exist to provide maintenance and implementation services on otherwise free (as in beer) community-developed enterprise software. These companies do not receive license revenue in the manner of most independent software vendors. This has two implications:

  • The revenue stream for software maintenance makes up 50 percent or more of the overall software market (as I described recently on ebizQ). To the extent that open source Ts&Cs relate to an increasing percentage of installed software and to the extent that open source software does not require maintenance, the software market could theoretically contract. This would hasten the consolidation movement.
  • On the other hand, if many software market startups use open source Ts&Cs and remain relatively small companies because of the above maintenance paradox ("the open source software is too good and doesn't need maintenance"), they will not be good candidates for acquisition and this will slow down the pace of consolidation.

To be clear, there are only a few signs of this maintenance-paradox theory turning into practice yet. Red Hat not realizing as much revenue from JBoss as it had hoped is the most obvious one. In fact, the situation was just the opposite during 2007-2008, with Citrix acquiring Xen, Nokia acquiring Trolltech, Sun acquiring MySQL, Yahoo acquiring Zimbra and many similar smaller deals. All of these acquisitions helped grow the use of the acquired open source software and the acquiring companies are realizing recognizable software-market revenue from the acquisitions.