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About how the selection of business model decides not only economics, but legal and social aspects of a business.
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20 September

Turn of the Screw

SCO's Q3, Linux v. Windows, and Open Source Software

Too busy this month, but SCO posted its Q3 results. Easy to miss, given the news coverage, where the Salt Lake Tribune happens to be the lead paper, and it gets barely a column inch of copy from the hometown rag.

They made $31K of UNIX licensing (sold a third of a license maybe?), while expending 2.3M in litigation to defend it. They might even survive til the start of the IBM trial in 4 months. Pathetic at best.

But, what if they run into a Justice Stevens decision like the Grokster one? Read more.

Linux is seen as Microsoft's key rival against Windows, and as the first stage in "taking out" all Open Source Software (OSS), which Harvard Business School economists see as battle of "first mover" verses "demand learning".

Lets first ignore the massive stupidity that lines this long conflict, a not insubstantial obstacle for any judge to stomach. Or as well the blatant gamesmanship of the supermassive corporations IBM and Microsoft - not exactly the kind of conflict anyone would care to be in the middle of. Lets just focus on Microsoft's dream here - the wounding of Linux.

What if SCO inflicts either a major or a minor wound on Linux integrity, irrespective of scoring on IBM's business practices, which you'd think would be the goal a real business would be shooting for - what might happen?

My bet is that in the minor case, Microsoft might dream up another "partnership" or "alliance" to float SCO more litigation dollars, hoping to prolong the agony IBM-style in the chance something big might happen. In other words, pretty much the status quo.

But if they scored a major hit, I'd expect that a quick acquisition "pay off" of a prior "partnership" might occur. That way, MS can take advantage of resources to selflessly rid the world of the scourge of pirarcy embedded within. For more justification of this, see again the comments of our prior mentioned Harvard economists as they detail how a certain amount of the presence of piracy actually helps Microsoft, oddly enough.

In short, clearly illegal activities create a price tension that can be used with a stratified pricing model to drive up the price - sort of like how prohibition increased the price of alchohol. In essence, as long as Linux is a pathetic, ruined competitor to Windows, it denies the space for a real competitor (e.g. like the tolerated opposition maintained by a banana republic dictator), while thrashing the customer base to push up the market price of Windows. Microsoft then is the only one who makes money off Linux - indirectly.

Given the academic view, the only way this cycle gets broken is if Linux breaks the "first mover" advantage and exploits "demand learning". What if the first time a business encounters a need, they find a rational process with Linux and necessary open source additions ... and that becomes where they search for solutions. Then, business looks first not to Microsoft, but elsewhere. Actually, Microsoft should be scared about this, but they're not, because they're too big to imagine this - its too simple a solution. And it doesn't depend on tech as much as social and marketing reasons.

But then we get into why this doesn't happen anyways. Many in Linux and the various open source groups get narrowly focussed on the same kind of featurism and low-level mindset that dominates Microsoft as well. Unlike Microsoft, they can't see peril and advantage from advocating for the average user, who wants a simple use of technology. With Linux, its you get it for free, and then you pay for your bargain for the rest of your life.

Since Windows comes first, the average user sees it as "free enough", embedded in the price. And Linux costs too much ongoing. To change the perception, Linux and open source have to be a solution worth more than the PC, that then just is bought to run it, and the overwritten copy of Windows has no market value. Not unlike the way that NetWare started, costing more than the PC you ran it on.

So its the perception of value that matters to the business model. And focussing on the "Free", whether it is in "Free Software" or "FreeBSD", kills the perception and works against the value proposition desired by the user. Conversely, the "Open" in Open Source Software is the energizing component that sells the promise of an direct, quick path to a valuable solution. One must deemphasize one and emphasize the other to compete.

Posted by william at 00:58 | Comments (0)
12 October

Scale and Competition on the Internet

How do you think small and big at the same time?

Tom Foremski has a must read article on the Google YouTube acquisition. He's one of the few who get the big picture.

Lets say you want to hit a home run in a start-up. If you shoot too small, you end up with a Facebook - a "nice small business" (Jordan Rohan, an analyst for RBC Capital Markets). Too big, and then everybody else is hoping you'll trip and drill a big financial hole in the ground, scaring off your investors. Gone are the days of a server in the kitchen auctioning Pez dispensers, that you can grow into Ebay, holding the first million off to the side, untouched. You have to think big AND small at the same time. How? Read more.

A rational business model can be the "kiss of death" to a start-up. It makes perfect sense, is perfectly executable, delivers on its promises, and is explainable in terms of team and plan. So why does it get a pass by investors?

Simple. Where do you take it? If it executes to plan, dollars flow in, and it connects with its market, we still can't get it into the big leagues, because the jump is too large. Scale matters.

You can do powerful internet startups on almost nothing these days - but that means there are too many with too long to get to the biggest leagues. And too many ways they can go wrong along the way. An "insanely great" Internet start-up must break the rules - well, at least some of them. If they break too many, they go the way of "dot bombs", or worse, WorldComm.

Take Facebook, which is considered a "nice small business", with a top value under a billion. But compared to many other Internet acquisitions, you'd think this to be big.

But not on the scale of a Google.

The Internet is becoming bimodal - a small handful of really big firms, and a very large number of much smaller firms. Smaller firms, like traditional small business, pay out the fewest pennies, and scrape in dollars, viewing business models in a conservative light. Big firms view business models in a disruptive way, ripping apart a rival's long held business by attacking its root assumptions - in the case of the Internet, substituting cheap bandwidth and distribution for more expensive paper, air time, and customer acquisition. You can also trade content and production costs for publicity. But for the big to be different than the small, the big have to have "insanely better" deals - for example, they need to be able to serve an hour length video (say 400 MB) for the cost that the small pays for a web page (say 20KB). A net advantage of 20,000!

Which is why you build your own datacenter as Google does.

In the "dot com" explosion in the 1999-2001 times, you used VC money to build a 3 Tier client server web facility inside a colocation facility, and negotiated a bandwidth deal for 3-10 megabit/s months, and that got you all the scalabity you needed from beta to IPO. I did this a few times enough to know.

But now its in the tens to hundreds of gigabits that big requires. How do you do this? Lets look at YouTube.

First, don't spend time on trying to monetize content, or even optimize your bandwidth usage - you simply don't have the pull to get all you need - you can't negotiate the deals, because you are starting as "small" and you'll only be "big" after you survive.

Don't worry about all the envy, for you'll always be put down no matter how good you do with what you have, because it will never be good enough. The point is to be better at gathering a community (and not just eyeballs), which one of the "big" can't really do as well as. This is the only thing that matters in the end - that "small" can deny "big" a top billing indefinitely.

As to copyright issues, well, that's a problem for the big acquirer post acquisition. Which is where Yahoo got cheap, trying to charge it off pre money to cheapen the deal. No surprise here - Google is beating Yahoo every time when Yahoo gets cheap.

And lets take a look at the copyright bogeyman. According to the Stevens decision:

Unlike Napster, YouTube content isn't dominated nearly 100% by exact copy pirated content, attempting to be a free source to create CD/DVD copies from. Lets look at a bigger picture before we strain for gnats, like mechanical royalties.

For Google, the click fraud issue is a far bigger one. The issue of collusion between Google and website traffic is far more serious, since both profit from the advertiser's misfortune. And its in the advertisers interest to assume fraud in the most common case - that the advertisement doesn't work. Could you imagine how the ad business might of faired if you could've proved such a link with print?

But in all Google's businesses, its best to realize that the bandwidth driven business model puts them at an financial advantage over competitors that goes a long way to funding a substantial legal defense. For Google is just out pennies of bandwidth for cost of goods, instead of dollars.

Also, the amount of material is overestimated. Those claiming this include satires, outtakes, short inserts, theme borrowings and other artistic uses covered by the doctrine of fair use. The biggest rated clips on the front page are usually totally amateur made videos. They don't need to compel piracy to have a legitimate business. However aggravated Jack Valenti gets about "Rip, mix, burn", and no matter how many Eldred cases Larry Lessig loses, its still a long way to tracking down some kids that supply humorous inserts to TV outtakes, and expecting to shake them down for a million or two.

There will be lawsuits. Google has as big a legal department as Microsoft does. But there have been many who have signed on. And more to follow. Why?

The RIAA experience in legal retribution didn't solve the business problem of the music industry, any more than the Digital Millenium bill did. Apple's iTunes did more to find a reasonable path out of this quagmire than all the rest - to start building media franchises that were functional in an internet age. Perhaps this is why Hollywood will choose a less litigious route this time.

We heard these same issues at the beginning of Open Source, and they all fizzled out. With 386BSD, we never got sued - yet envious rivals kept calling for it day after day, for 5 years. Call it for what it is - jealousy.

Yet YouTube could only be small for so long before being bought by "big" - in this case, "biggest". For it would have suffered the death of 1,000 cuts if it were to go the IPO route, and also been the perfect target for quick settle lawsuits, just at the time of needing to post 9 or so quarters of excellent K-1's to a touchy bunch on analysts, listening to every bit of ridicule and bad news.

So the answer is that you act like a standalone property "big" must have, pay the costs of being "big" ($1M a month!) for as long as it takes for "big" to be irritated that they aren't "big" in that sector, and you ignore all the bricks being thrown. Its also slightly helpful to have some kind of modest revenue model so that there's some proof that you'll be profitable - but face it, your actual business model is the "big" one - post acquisition. The one you can't credibly pull off in growing from "small" to "big". Which is why you must be acquired to complete "The Google Test". And why there is no "Yahoo Test".

Posted by william at 20:29 | Comments (0)
10 May

Giving away the Store ...

Bill Burhnam notices the upcoming endgame of tactical open source business

In Indian Outsourcers: Open Source's Best Friend or Worst Enemy, Burnham describes the latest chapter in the open source story as the battle between outsourcers and Open Sourcers over support profits.

Having myself been part of what he describes as the first chapter, I'd wish that he (and others) go back and recall some of the early discussions of Open Source business models, before the support side was anointed as the One True Model with Redhat - there was tactical AND strategic sides both at that time.

But what he's describing is the endgame for the tactical side - read more...

Burnham writes of an outsourcer who not only integrates open source solutions on contract, but then will support them including the open source elements together for $10/hour, cutting out the open source creators support revenue stream as well. He suggests this means that following the obvious example of Oracle eating RedHat's support lunch, outsourcers will take an increasing cut of the support profits away from open source products.

Open source has long been cannibalistic, with less aggressive ones having been eaten by more aggressive ones - just the law of the jungle. Some have even obfuscated products intentionally to make it more difficult to support by other parties. Ironically, its often the clarity of open source over proprietary ones that allow them to outmaneuver and win accounts, because its easier to integrate.

The scenario of support being undercut, either by a megacorp (Oracle), an outsourcer, or even a channel partner, was long understood as a vulnerability to this business model.

Yes, this can be done competitively or cooperatively, but in the end tactically it boils down to who owns the customer owns the revenue, and who supports the support business owns the scalability of the revenue. Those that try to do both run the risk of driving up costs and becoming non-competitive to specialists.

Open Source is a horizontal business that tends to fragment as it matures, as it is perfused into the broader market. When you try to "verticalize" it, you lose many of its competitive advantages, allowing the instant opportunity for a rival to spring forth. Burnham is right to be wary of predicting futures here, but not for the reason of choosing which of two paths here.

The problem is bigger - you can't simply pursue a pure support business model for open source. You must consider the strategic side of open source - which has far greater revenue opportunities anyways. But that's a topic for another essay.

Posted by william at 22:37 | Comments (0) | Trackbacks (0)
22 February

How OS Creation is like Assembling a Car

Or how strategic business models for open source enable massive growth in the software sector

Over breakfast Lynne Jolitz gave me this quote:

She captured what it was like doing 386BSD for 6+ years. And you know, it caused me to think of the evolution of software business models, as the industry turns en masse to service oriented software, the thin client model, and cloud computing.
Read more ...

Open source success was keyed upon support services, which as Bill Burnham commented on, might be tanking - see "Giving away the Store ...".

When I had lunch with him, I discussed the strategic open source business model class, which could transform the flat outlooks for many current firms into more dynamic performers.

It seems that the elements for this to occur have finally happened with the growth of gadgets, the move to software on the web as a primary platform, and virtualization trends.

Suddenly, the ability to develop and deploy new software platforms reliably becomes measured by approaching a zero cost, zero defects, zero power trifecta - or, in another term of art from consumer goods, a "triple zero point".

What is the value of insuring that your new software product always leads its rivals in this competition? So the model here is similar to business intelligence, but the yield is based off of insuring critical path and time to market concerns.

How much does a day/month/year slip or a flop in a product release cost Microsoft? Answer: 7-8 figures. How often does it happen? Answer: too often. And its not getting better, its actually getting worse.

Posted by william at 20:27 | Comments (0) | Trackbacks (0)
11 September

Valuing New Ideas with an Open Mind

C.H. Townes on "game changing" events

Nobel laureate C.H. Townes prizes retaining an open mind.

With it, he claims, America got to the moon on time and budget. Without it, he intimates, General Motors eminence went from American greatness to American cluelessness.

Believe him - he brought you the laser, modern fiber communications, an understanding of the cosmos, and countless other "game changing" events.

Because they are "game changers" - listen and you could win, don't listen and you will lose.

And what you didn't know - he took on Vannevar Bush, an early opponent of the Apollo program, where in his losing we all won. Read more...

Dr. C. H. Townes spoke today at SETI.

When I went to Berkeley, Professor Townes, while a lot younger - he's now 93 - was so much in demand he was almost never seen.
Yet he had a fantastic influence on science, government, and industry.The way he speaks of it now, the principle issue restraining effectiveness has been having an open mind.

Sounds trite, doesn't it? Would you think losing GM and civilization changing moments like with Apollo are also trite?

Townes vividly recalls John Von Neumann, as having flippantly writing off "amplification by stimulated emission" as being unworkable and walking off, leaving him cold. But then 15 minutes later, spontaneously returned, withdrawed his rejection, and admitting that after further thought, such was a workable and an excellent concept.Which only reminds us not only of Von Neumann's genius, but of the worth he placed on having an open mind.

If you think that this was the only example, or that even after lasers started lasing, minds became open, Townes cites a continuing chorus of "no, can't believe you can take it further" for decades. It's still not over - new science in lasers are still being conceived.

In the financial community (and industry in general), this isn't so. Some of my worst moments have been when an investor or partner has said "I have changed my mind and refuse to reconsider ever again".

One tries to make "gut" level decisions, and not wreck instinct by letting it switch back and forth like a gate. You don't want to poison your gut instinct - the fear is that this can be deadly.

The issue here is the degree than intuition verses intellect, or, mathematically described as inductive verse deductive reasoning are at odds. Some believe deductive can poison inductive - implying the need for what the Brits call "bloody mindedness". Our current American president refers to this as "resolve".

Townes experience is that this is a fallacy - John Pierce of Cal Tech, an opponent of Apollo alongside Bush, wouldn't consent to meeting Mueller, saying that "something not worth being done I won't have anything to do with".

Townes had run into George Mueller, who had been a student he had known once, and had ended up running the Apollo program, and had mentioned Bush's criticisms. All but Pierce agreed to meet Mueller, and each supplied valuable criticism to Mueller that was taken back inside the program.

Even with that, Bush continued to be an opponent of Apollo, simply on the grounds of not believing that a government program could ever achieve it, much less within budget and time restrictions, but agreed his opinion turned out wrong when it did, and that in the end his opinion had not been justified by fact, circumstance, or failure to execute. For Townes, it meant the end of being at MIT, and caused him to move on to Berkeley.

In other words, Vannevar Bush's gut instinct had mislead. It was poisoned anyways by willful ignorance, masquerading as sticking with one's gut instinct.

GM's board also had the instinct not to change - "what's good for GM is good for America". Another victim of the same poison?

Townes sees this more as rigid fundamentalism that denies the open mind, and that it can be found in science, religion, and business to equal damage.

Trust your gut always? Trust but verify always. Don't be a victim of one's own ignorance. Balance inductive with deductive - too much of one can be a poison as well to both.

[For another view on C. H. Townes, read The Archetype Physicist Entrepreneur Speaks on Exploration and Success]

Posted by william at 02:09 | Comments (0) | Trackbacks (0)