Open-source software is the future, and it is free, assuming it can survive capitalism.
Melissa Di Donato, CEO of open source software company SUSE, was at a tech summit recently where every other attendee was an executive from a proprietary, closed-source software company.
“They were all talking about the importance of crowd-sourcing, of community building, so I raised my hand and said: ‘Wait a minute – are you aware there is a whole world out there and it’s called open source? Do you even know what open source is?'”
The other execs were a bit perplexed, she remembers. “These people didn’t realize how much potential the technology has,” she says. “Open source is shaking the world, and it’s coming like an earthquake.”
The idea of open-source software goes back decades, but in the past decade or so, and in particular with the advent of cloud computing, it has become a core part of the business technology landscape.
Whether it’s being used on a PC, a smartphone or to underpin a vast enterprise application, the fundamentals of open source are the same; it’s a vast club of software engineers bouncing off each other’s ideas and using other people’s creations to design their own, before feeding their inventions back into the community. Open source is essentially a trove of innovation, and it is all for free.
It’s easy to see, in that context, why executives like Di Donato are certain that open-source software is the future. “I am super confident about the next few years,” she said. “Open source will only get bigger and richer than ever before.”
As enthusiastic as she is about the technology, Di Donato is a newcomer to the world of open source. She took the leadership of SUSE only six months ago, succeeding Nils Brauckmann after he announced his retirement; prior to becoming CEO of the company, she was working at software company SAP.
Di Donato, however, lost no time in learning the open-source ropes. “When I came on board, my 100-day plan was to talk and meet 100 customers in 100 days. It was completely insane. I got to 97,” she said.
But now at least, she’s got a view, she added. The first lesson she learned is that the majority of SUSE’s customers are what she calls “traditionalists”, like banks or big retailers, who have spent the last quarter of a century trying to accelerate their adoption of technology but often have done so in a patchy, fragmented way. “They have built an IT wall,” explained Di Donato, “and my first job, to help them modernize, is to simplify that infrastructure.”
There is one huge technological revolution that she can certainly bank on: that switch to the cloud, much of which is built on open-source foundations. Di Donato, in fact, noted that providing for hybrid environments is likely to become a key focus for the company; global public cloud revenue is expected to grow 17% in 2020 to reach $266.4 billion.
There remains a critical caveat. Open-source software development is built on the concept that software code is free and open. The challenge for companies built around open-source technologies is how to build a sustainable business model out of it when the underlying product is free.
Blair Hanley Frank, principal analyst at research firm ISG One, told ZDNet: “It’s incredibly difficult for any company, no matter its business model, to continue growing indefinitely. That becomes harder when there’s a free version of the firm’s core product available for anyone to use.”
One solution to the equation is to inject a dose of commercial, proprietary software – a model that entrepreneurs are increasingly eyeing. Joseph Jacks, the founder of VC firm OSS Capital, which invests in commercial open-source software (COSS) startups, told ZDNet that the past decade has seen a huge increase in so-called COSS companies. These businesses use a core open-source project as a base to develop a commercial product, protected by intellectual property rights, that can in turn be sold.
“This model is a hybrid between proprietary and open-source software,” said Jacks. “It is a form of direct commercialization of open source, in which the product supports a more capitalistic business.”
For Di Donato, a hybrid model is absolutely out of the question. The only intellectual property that SUSE holds, she notes, is the company’s green chameleon logo, and that won’t change anytime soon.
“We don’t want to crush the spirit of open source,” said Di Donato. “We want to stay true to the culture that goes with the technology. We are an open-source company, and we’re going to stay that way.”
SUSE, she believes, has found a functioning business model to marry open-source software and profit: it is support and services that the company sells, to the enterprises using the open-source technologies developed by SUSE developers.
Customers would never dream of implementing a software if it hadn’t gone through QA testing, she argues. They would not start using an application before it had gone through beta. It’s the same thing with open source: through the SUSE Linux Enterprise platform, it is safety that the company is selling. “We package the software in a way that establishes the highest level of certification for customers. They want to pay us to make sure that what they are downloading is safe for their business,” she explains.
Marc Saulnier is the IT director at wood manufacturer Les Entreprises Barrette, a company established in 1924 in North America – as such one that certainly fits the definition of “traditionalists” that Di Donato cornered during her 100 days, 97 customers challenge. But as business accelerated, it became necessary to ensure that software was running round-the-clock to support a growing number of shifts in the Barrette plants.
“We had to transform a business infrastructure into an IT infrastructure,” said Saulnier. “And open source was always going to give us more flexibility. SUSE was an obvious choice, because as an IT professional, my big challenge was security. SUSE can ensure that my software isn’t going to get hacked. Plus, they have a long-standing relationship with SAP.”
Saulnier has a point. Di Donato joined SUSE straight from the ranks of SAP: the two companies have been going hand-in-hand for 15 years now, in what they both call a “strategic alliance”. Back in 2010, SAP HANA was actually developed using SUSE Linux Enterprise, and in turn today 90% of SAP HANA customers subscribe to SUSE’s enterprise offer. And with SAP claiming that a gigantic 77% of the money exchanged through global business transactions touches one of its systems, it’s looking like SUSE won’t run out of business anytime soon – at least in theory.
But despite all the cards that SUSE has laid on the table, OSS Capital’s Jacks has his doubts. While the industry is currently dominated by the indirect commercialization of open source, he believes that directly selling open-source technology is a strategy on the rise, and all set to become a significant trend.
“SUSE’s business model is valid,” he said, “but a hybrid model that fuses proprietary IP and open source – that’s exponentially scalable. And that take is a pretty common one to have in the investor world.”
Di Donato, for one, won’t be deterred: she is convinced that SUSE’s business model is set to grow, and fast. To illustrate, she pointed to the company’s nine years of continuous growth. Last year only, SUSE registered almost 300% year-on-year growth in its application delivery subscription revenue.
In its latest quarterly report, the company registered a 67% year-on-year surge in cloud revenue and highlighted a continuous growth in “large deals” worth $1 million or more. With a 1,600-strong employee base, SUSE prided itself of an “excellent start” to the financial year.
For the company’s new CEO, however, it is just the beginning: “I’m extremely ambitious,” she said. “We’ve delivered our numbers for nine years in a row, we’re doing great things for our customers, but now I want to take this great company and give it better light.”
As remarkable as the numbers are, they need to be put into perspective. In the words of Di Donato herself, no one really knows about SUSE. The company’s actual revenue, in fact, is not even half a billion dollars.
More importantly, SUSE is entirely owned by private equity firm EQT, which bought the business in 2018 for $2.5 billion. In comparison, open source competitor Red Hat was recently acquired by IBM for a colossal $34 billion. Di Donato did insist that her objective was to double in size and reach $1 billion in revenue by 2023, but it can hardly be said that SUSE is playing in the big leagues right now.
“SUSE’s ownership by a private equity brand somewhat complicates things,” said ISG One’s Frank. “The company remains under the umbrella of a larger organization. That speaks to both the difficulty and market opportunity that companies face when building businesses around open-source software.”
What we’ve seen in the past 20 years, he added, is “tens of trillions” of dollars created by proprietary companies – Google, Facebook, Microsoft – building software based on open-source code that other people wrote. Jacks, in fact, argued that he is convinced that such business models are those that will drive future innovation in open source.
For Frank, ultimately, open-source is thriving, but it is still searching for a way to exist. “There’s a new crop of open-source startups that have arisen since SUSE’s founding, and all of them struggle to balance commercial success and community obligation,” he said. “It is important to remove those moral and ethical concerns,” he said. “The fundamental principles of open source were never to educate people on egalitarian values. They were about innovation, and making the world more efficient.”
Still, Di Donato argues that the open-source ethos is the core of the company. The moment an open-source business departs from the community’s ethos, said Di Donato, the company’s software engineers will leave; because open-source developers will always place their community above anything else. “Open-source developers stay true to open source first. If the open source strategy changes, they’ll be gone.”
And once the software engineers have left, there is very little remaining value to monetize. An open-source software company cannot claim any intellectual property; it is only worth its employees. And there is no other way to make sure employees remain loyal than to preserve the integrity of open-source values.
The company’s insistence on stressing its autonomy comes from a desire to reassure employees that SUSE will remain loyal to open source. “The people are all we’ve got – if you lose them, you lose everything,” said Di Donato. “And if tomorrow I tell them I’m opening the door to proprietary software, they’ll just go.”
“That’s why I need to make sure that our open-source engineers feel that their innovations are being delivered across the community. That’s what keeps me up at night – it’s our people, not monetization, or even growth.”
Di Donato puts it more plainly: “We are an independent open-source company,” she said. “It’s all we’ve got,” she says. “I’m so confident that I’m not even cautious anymore.”