Three Business Cases:

• Leveraging OSS in Business Strategy
• Working with OSS Model and Community
• OSS and Alliances

Ed Buckingham ( SDForum ):

So with that, I would like to take a moment to introduce John Soper who is going to moderate the meeting tonight.

I met John about 10 years ago. He and I have worked together off and on many years back. When we started talking about this, we were figuring out how to make something around the whole Open Source fit the marketing scene. John started an organization called New Paradigms Marketing where alliance management and Open Source are two of the things that he does, as well as what you would call general marketing, business strategy, contract negotiations, alliance development and management.

So, with that, why don't I turn the meeting over to John? John will moderate and we'll have a panel discussion and then, Q&A at the end.

Thank you.

John Soper (Moderator, New Paradigms):

.... I've been to a lot of panels where we talk about Open Source and for all generic terms, so we'll get a little more focused on the business strategies tonight.....

....So, the way I'd like to approach this tonight is to drilldown on three business case study areas – one being marketing and the Open Source model, how businesses are utilizing that to leverage their marketing efforts. Second, Open Source software – that model and how it interplays with the community-development model. There are a number of ways that can be done – pluses and minuses of different ones, so we'll hear some good perspectives on that. The third area I would like to drilldown on is how Open Source companies play in third-party alliances – anywhere from joint marketing to OEMs to acquisitions such as… Many of you have probably read about the Citrix acquisition of XenSource which we will certainly… We're going to hold that until last. How do you make half-a-billion dollars on an acquisition from an Open Source company? We're going to hear a lot about that in the end, I hope.

So, those are the kinds of things we'd like to drilldown on, but since this is truly somewhat new differently for different people, I'd like to get us all on the same page and Bernard has kindly offered to give us a bit of an overview of where Open Source is today, what some of the challenges are and what some of the leverage points are.....

A Primer – Why OSS:

• Collaborative Development – The New Way
• Old Model Exhausted
• Less Expensive
• Margin Retention
• No Lock-In
• Customization
• Distribution
• Transparency
• Works Best for Infrastructure Products, Less for Vertical Apps

Bernard Golden (Navica):

....What is Open Source software?

.... it's really a conglomeration of a number of things and these are kinds of things that I've drawn out.

One is it's a collaborative development, I think. It's a way for people to work together to develop products and those can be individuals or they can also be companies collaborating. We'll be talking about both of our case studies and frequently XenSource, we'll be talking about how that's interesting, how competitors can work together to create a product that they both take advantage of for their own competitive pursuits – the benefits of that and also, the challenges. But, it is a way for people to work together in contrast to the old way that things were done which is basically, you hired a lot of smart people, you put them in an office at Palo Alto and they build something on their own. This is much more of a worldwide phenomena than anybody can attribute to.

From a perspective of a lot of software companies, it's an inexpensive way to achieve distribution. You put it out there and anybody can download it. We can use it again. You don't have to go tell them about it. You don't have to convince them of it. They find their way to it. They pull it down. They start using it. So, instead of having to go out one-by-one and finding people to use your product, you can really let the Internet distribute the product for you. You can let people start talking about it, so it's a great way to achieve distribution at a lower price.

It is of course, a threat to proprietary software companies although many of them still will say, "Oh no, we don't really see software and outsource to our competitor," or "It's used by small companies," blah-blah-blah. It's a competitive threat and I think that that's becoming more and more clear as time goes on.

It is, of course, a large investment.. Open Source is driven by the licenses that carry it and we obviously talk about that in a couple of slides, but essentially, what makes Open Source Open Source is the license that the software carries.

In contrast to crucial proprietary licenses that are typically custom-done most for every deal where it's kind of, we're going to give you this much usage, this many machines, this many users. Open Source licenses are more or less potential software and say, it's a standard license – these are the conditions you can use it under. The licenses really discipline the way the software can be used.

In particular, Open Source licenses give you a lot more freedom because it's irrespective of the user, you can use it pretty much any way you want to use it. You can go ahead and add as many machines as you want. You can even modify the product because the source code is included and that's a factor of all these Open Source licenses. I'll talk about this a little bit more in terms of the business implications for a vendor. ....

.... a large analyst firm described Open Source as being the biggest change to the software industry in 25 years, so it's a huge, huge sea change.

....So, why are companies turning to Open Source? Well, from the vendor perspective, there's the exhaustion of the enterprise business model. It used to be you put those smart people in Palo Alto, they build a product, you get it to 1.0, you need to hire a big, expensive direct-sales force to go bang down doors to get you customers. What's really happened over the last eight to ten years is that model's become exhausted. The buyers stopped buying that way ....

For existing companies on that model like your Oracle or whatever, it's still a pretty good deal, but in terms of a start-up, it's very difficult to try and afford that. So, we need to find something different as a vendor – Open Source.

A lot of reasons that companies look to it is tied to market- and competitive advantages. If you don't have to build something, write it yourself and pay the expense of getting it developed, but you can leverage Open Source that's already out there, you can bring your own product to market a lot more quickly and also you can keep more margin than you would have had in the past. So in the past, if you had to license a component…

I'll just use one of these as an example. If you needed an application server and you bought BEA, you'd be giving up some of your margin to BEA. Given that the market's got tougher, people started saying, "I don't want to give up that much margin," and so they turned to Open Source components as a way of saying, "I can use software, but not have to give up margin – that makes it better for me."

Really, to reiterate the point that I was talking about in the last slide – the ability to achieve distribution and adoption with different time-cost constraints. I mean, you can reach people with your product that you never would have been able to reach before. You can get to them much earlier than you would have been able to before. You can get different geographies that maybe you wouldn't have gotten to for three or five years....

For the perspective of users which is the flipside, why are they interested in Open Source? Why are they willing to use Open Source? Why are they interested in Open Source companies? First and foremost, probably cost. Essentially, it costs a lot less to be going with Open Source. There isn't a big license fee upfront and that's very, very attractive.

It's also because of the lack of lock-in and there's not a of bit coercion – in other words, you've got to give me a lot of money to get access to the bits and the products. Once you've done that, you're locked to me because I'm the company you can get that product, updates and support from. Open Source was not ready for model. The products that are out there – you don't have to pay for that. You can either come to the company for support or not, if you don't want to and if the company doesn't do a good job, you're not locked-in...

Opportunity for customization – I was talking to a pharmaceutical company. This was just a little bird, a bioinformatics company and any real challenge in that, they're big companies, but bioinformatics isn't that large a market and so, the vendors who sell software into that market typically don't have great products because they don't make enough to really invest enough to keep it up to date – put in new functionality. So, they're very frustrated as users.

So, they came to me and said, "What we'd like to do here is put together a consortium of bioinformatics-using companies to build our own products because we feel that we can take Open Source components, customize them and get a better solution for us." So, the opportunity to take that source code and do something with it – very attractive.

Then, the collaboration of the community – Open Source is sort of, inherently associated with the community. The other people are using it and many people were developing it. It's a fountain of wisdom. It's a great way to get information. It's a great way to co-develop and as an end-user, the ability to turn to other people and say, "Gosh, I'm running into this problem with this product," and have them say, "Oh, I had that problem, too – here's how you can solve it," is just a great resource.....

So, this is what's driving people to begin looking to Open Source.

.... Well, one of the things you have to do is ensure that Open Source you use is managed properly and this is true whether you're creating an Open Source product from scratch that you're delivering like a XenSource or an Adaptive Planning, or if you're incorporating Open Source components within your own product. You have to be very certain about the licensing you're using....

It's also important because there's a movement around Open Source and you want to rely on the goodwill of that movement. If you're seen as not complying with the licenses, you're going to have problems with your business strategy trying to appeal to those folks....

You can use Open Source to get great distribution, to piggyback on it, but if you're not aligned with the license, you're always going to be at cross-purposes and have a really difficult time with your business strategy....

You have to make sure that your business model aligns with Open Source realities, but first and foremost, can you build a community? That is absolutely fundamentally crucial to Open Source products being successful. Can you build a pool of people who are using it, involved with it, willing to interact with you, willing to contribute to it and willing to work with other members of the community?

Are you really being transparent? This is a real challenge for many, many companies, particularly companies that say, "I'm now proprietary – I want to go Open Source."

First and foremost, your code's transparent ....

But, beyond just the code itself which is clear from the license, there's an expectation that you're going to be more open about things like your product plans. You're going to need more room to engage with people about product plans....

Then finally, your product has to make sense as Open Source. In other words, it has to be something that people want to adopt, download, use, experiment with and contribute, and there are certain products that we can thumb-sense that way and certain ones that don't.

An area that Open Source hasn't done a lot in yet is vertical applications. Those don't seem to have really caught fire....

Why OSS for AP:

• Smaller Capital Requirement
• Speed of Development
• "Deploy-Before-You-Buy"
• Reduced S&M
• Combined with SaaS Model

John Soper (Moderator, New Paradigms):

Thank you very much, Bernard. That's very useful and we will now start to put flesh this out.

First, I want to give John and Bill a chance to get just a little bit of overview on the companies so we understand them, and how Open Source makes sense with them, so that we can put some context.

Bill Soward (Adaptive Planning):

Let me just give a quick overview of Adaptive Planning. We are in business performance management category that in this context, especially with planning, financial reporting – towards operational metrics ....

So, we target companies with 100 employees up to 2,000 employees is our focus....

Our challenge is business – was how to build business quickly that has thousands of customers generating tens of millions of dollars and do that in a very capital-efficient way.

Salesforce raised $65 million or something at the bubble, NetSuite another famous software as a service company got over $100 million.

We didn't have access to all that cash, so our challenge was how to get big fast and not spend a lot of money getting from here to there or a lot of time.

So, as we looked at it, part one – we need an on-premise solution. Part two – if you're going to introduce an on-premise solution in 2006, what is the absolutely fastest way to do that? There's no question that leveraging Open Source made a heck of a lot of sense.

So, we introduced a downloadable version of our product in August of last year at Linux World in San Francisco and so, we've been out for a little bit over a year. We have over 50,000 downloads in over 80 countries around the world that are taking advantage of our free downloaded express edition product. So, that's now starting to convert into meaningful business for us and it's a meaningful part of our revenue stream now today.

So, our business model is Software as a Service. We believe that the next version of Software as a Service, not the conventional wisdom today perhaps, but where it's going is that as a subscription-based offering – offering that includes software, software enhancements, bug-fixes with all the maintenance and support. In our definition, that is a great business model. It does not require the server to be living in our datacenter that it can live behind the customer's firewall. We can provide our subscription-based servers remotely and connect to technology that's sitting behind the firewall. In fact, the future is, the truth is somewhere in between. Something in the cloud – it's something behind the firewall.

For us then, having an on-premise version of our product, it's also subscription-based. It makes perfect sense. It's very consistent to where our strategy goes.

Ultimately, the core of success for our Software as a Service companies is a very extensive, try-before-you-buy program. For most Software as a Service companies, try-before-you-buy means the 30-day trial. In our case, we've decided to dramatically expand the definition of try-before-you-buy and really, in the Open Source world, it's deploy-before-you-buy.....

So, the model that's emerging we think, is extensive try-before-you-buy when you're dealing with the mid-market. The dollar size of the transactions is not very high, so you have to figure out a way to close customers in, in a much lower cost of sales and marketing.

The challenge for most software companies here in the audience is how do you reduce sales marketing expense because that's the humongous number that doesn't want to ever go down.

So what we're doing is, we're reengineering the front-end of the sales funnel, trying to offload as much of the discovery and evaluation process onto the customer, and let them do it through a self-service strategy, let them try it, let them work it through, let them see value and then, let them come in and talk to our more expensive sales people on the phone where we decide to close them.

So, the advantage of our model which is a hybrid model Software as a Service as the business model – two choices of deployment; on-premise; on-demand; customer decides; same price for both; extensive try-before-you-buy; let the customers evaluate the product, see the advantages of it; and then, hopefully compress the amount of time that you have expensive sales people talking to them. Then, close them in that way.

Through that whole process, the only thing I'd say is that Software as a Service – the heart of that is subscription-based which means that in our case, customers buy on a perceived basis 12 months in advance. Every year, they'd renew.

So, when you're in a renewal business, it's all about getting the renewal. .... So, transparency comes in terms of try-before-you-buy. Transparency is here's all of our pricing. Transparency is here's our source code – it's available and you can go look at it yourself. It's all out there, so really, what you're trying to do is match the customer's expectations with your ability to deliver.

Through that process, and having a great sales and support team behind the scenes, you're able to have higher renewal rates.

Our company has well over 90% renewal rates today .....

Do you have a question?

OSS and XenSource:

• Throw Old Business Models Away
• Risky to Use OSS in New Segment
• OSS as a Vehicle
• OSS and Fast Growth
• OSS Chaotic
• Protect Your Trademarks
• Importance of PR
   

John Soper (Moderator, New Paradigms):

.... let me get John to give up a brief introduction of XenSource here..

John Bara (XenSource)

....I'm John Bara from XenSource here at Palo Alto. We're the other virtualization company in Palo Alto.

It's very interesting what both Bernard and Bill said today.

So, I think I'm going to start my remarks for those of you that are new to Open Source or evaluating converting to an Open Source model who maybe, have done marketing here in the valley for 5, 10, 15, 20, 50 years – whatever it is.

Everything you just heard Bernard and Bill describe is pretty revolutionary. You might not see it as there yet, but let me just contrast what I was doing three years ago here in the valley.

I was SVP of Marketing at a company called Interwoven which was a $250 million enterprise software company. We had 200 sales people and a lot of system engineers. We had 50 inside sales people. I had 75 marketing people on my team. We spent most of our time buying lists, cold calling, doing campaigns, doing live events and seminars, targeting IT execs. Our average selling price was…I don't know…$250,000. Our sales cycle was 12 to 18 months.

So what I would suggest is, if you're interested in Open Source, all that stuff I just told you about this sort of, enterprise sales model – throw it in the dumpster ....

In the next five or ten minutes, I'll try to share some of the key learning I had in the last 18 months, some of which were very shocking coming from a $250 million software company, targeting CIOs with $250,000 ASP and BMW-driving sales people who like to make $1 million a year, and so on and so forth, to really bare-knuckle grassroots as both Bernard and Bill described Open Source software sales and marketing. It's really a completely different world. But just like when you study a new language – a foreign language, at first you get into it and it kind of, blows your mind, and you think, I'm never going to get through this.....

Citrix acquires XenSource for $500 million in cash and stock – that was last month. This was…

What am I doing wrong here?

…so far the high watermark for Open Source software in terms of the sales price and hopefully, somebody in this room can beat that because it seems like a really big number, but I think what you're seeing here is these numbers continue to go up. I think it was JBoss sold to Red Hat last year for $300-$350 million. Now, this $500....

....I joined this company 18 months ago. It was in a tank. Bernard came and saw us. He can tell you things weren't that great, but we did a few things. I'll try to show that in the next few slides to try and just put it into a little bit of a cookbook for you.

.....Obviously, Citrix saw this as a huge opportunity for them – a very rapidly growing market server desktop application and virtualization. There was a lot of synergy between the two companies and I think together, we're going to go on and do great things, right? I mean, we're a small little company in Palo Alto with 80 employees. They are…I don't know…6,000 employees and 200,000 customers. They run like 90 million desktops worldwide and somehow, they've managed to partner with Microsoft for 18 years and not get killed. We also have a good partnership with Microsoft.

That's all sort of, the future, but talking about how we did it I think, is what matters to you guys.

So, how did we do it? Something that Bernard talked about that I think is significant and also Bill, is there aren't a lot of Open Source companies that come out of nowhere and create a whole new segment.

So, if you're trying to create a whole new segment and use Open Source to do it, God bless you. Come talk to me after and you can share your slide of how you did it with me because I think it's going to be damn hard.

Piling sort of, a risk of a new distribution vehicle over the risk of a new market – it can be done, but it's like two difficult things combined maybe just too much to handle, right – a bridge too far.

So, what we decided to do as Bill and his company have done, as the Linux distros did… Right, what did they do? They picked a known segment – operating systems, right? Operating systems – they said, "Microsoft, Sun, Solaris, HP-UX, IBM AIX – it's too expensive and too difficult – there's a better way." That's Linux, right? Another example, SugarCRM – great company. John Roberts is the CEO – amazing guy, amazing entrepreneur. Known segment with legs – Bill's segment. A known segment with legs – that's a real segment where there's a better way.

In our case, we picked virtualization because that was sort of the impetus of the Zen Project which came out of the University of Cambridge. Our founders were computer science professors at Cambridge and they thought there was a better way to manage distributed virtualized systems. That was the birth of Xen. ....

What are you really talking about here in Open Source if you're following a known segment with legs is sort of, a David-and-Goliath story, right? The press likes that. Customers like that. Channel partners like that – they're tired of beaten up by a large, dominant player. They might want to listen to somebody new who's going to come along and show them a better, faster, cheaper way.

Create drag – Linux vendors, we got Xen adopted by both Red Hat and the Red Hat Enterprise Linux Five, and Novell and the SUSE Distributions. Also, Intel and AMD – huge sense of rivalry there. They're beating the hell out of each other and leapfrogging each other. If you keep yourself in the middle of something like that where a couple of vendors have a high sense of rivalry and you can show value to both sides, you'll do well....

One hundred percent a year growth – unbelievable! It doesn't go on forever, but it's great right now.

.... Look at Open Source as a vehicle – that's your lead generation vehicle, not seminars, not tradeshows, not buying lists, not cold calling. Forget all that. Throw that in the dumpster. Think about having a great product that's innovative and distributing it over the web through your community, and making the community extremely active.

The Xen community includes regular contribution from about 300 engineers. How many employees did I say we have? Eighty. Yes, 65 of them are engineers, but what about the rest? The other engineers come from Intel, AMD, HP, IBM, so on and so forth, Red Hat, Novell. How could a company with 80 employees and some nice venture capital build a competitive threat to VMware? One way to do it as Bernard well said, is through Open Source. You're sharing the game by getting developers to contribute from other companies. It's amazing. Guess what? As soon as their products ship, your product may just be optimized and run faster than the competitor's products when Inter ships a new chip, AMD or HP ships a new server, so on and so forth. So, it's aligning your goals like that.

To make fast quarterly releases, we just kept going – boom, boom, boom. Our competitor does pretty much annual releases, so you have an ability to move faster than the incumbent because you are moving with Open Source.

This is when you get into more of the marketing stuff – brand PR websites, Google, watering holes. Okay, make sure that you have a branding strategy. Make sure you own your trademarks because Bernard and Bill both talked about the collaborative nature of Open Source. The flipside of that is it's wild-west, it's very chaotic, there's a lot of pushing and pulling, and if you don't own your marks – you don't assert yourself that this is our project and we own this brand, you can get hijacked very easily.

We had an example where a competitor called Virtual Iron on Boston tried to hijack our brand and did not use our code, at all, and started to tell all the ....

Well, you know. It happens, right?

So, the PR – get a great PR firm. This is a marketing, right? Go for somebody who is going to be who will get you great exposure and PR. Go to the influencers who are not just the writers. Go to the experts like Bernard. He's someone who's a writer that has a lot of great coverage. A lot of the bloggers out there – in our segment, it's like Dan Kuznetsky who used to be with IDC. He's with ZDNet, Charlie Babcock – InformationWeek, Steven Shaglin – Cnet. These are sort of, the go-to people. The people at CRM – they just really work those relationships.

.... Now, what's your business model? I didn't put it up here, but you should know what your business model is. Don't just go blindly and say, "We're Open Source," and then, six months later, you've burned all your cash and you said, "How were we going to make money again?" So know. Are you like a Red Hat – are you going to make money on service and support, even more like a XenSource where we sell proprietary licenses built on top of the Open Source of Zen model or it's something else that you invent? So, know what your business model is upfront.

.... We've gotten some huge number of downloads, as well and now, those people are just coming back. They're just buying the product everyday, every week.

So, it's a completely different model. It's more about harvesting than cold calling and that's what I would say about Open Source....

OSS and Marketing:

• Blend Old and New
• SourceForge and Distribution

John Soper (Moderator, New Paradigms):

We'll get back to you. Thank you.

We want to cover a couple of points before we open it up. I wanted to go through some of the marketing issues which have already been covered in a number of ways, but I also wanted to drilldown on close development and alliances.

So, let me ask you, Bill… 

So, I'm hearing a lot of executing viral type marketing, global, Internet and so forth. What I'm going to ask you is …since you're in the 99 percentile of SourceForge, what is it about Open Source that allows you to do that, as opposed to just normal viral Internet Google, etc. marketing that you could do with any kind of software?

Bill Soward (Adaptive Planning):

Let me go back a step before all of you to take all of your marketing collateral and programs, and throw it in the dumpster. They work for certain companies. Some of us were, it's more of a transition and so I will say, we have a very integrated marketing program and as I said earlier, the core of this is test-drive, but we have very extensive lead generation activities. We are still buying lists. We are building a very extensive in-house database. We have narrow-targeting Email campaigns. We do some seminars with some of our partners. We do still show up at certain tradeshows. So, some of the traditional programs actually are still quite useful in our market because our core product – where we came from again was Software as a Service behind the main version. So, when you're selling to people in finance, you have to go to where they are and try to figure them out. For us, the evolution to, they find us, it's all viral and we keep them warm until they're ready to buy and then, upgrade them up to the chargeable version. That is pretty much a work in progress, so we still have to do some of the other programs but will continue to tweak that every quarter.

In that context for us, as I said, SourceForge is a great global distribution channel. It's a lot of free awareness effectively for us and so, for people who go to that place to discover new opportunities for new solutions, they're going to go in, they're going to put in some keyword and they're going to search on it or they're going to use the software they have to assertively drilldown and to find things, so in that context, your ranking at SourceForge for that channel matters.....

Attach Rate:

• Maximize Downloads
• Provide Options to Upgrade to Paying

John Soper (Moderator, New Paradigms):

Relatedly, what is your attach rate from the people you get out of SourceForge to paying customers?

Bill Soward (Adaptive Planning):

Well, it's interesting again. It's because we came from a hosted world, we keep score in perhaps, a little different way than everybody else does. I mean for us, what we're interested in is paying customers. We're less interested in what flavor they are and so, what we're finding is if you go back, conventional wisdom would be someone would download at SourceForge, install it, deploy it and start to use it. At some point they'd say, "Wow, I want to take advantage of your enhanced capability – I'll install it onsite and manage it myself."

That's sort of Open Source 101. For a lot of companies, that's what they do.

In particular I think, if you're down to the infrastructure level, that makes perfect sense because it's much more of an IT sale.

Now in our case, remember we're selling finance and finance CFO Controller, VP of Planning – those are the people that are signing off on these deals and so for them, the IT organization is a supporting cast member in most cases. That's all what it is.

So, what we're finding is, that yes, some of our customers downloading, deploying and upgrading are staying on premise, but other customers, this is a sales tool, so the ability to download and to discover it – download it to start looking at it and start using it – it's a sales tool. Then, when they identify themselves to us through the different schemes that we have to get them to identify themselves, they say, "Well, what else do you have? You've got a hosted version – how interesting. That sounds a lot easier actually. I don't need to do it myself, is that right?" "Right." So, we're converting downloading customers with the sales tool being the download into paying hosted customers who don't even care at that point about Open Source anymore. What they care about is solving the business problem.

So, our whole approach on this is to give customers lots of different ways to discover the value.....

Find App Buyers:

• They come to SourceForge
• Bypass IT

Audience (Q&A):

Most of the finance people I know don't go on…

Bill Soward (Adaptive Planning):

Yes, they don't go on SourceForge, do you think, right?

Audience (Q&A):

The question is the education piece of educating the customer…

Bill Soward (Adaptive Planning):

Well, it's very interesting is if you know, this is the old world and the new world, exchanging them in like, lightning pasture. Conventional wisdom I think, is the Linux crowd hangs out at SourceForge, etc. and what's interesting to us is in 13 months of experience, a surprisingly high percentage of the people who come through SourceForge have finance titles.

So, a little sleeper story out there is a lot of business people are hanging around SourceForge.

What's that all about? Well, you can download our product and have it installed in an hour. Push one button, click, it would go down and install and you can open it up and you can start working with it and building your budgeting and planning application in our app. You can go a long way these days without having a bunch of IT people. ....

Revenue Growth:

• Subscription Model

Audience (Q&A):

.... But the question is, how do you grow your company on revenue basis? Not like how many downloads that VCs funded that's fine. Then you can go and say to VC, "I'm on my own. I'm going to be the next Microsoft in real revenues. Not in terms of…

Bill Soward (Adaptive Planning):

So, the answer, in our case is we do the math. To be a relevant company you need…NetSuite is going public with a little over 5,000 customers and they're in the same market size or a little bit under ours, so we'll use that and say, "Okay. Here's an IPO strategy with 5,000 customers." So, how do you get 5,000 customers?

In our case it's subscription base relationships over time. We don't care how we get them. So, to us, Open Source is not a business model, it is a set of techniques that different people use in different ways as Bernard had on the slides. You have a half a dozen different reasons why you might have an Open Source strategy – it's a set of techniques. One of the interesting techniques that we leverage is the distribution channel called SourceForge. Another technique is how to build a partner channel lightning fast, globally because they find you and they can provide value easily around that model. So, those are two of the six things that are on his list that we like. Other people say it's all about developer communities, that was less important. But it's a piece of our puzzle, it's not the only thing that we do.

OSS and Innovation:

• A Key Value of OSS Model
• Developing with Many Engineers
• OSS "Engine" and Proprietary Bits

John Soper (Moderator, New Paradigms):

Speaking of developer community, I wanted to ask John to address a little bit how you've worked out with developers, moving away a little bit from the marketing focus on this to what is the development model. I don't know if it's your quarters, someone in XenSource, who worked with other companies in developing what they refer to as the engine and you put the car together. So, you have a group of companies…tell me if I get this wrong…that are working on the same kind of engine product, then they all go out and they put the car around it. So, different models of Ferrari and the General Motors, and compete with each other. 

As a development model per se, can you address a little bit how that works?

John Bara (XenSource):

If I find the answers, it will be dangerous. So, in our case, clearly the biggest benefit of being an Open Source company is not the distribution and the downloads, it's the innovation. Again, for a small company, 80 employees to have top engineers from Intel, AMD, IBM, HP, Red Hat, etc., pounding away on this thing and adding new instructions, literally daily, then exposing that code to the world and the community, running open tests and whatnot is extremely valuable.

So that's what, John, alluded to in terms of the Xen engine. Then, any company, since this Xen engine Open Sourced, can take that virtualization engine and build it into their own solution. 

Two examples I cited previously were Red Hat and Novell for SuSE. What's a little bit unique on us is, we then take the Open Source engine and put some proprietary bits on there, especially around Windows, because in the case of Windows, Microsoft won't touch GPL. So, when we did this agreement with Microsoft, basically had to re-implement Xen in a cleaner environment up in Redmond and put some proprietary wrappers around in so that it could work together with Windows. So, we're sort of selling these engines of Xen, we're also selling complete vehicles as our…people like Red Hat. It's a little bit complicated to explain.....

OSS as Joint Development:

• Working with Other Companies
• Financial Model

John Soper (Moderator, New Paradigms):

The thought in that engine, what's the difference between proprietary companies forming either joint development alliances or forming joint ventures or any form of proprietary alliances?

John Bara (XenSource):

Great question. So, it's probably the level of help we (XenSource) would give those companies. If a company wants to take the Open Source of Xen GPL engine, they take it…we help them. We do assist Red Hat and Novell to some extent, to birth their products but if a company were to do a commercial agreement with us on our OEM products, they would get a lot more specific R&D and an example would be Symantec. We did an OEM agreement with Symantec and our products are being fused together and there's dedicated engineering for that.

Last week we announced an OEM addition targeting the big server vendors, so you see some announcements there where we'll be coming out with the Xen .... If you're kind of a hybrid company like XenSource, you have to sooner or later, draw the line in terms of how much resource you put on the Open Source community. Where it's essential and it's driving innovation but you might not be getting paid versus I've got somebody like Symantec or Microsoft or Dell, HP, IBM, where they want to do an OEM agreement and financial considerations are exchanged, where do you put your engineers? I think there's a balance point between those two and you may face that as a company. 

OSS and Alliances:

• Working with Proprietary Companies

John Soper (Moderator, New Paradigms):

Okay. I want to get to your questions but I have one more area I've got to cover and that's third parties, alliances and acquisitions. So, feel free to jump in at any point.

Talk to us about Citrix. How did you do it? Is there something about being an Open Source company that makes it more challenging, that makes it more advantageous? It's not just capitalization.

John Bara (XenSource):

No, actually, I think it's a bit of a misnomer that Open Source companies and proprietary companies can't work together. I think the acquisition of XenSource by Citrix is another signal, as Bernard said in his opening remarks with the Dilbert cartoon, that Open Source is mainstream. Somehow, that company figured out that acquiring a company that has Open Source roots and an Open Source engine was fine. From an IP standpoint, from a valuation standpoint, from a channel standpoint, from a community relations standpoint, they went through all of that.

.... Don't worry about the price for your company and all that stuff. Worry about delivering value for your customers, your partners and good things will happen....

OSS and Company Valuation:

• "Force Multiplier" in Fast Growth Market

John Soper (Moderator, New Paradigms):

Nevertheless, the price was overpriced. So, one of the question is, right place at the right time or is there something about the viral effect of it being Open Source that gave that force multiplier effect.

John Bara (XenSource):

Probably a little of both. .... if you just look at the multiple that VMware had garnered, and continues to garner, relative to our revenue and our install base is growing so rapidly, $500 million is actually a fair price. Seems a little bit crazy but it is, anyway you cut it, they're getting into a rocket growth market. Don't you think that if there were a real viable alternative to Google, say four years ago, don't you think Microsoft probably should have bought that company? They paid pretty dearly because how many billions have they sunk to try to take Google out and failed? I think Citrix has sort of said, hey, we like this market. It's extremely adjacent to our market and we're going to go after it. 

So, the combined strategy of Citrix and XenSource is about rolling out virtualization across the entire application platform. Server – XenSource; storage –...

OSS and Alliances:

• More Significant Role

John Soper (Moderator, New Paradigms):

So, unless Bernard or Bill has some more comments…

Bill Soward (Adaptive Planning):

I just wanted to say one thing about around alliances, which is for Open Source companies, I think alliances take on more importance than the proprietary alternative. That's because a lot of, with Open Sources, getting known, getting awareness because you don't have a lot of the tools you usually had in the past, where you're basically just hiring a lot of marketing and sales people. Absent that, how do you get known? One of the ways you get known is to make friends in the Open Source world with other Open Source companies. Start integrating with them or something, as a way of getting people who are those company's users were yours.

So, alliances take on, I think, a more significant role with Open Source as somebody to be aware of and pay attention to.

Pricing SaaS vs. Hosted:

• Costs Basis Similar
• Keep it Simple

John Soper (Moderator, New Paradigms):

Thank you. I know there are a lot of questions out there so let's dive into some Q&A.

Audience (Q&A):

I have question for Bill, I was wondering why you have the same price for your hosted version and your on-premises version when you might add more cost with the hosted version but you're locked in with the…

Bill Soward (Adaptive Planning):

So, the question was, why do we have the same price for on-premise version as for our hosted version. You would think that hosted version would be more expensive because you have more cost. What's interesting is that we looked at the cost structure for both sides and the multi-tenant infrastructure that we have on our data center, the incremental cost and the next customer isn't anywhere near what you would think it is. So, I think our hosting cost is not so bad. 

In the end, technology living out in the wild behind the firewall, you probably had potentially more technical support questions in terms of operability and so forth. We looked at it and we said it could go one way, it could go the other way. The most important thing is keep it simple – one price, done. Customers don't agonize over why we decided with one price, one price is more than the other, it's one less thing to worry about. You worry about the short sale cycle, so [inaudible].

GPL License a Barrier to Sales?:

• Value of Indemnification
• Not purchased through normal channels

John Soper (Moderator, New Paradigms):

Next question.

Audience (Q&A):

I'll just throw it on to the panel, whoever would like to respond. 

One of the issues I have heard historically a lot. I was talking about some of the BEA solutions that support Open Source in one fact or another. They have the strategy blended, bringing together proprietary Open Source. That's one issue. One reaction I would get, pretty commonly was, love to use Open Source but our legal department won't let us. They're deathly afraid of someone plopping up out of the woodwork and suing us. How do you address that kind of a concern? It's not unique, I've heard it more than once.

Bill Soward (Adaptive Planning):

While they're thinking, I'll just jump in. I think what's interesting is we're at a GPL 2 at this point. At some point, probably we'll do GPL 3 when things kind of stabilize out there. 

The opportunity with upselling customers is to not only sell them enhanced capabilities but also indemnification. So, it may support your conversion process by making that available. So, if someone has a concern about that then great. Buy our commercial edition, sign those agreements, get protected and we'll take that responsibility.

So, I think it's a legitimate issue for a lot of customers, they kind of come through all this and make their own decisions but JBoss was very successful in targeting wealthy corporate Fortune 500 companies with deep pockets and saying, buy insurance policy from us with the supporting indemnification. That's where a lot of the money cam from was through that. 

Bernard Golden (Navica):

What I would add to that is a couple of things. First of all, that's a way that your license can align with your business strategy to provide you with a value proposition that people want to give you money for Open Source products. One thing is just it's nice when there's an alignment, and there are Open Source companies that essentially have that. It's kind of a…maybe I'll informally say it but GPL's got a time bomb and they'll sell you the defusing mechanism if you give them some money. So, that's one thing. 

The other thing I say about corporate attorneys, kind of saying, "I'm not comfortable with that, I don't want that." That makes a ton of sense for an environment where their aware of it upfront, and that's traditional procurement model. We're interested in buying a product, we're putting together an RFP. They get alerted to an acquisition, to a procurement acquisition.

Open Source in a lot of companies never goes that route. It gets downloaded by somebody off in a corner and what happens is it eventually comes to the attorney as a, "Oh, by the way, do you know that we have…blah…blah…blah....."

John Soper (Moderator, New Paradigms):

We have time for two more questions.

Advice for OSS in New Company:

• Is product a good fit for OSS?
• Get the licensing right
• Do you fit the OSS culture?

Audience (Q&A):

I'm starting an Open Source company because it aligns very much with what we're trying to do and I'd love to see what are the Top 2 things that you would recommend in starting a business based from Open Source. 

John Bara (XenSource):

First and foremost I'd say, make sure it's a product and a business strategy that makes sense to provide Open Source. In other words, both these products are ones that can align very well with Open Source, particularly, XenSource. I mean it's perfect for Open Source. If you have a new kind of product, it might not align very well. 

First off, given all the realities of Open Source, I'm going to look for a community, I'm going to look for downloads, I'm going to be more willing to be more transparent because that makes sense for the product and strategy I'm going to do. If it does, that's great, if it doesn't then you need to think of something different. Really, the second thing I would really say is get your license right. Make sure you've got the right license underneath the product or products that you're using. That will also be the case if you're incorporating other Open Source products or components into yours..... 

Bill Soward (Adaptive Planning):

.... If you're going to be an Open Source, more often than not, you need to be in a big space that already exist when there are well known competitors that already defined the space and you can come in and hack them to death. You don't want to be out there creating a brand new market space. 

But having said that, then how are you going to compete against them and where are you going to make money over time? Comes right back down to the basics because a number of commercial Open Source companies believe that their revenue stream is going to be support only. For many years, they said, "Oh, we're not going to charge for enhancements." There's one software baseline, everybody gets it and they come when they need support. You can imagine doing that if you were an infrastructure play where you have hundreds of thousands, ultimately, millions of downloads, people trying your product and there's thousands of developments. MySQL started that way, right? JBoss certainly was in that realm. 

But if you're something that's a little bit smaller, the numbers don't add up. There aren't enough of them out there to just only do it on support. So, you have to think about, I'm going to make my money by a new software company, I'm going to sell my IP. I'm going to have enhancements, that's our strategy. Do the upgrade for the enhancements that are not part of the baseline product. You have to know that because that then determines how you position your product, your versions of your product, what goes where and what kinds of people you need to have on your team. 

John Bara (XenSource):

I want to add to your remarks, do it for the right reasons. Don't do it because it's a trend, a fad or a gimmick. Do it because you believe it's the best way to take software to market and get innovation into your product line. You have to walk this balance between providing value, leading your community and being…I don't want to say punitive but sometimes you've got to pull out the stick and lead.

So, you can't go too far one way or the other. Let's say you just do everything nice for everybody and you're Mr. Nice Guy. You could get your pocket picked. Somebody could come in who is evil and just push you out of the way and take control of your project, and fork it, as Bernard said. 

On the other hand, if you're just out there trying to make money and self interest is all that matters, the developers in the Open Source community are going to kick you to the curb on day one. The culture that I think Bernard was sort of describing is, it is extremely collaborated and there's some benevolence that goes on, there's some sharing. I mean HP and IBM work together, Intel and AMD. That's the kind of thing that happens here is that you have to be able to nurture innovation in collaborative environment across competition and when the time is right, you've got to step up and lead. You've got to pull on to the reigns because there will be people who say, "Hey, look at what that company is doing. Our business model is failing; I'm going to go take that project over." It happens all the time. You wish it didn't but it's sort of the other side of Open Source. It's easy for anyone to participate, so they do – for good, for bad or whatever.

Audience (Q&A):

Just a comment, I found there are many people around here they don't really understand of what they're talking about, the VCs understand a little bit more of the city dwellers. There's a few out there but they really don't get it.

VC Advice

• Make sure they understand OSS
• There are several who do

John Bara (XenSource):

Sure. So, I'll give you six names right now, okay? Kevin Compton - Kleiner Perkins. He's also got his own firm called Radar. These are our board members: Pete Sonsini – NEA; Kevin Efrusy – Accel; Nick Sturiale - Seven Rosen; and there's two more, John Connors at Ignition Partners in Seattle, is a former CFO of Microsoft. Those are our current board members. We did have Peter Fenton, he was at Accel, he is now at Benchmark. He's also outstanding, Peter Fenton, and all of these guys understand Open Source. Clearly, they do. 

So, if you're finding some VCs who don't understand Open Source or don't believe in the model, don't waste your time, because I just gave you six who do.

Bill Soward (Adaptive Planning):

Yes, and the challenge these days is in some cases, their dance card is pretty well full, they've invested on a lot of Open Source companies, and so you have to have something that's going to be quite unique and compelling because they've already checked a lot of the boxes in terms of covering the main categories. So, there's a lot of stuff that's already been ticked off.