Open source, SaaS, and the shrinking software industry?

I had the opportunity to keynote at the New Industry Leaders Summit (NILS) in Japan last Thursday. In a follow-up panel on open source, an audience member asked one of the better questions I’ve heard recently: “If open source, Software as a Service (SaaS), and Web 2.0 technologies are driving down the total cost of ownership (TCO) of software as you say, won’t that cause our industry to shrink?” I’d heard a similar refrain before: When we at Zimbra made the decision to go open source, some of my old-school buddies felt we might ultimately be taking food from their progeny’s plates.

My answer is an emphatic no, but before I get to why, I should also say that NILS was an excellent event—dispelling some of my notions of Japan as a country in which smart engineers spend most of their careers working very hard for a single large company. Instead, I found a thriving open source community and enthusiastic entrepreneurs in abundance. Between the sex appeal of the Zimbra/Web 2.0 demonstration and the fact that WebLogic has a cult following here, I had the good fun of being enshrined in the role of uber-geek for the day—sizing up nascent technology demo’s and sharing start-up war stories.

Now back to the topic at hand: If software unit costs (whatever the unit—users, servers, etc.) go down, then doesn’t our industry as a whole shrink?

(1) No, because we can make it up in volume. Microsoft became the richest computer company in history, by simultaneously lowering unit costs and increasing the overall reach of software. Open source is so exciting because the industry now has a distribution model that will ultimately deliver software beyond the current reach of Windows and Office (e.g., Nokia’s phone browser was just open sourced). SaaS (also known as on-demand) has also well extended software’s reach—Yahoo!, Google, and MSN are all SaaS sites after all. SaaS isn’t just about consumers either: has had the most success to date not displacing Siebel, but rather getting CRM into the hands of small companies that were still trying to do it on spreadsheets.

(2) No, because we can make it up with innovation. If all we in the software industry collective achieve in the next decade is rebuild new open source, on-demand, and Web 2.0 versions of the same tired software from the prior decade, we deserve to shrink! The way for the industry to grow is not to set our sites on redoing what has already been done, but rather on doing new things and on doing the old things dramatically better. The best news of all is that the barriers to innovation have never been lower: new software ideas can be far more quickly realized via the re-use of open source building blocks and by mashing up existing Internet services.

So the next time you hear a software vendor whining about open source, SaaS, or Web 2.0 undermining their business, or else attacking open source as unreliable, tell that vendor to buckle down and deliver more value to their customers. Business models and buzzwords aside, the companies that deliver higher value will thrive, and the ones that do not deserve to shrink.

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