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Just a reminder, these posts are not legal advice. This site is the personal blog of Mark Radcliffe and the opinions expressed are those of Mark Radcliffe and not those of his clients, DLA Piper or the clients of DLA Piper.

About Me:

Mark Radcliffe

I have been practicing law in Silicon Valley for over thirty years assisting startups and global companies develop and market innovative products and services. I have participated in multiple business cyles in Silicon Valley from hardware to software to internet to cloud. My projects have included developing the dual licensing business model for open source startup, developing the original domain dispute resolution policy for NSI and assisting Sun in open sourcing the Solaris operating system. Recently, I served on the US Japan Innovation and Entrepreneurship Council (one of ten members) to develop a plan to encourage the innovation in Japan and the United States. I have been working with the same attorneys since 1986 although we have merged with other law firms several times. I am now a partner at DLA Piper, a (relatively) new global law firm formed in 2005 from the merger of three law firms. The firm now has 4200 lawyers in 31 countries and 77 cities. My experience in corporate securities (particularly venture capital) and intellectual property enables me to assist companies structure the financing and intellectual property strategy for developing ane exploiting a new product or service. I and my team work with fifty startups at one time as well as Global Fortune 100. I have been fortunate enough to work with companies in software, cloud computing, semiconductor, health care IT and Web 2.0.

We had a great time in Paris at our Third Open Source Think Tank this year! We had over 120 attendees, primarily from Europe http://thinktankeu.olliancegroup.com/index.php. 

The two case studies were very different and illuminated the range of the open source market: Airbus and the Danish Government.  The Airbus discussion was particularly fascinating as they described a product development cycle of twenty years with a product life cycle of forty years.  Software has become critical to their planes, but given these time periods, proprietary software has significant disadvantages: (1) most proprietary software companies are likely to be acquired or go out of business during such a long period and (2) even if the proprietary software company still exists, the technology will be dated and the company may be reluctant to invest in maintaining it.  An open source approach overcomes many of these problems. 

The Danish Government described their efforts to encourage the use of open source in the government, including developing a forge. They faced many of the same challenges described by the State of California which we discussed at the Open Source think Tank in Napa. 

We once again had a great discussion of M&A. This panel was particularly useful for startup CEOs because merger is the exit strategy for over 90% of venture backed startups. The panelists emphasized the need to ensure that the company has clear title to the intellectual property in the product. The failure to do so can result in significant delays and possibly reductions in the purchase price.  They also noted that one problem that target companies rarely consider is the negative effect of large potential contract liabilities: the most common problem is unlimited liability for intellectual property infringement. Many acquiring companies will not accept such liability. In one case, the acquiring company structured the transaction as an “asset purchase” rather than a merger (much less favorable from a tax point of view for the acquired company) in order to leave the contract with unlimited liability behind.  We also addressed these issues in the legal panel (see our presentation at http://www.scribd.com/doc/40133936/Open-Source-Paris-Think-Tank-2010-Final). 

The cloud computing panel was supplemented by a real time poll.  The attendees were more optimistic about the effect of cloud computing on the use of open source software than the attendees in the Napa Open Source Think Tank in the Spring. A large majority stated that the advance of cloud computing has not effected the adoption of open source software.  Both groups agreed that security was the most significant barrier to the adoption of cloud computing. I am sure that this topic will continue to be important at future Open Source Think Tanks. 

After the last presentation, we joined attendees of the Open World Forum for a cocktail party in the Paris City Hall and then had a wonderful dinner on a barge on the Seine. We look forward to seeing you next year.

 

I have been reading the debate about “Open Core” which was stimulated by Jorg Janke post about Compiere. http://www.compieresource.com/2010/06/compiere-open-source-failed.html. The open source community owes Jorge Janke a huge debt of thanks for his frank discussion of what happened at Compiere. People are rarely eager to share the details of their failures. I think that the most important lesson from his posting is the critical importance of management that understands its market. The venture capital industry learned this lesson long ago. When making a decision about an investment, venture capitalists focus on the management team; they understand that the technology is important, but great execution with mediocre technology will win over poor execution with great technology. This rule has been established by decades (and thousands) of investments. Open source companies pose particular challenges for management because of the critical role of communities and their expectations in the success of the company. These issues are very different from traditional software companies. Compiere is a very telling example of the nature of those challenges.

This post has launched a discussion of the “open core” business model and whether it is true “open source” http://www.computerworlduk.com/community/blogs/index.cfm?entryid=3047&blogid=41. I have great respect for Simon Phipps and his contributions to the open source community, but I strongly disagree with his statements. I am very concerned that if he is successful, end users will have fewer software programs under open source licenses. This result arises because of the law of unintended consequences: the successful demonization of the open core model will result in fewer venture capital investments in companies using open source licenses.

In the interest of transparency, I work with over twenty open source companies, most of who were funded by venture capitalists and the vast majority of which use the “open core” model. These companies have provided significant value to end users through the software licensed under open source licenses. Simon states: “But to use the package effectively in production, a business probably won’t find the functions of the core package sufficient, even in the (usual) case of the core package being highly capable.” This statement is simply incorrect. I have sat through many Board meetings and, in fact, the conversion rate from “open source” to “commercial” licenses is generally less than 10% for these companies. Thus, more than nine out of ten end users find the functionality of the open source version satisfactory.

Simon says that open core does not provide software freedom for “end users”. Yet, nothing prevents the end users of the open source version to modify it and distribute it or otherwise exercise the rights under the license. In fact, Compiere demonstrates the fallacy of this position because it created two different forks. Simon complains about the lack of access to the “commercial extensions” of open core programs. However, as Marten Mickos notes, the effect on the end user of the employment of the Apache license is the same as the open core model: commercial extensions are not made available to the community. http://webmink.com/2010/06/24/links-for-2010-06-24/#comment-870. I agree with Matt Aslett that the open core model does not violate the Open Source Definition, either literally or in spirit. http://blogs.the451group.com/opensource/2010/07/02/open-core-is-not-a-crime/. (please note that this position is a personal one and does not reflect the view of the OSI which has not yet taken a position on this issue). Simon appears to be suggesting that only a “copyleft” approach in which all of the software must be available under an open source license to meet the Open Source Definition, which is simply incorrect (the Open Source Definition was a reaction to the limitations imposed by the copyleft approach).

I agree with Matt at one level that ultimately this debate will be decided by the market (i.e. end users). However, I don’t agree that it is futile. Most venture capitalists will not invest in companies that do not use the open core model, so if the open source community leaders are successful in demonizing the open core model, they will decrease the willingness of venture capitalists to invest in open source companies (just a reminder, that a recent book, Mastering the VC Game, recently noted that venture capitalists typically look at 300 companies for each company in which they invest). Although not all open source projects need venture capital support, venture capitalists have been a significant source of support for open source projects (as well as new software made available under open source licenses) and end users have been the beneficiaries of their investment. If the open core model is no longer considered open source, the biggest losers will be the end users; they will lose the opportunity to benefit from that investment and that is certainly not consistent with the goals of open source

I am participating in SDForum’s Global Open Source Colloquium for the third year. This Colloquium is held the day before OSBC. http://www.sdforum.org/index.cfm?fuseaction=Calendar.eventDetail&eventID=13371  The event is always fun because it is much smaller than OSBC and permits you to interact with the speakers on a personal basis.  The speakers are always drawn from major figures in the open source industry with a leavening of speakers from overseas.

This year has a particularly interesting set of presentations with Larry Augustin as the keynote. Larry is a seasoned entrepeneur and a very successful investor in open source companies.  We will also have several panels with open source CEOs which focus on the global market. And we will have a great panel of venture capitalists who invest in open source (I know because I will moderate the panel!). 

The Colloquium will begin at 11:30 am at the Palace Hotel on March 23. I hope to see you there!

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After a busy year end, I have time to reflect about the last year and developments in open source.  I was particularly interested in the cascade of articles and comments about how the “Open Source” business model is broken started by  Stuart Cohen’s article in Business Week on December 1.  http://www.businessweek.com/technology/content/nov2008/tc20081130_276152.htm. I believe that Stuart is just wrong.  I think that Charles Babcock got it right in his blog responding to Stuart.  http://www.informationweek.com/blog/main/archives/2008/12/open_source_bus.html?cid=RSSfeed_IWK_ALL.  

From my point of view, Charles’ most important point is that  “open source” is not a business model, it is a means of developing and distributing software. And 451 Group makes a similar point in their report on open source business models (which actually pre dated Stuart’s article). http://www.the451group.com/caos/caos_detail.php?icid=694. I represent over fifteen open source startups (as well as large companies developing open source software) and they have  a variety of ways of making money on open source software, ranging from “dual” distribution to support for proprietary additions.  Marten Mickos in his keynote at OSBC in 2007 noted thirteen different ”open source” business models.  http://akamai.infoworld.com/weblog/openresource/archives/OSBC2007%20-%20Marten%20Mickos%20Keynote.pdf.  Second, “open source” cannot be a single business model because it spans a wide variety of different products: the business models for application software are quite different from infrastructure software.  Third, most of the companies that I represent use a mix of business models, such as dual distribution and SAAS.  In fact, even the “dual” distribution model has two forms: the newer model in which the company distributes a commercial version which has additional functions compared to the open source version and the older model in which the open source and the commercial version are the same.  While the characteristics of “open source” development have strong similarities across different types of products, the business models are likely to quite different and will continue to evolve.

The open source community also owes Charles Babcock (and his colleagues at InformationWeek) a vote of thanks for the Analytics report “Open Source Enterprise: Its Time Has Come, And the Price is Right.”  It provides an excellent summary of the state of open source software in the enterprise, with plenty of specific examples.  However, I think that the most interesting part of the report is “What Happens After the Acquisition”.  This section describes the challenges faced in the integration of open source companies into larger companies.  The nature of open source companies and their communities requires a different approach from traditional acquisitions.  In particular, the acquiring companies need to consider carefully the effect on the open source companies employees and their community when modifying the business model. As more open source companies are acquired by traditional software companies, these issues will take on increasing importance. Both sides need to understand that such an integration will require flexibility.

I think that 2009 will be a very interesting year for open source!

Gartner just reported that 85% companies currently use open source software and the remaining 15% expect to start using it within one year. http://www.gartner.com/it/page.jsp?id=801412 They noted that OSS is frequently replacing proprietary software for applications. For new projects OSS is being equally adopted for mission critical and non mission critical projects. TCO and reducing development costs continue to be the lead drivers of OSS adoption, but concern about vendor lock in with proprietary software remains important.

They noted that governance remains the number one problem. They noted that 69% of companies surveyed do not have a formal policy for evaluating and cataloguing OSS use. This number is even more dramatic than the findings of the survey for the DLA Piper Global Technology Summit. http://lawandlifesiliconvalley.com/blog/?p=108

Gartner notes:

“Just because something is free doesn’t mean that it has no cost,” said Laurie Wurster, research director at Gartner. “Companies must have a policy for procuring OSS, deciding which applications will be supported by OSS, and identifying the intellectual property risk or supportability risk associated with using OSS. Once a policy is in place, then there must be a governance process to enforce it.”

I strongly agree with this recommendation. As I have noted in the past, an open source use policy is essential for any company using software (in fact, a third party use policy is a more accurate description of the need because many “commercial” software components are readily available on the web). http://lawandlifesiliconvalley.com/blog/?p=18. The failure to have a OSS (or Third Party Software) Use Policy runs the risk that a company will be liable for monetary damages due to intellectual property infringement and may even be prevented from distributing its products due to an injunction. The recent Jacobsen case, in particular, raises the risk of injunctions being granted for failure to comply with OSS licenses. http://lawandlifesiliconvalley.com/blog/?p=64.

An OSS Use Polcy provides the best protection from these risks. And such a policy can be lure for the best programmers if it permits contributions by employees to open source projects. Many programmers now contribute to open source projects and want the assurance that they can continue to do so even when working for a corporation.

Recently, Trip Chowdry, a Silicon Valley pundit, predicted (as reported in Barrons): ’”‘almost every’ VC funded open-source company is struggling and will run out of funds within the next 6 months”  http://blogs.barrons.com/techtraderdaily/2008/11/10/trippin-with-trip-one-mans-view-of-carnage-to-come/.  I share Matt Asay’s scepticism.  http://news.cnet.com/8301-13505_3-10094221-16.html

Based on my experience with the open source startups who are my clients, Trip is simply wrong. In fact, I have been involved in two different open source venture fundings in the last thirty days. At worst, no more than 10% of the open source startups that I represent are in difficult straits. I have been working with startups for over twenty five years (and remember about half of all startups fail over time), this percentage is hardly unusual.

Bill Snyder makes some interesting points about the differentiation between open source companies and other technology companies (particularly Web 2.0 companies) http://weblog.infoworld.com/tech-bottom-line/archives/2008/11/nuclear_winter.html. I think that the open source companies will thrive in the current market because of their lower cost (critical as IT budgets shrink). However, open source is not business magic and open source companies need to manage their resources and costs carefully.

 

 

Matt Aslett of 451 Group notes that announced venture capital investments in open source vendors in the third quarter of 2008 was down 12.2% over the third quarter 2007, from $87.2m to $76.5m.  The overall market itself is down 6% overall.

Given the fact, that the first quarter of 2008 was the largest ever for open source investments and that second quarter investments were also significant, this reduction is unsurprising. Matt noted that the open source market is small enough so that even one missed deal can effect the statistics.  His analysis also notes that the deals in this quarter are more late stage and the average deal size is larger ($9.6m); only two Series A/Seed deals were announced.  For more information, see Matt’s post. http://blogs.the451group.com/opensource/2008/10/16/vc-funding-for-open-source-down-12-in-q3/.

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The question of how Microsoft will respond to competition with  open source software is beginning to be answered. I have already discussed the views of Stanford and Harvard Business School professors in an earlier post http://lawandlifesiliconvalley.com/blog/?p=74.  

Jean Louis Gasse, a smart entrepeneur and technologist who is now a venture capitalist, suggests that Microsoft is working on a comprehensive strategy for the threat to its Windows operating system which includes responses in all three areas of risk: servers, mobile and desktop.  http://www.mondaynote.com/?p=1022. As he describes it:

Microsoft’s Live services are but a rehearsal for a much bigger act, Microsoft’s Cloud OS, sometimes called Strata. And, based on Microsoft’s own Cloud services, we’ll see a Danger-based smartphone, as proprietary as the Xbox and the iPod competitor Zune.  Put another way, Microsoft’s future business model will borrow from Apple and Google, it will have two components: proprietary devices and “universal” Cloud services

I recommend that companies using open source stay alert for the next month as this new strategy rolls out.

Sun announced today that they are purchasing the open source database vendor, MySQL AB, in a deal valued at around $1 billion. The transaction is scheduled to close late in the third quarter or early in the fourth quarter of Sun’s fiscal 2008. According to The Street: “Sun will pay approximately $800 million in cash for all of MySQL’s stock and assume about $200 million in options.” http://www.thestreet.com/s/sun-to-buy-mysql/newsanalysis/techsoftware/10398964.html?puc=_googlen?cm_ven=GOOGLEN&cm_cat=FREE&cm_ite=NA

Sun’s CEO, Jonathan Schwartz, described the acquisition as based on MySQL’s unique position: MySQL’s database is the “M” in the LAMP stack which is favored by web companies, yet MySQL is having difficulties selling to more traditional companies, because CIOs want traditional “big company” commercial support. MySQL has stated that “more than 100 million copies of MySQL’s open source database software have been downloaded and distributed and an additional 50,000 copies are downloaded daily.” Sun gains the advantage of MySQL’s customer base while supplying the commercial support that MySQL needs to sell into more traditional enterprises. http://blogs.sun.com/jonathan/ Jonathan’s post is particularly interesting for the vision behind the acquistion:

So why is this important for the internet? Until now, no platform vendor has assembled all the core elements of a completely open source operating system for the internet. No company has been able to deliver a comprehensive alternative to the leading proprietary OS. With this acquisition, we will have done just that - positioned Sun at the center of the web, as the definitive provider of high performance platforms for the web economy.

Jonathan’s post also provides details about how Sun will integrate MySQL into its offerings.

And he announced that Sun will be funding additional developments at universities through global research fellowships designed to advance the state of engineering on the internet. The announcement of this academic initiative follows Sun’s announcement in December that Sun will be establishing an “award program” to support innnovation and advance open source development relating to its products. http://lawandlifesiliconvalley.blogspot.com/2007/12/paying-developers-new-way-to-develop.html

2008 is starting with a bang for open source.

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