If you thought open-source software was a threat to big-company profits, think again.
Just a few years ago, the open-source software movement was a pariah among big software firms. Shai Agassi, then an executive at SAP (SAP), likened it to socialism. Microsoft CEO Steve Ballmer called it a cancer. The attitude among many in the establishment seemed to be that the “free code” revolution led by software such as Linux would discourage invention and erode profits.
How? Last quarter, the business software giant pointed out that its database market share actually tends to improve when customers move to Linux, which has been a fast-growing server operating system for much of the decade. And Oracle is poised to capitalize on open-source trends in other ways. For instance, the company distributes Linux for free, and makes money by offering support.
So far so good: earlier this year CEO Larry Ellison reported that Oracle is in the early stages of selling high-margin Linux support contracts, some for as much as $500,000 a pop. Ellison claims the open-source strategy is also helping to lure database business away from competitors. “We’re just taking share right away from IBM on mainframes and we’re taking share away from Microsoft using Linux,” he told analysts in September.
The Linux love-fest doesn’t stop with Oracle. Google (GOOG), which already uses Linux-based servers to power its search platform, also wants to tap its open-source infrastructure to deliver more and more software over the Internet. (Google’s Android cell phone platform will also be based on Linux.) VMWare (VMW) has long been a Linux-friendly shop. Co-founder Mendel Rosenblum has praised it as a natural fit for the company’s virtualization software, which is all the rage these days as companies seek to cut data center costs by using the software that lets one computer do the work of many.
Beneath the surface, the companies are making similar bets on the profit power behind open source. All are wagering that if the cost of a computing platform drops far enough that everyone can afford it, there will be opportunities to make money by helping customers to use fascinating software and services on top of it. In Oracle’s case, it’s profiting from software and support; in Google’s case, from advertising, and in VMWare’s case, from helping people run more programs without buying more equipment.
It still remains to be seen whether the open-source approach has a shot at eventually becoming the most popular force in computing. Some powerful companies still don’t think so. Microsoft (MSFT), which believes it can do better than the open-source community, continues to do well in the server business — there are even signs in the most recent IDC server report numbers that Windows server growth is outpacing Linux. And Apple’s (AAPL) iPhone certainly doesn’t use an open-source operating system –- Steve Jobs likes to point out that it runs the same software as full-fledged Mac computers.
Nevertheless, it clear these days that open-source software is far from the profit killer some feared. Just ask Larry Ellison.