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.

The NY Times published an article about open source yesterday which was very disappointing. The article perpetuated many of the myths and misperceptions about open source. The first misperception is found in the title: “Open Source as a Model for Business is Elusive”.  Open source is not a “business model.”  It is a development methodology which supports multiple business models as I have discussed in an earlier post.  The article starts from two false premises: (1) open source software is released free of charge to the world and is maintained by volunteers and (2) the revenue for open source companies comes solely from “support” deals.  These assumptions are very dated.  For the last five years, much of the most useful open source software has been created by commercial companies who develop most of the software using their own employees, such as SugarCRM and Zimbra.  Similarly, most open source companies use a combination of license or subscription revenue as well as revenue from support services. For example, MySQL received revenues from licensing of a commercial edition its software as well as “support” revenues.

The most disappointing quote was the following: “Whether open source firms are practical as long-term businesses, however, is murkier.”  The problem is that the long term business strategy of most software companies is “murky” due to the rise of less expensive “open source” alternatives and cloud computing.  The fact that several open source companies were sold at very substantial multiples to their revenues suggests that large software companies view them as valuable.  Moreover comparing the profitability of open source businesses with the traditional enterprise software model fails to take into account the tectonic changes which the traditional software business model is undergoing.  In fact, the traditional enterprise software model has proven  not to be a “long term business” for many proprietary companies. You need only consider the demise of Siebel Systems and PeopleSoft. Open source software is one of the major driving forces in these changes. For example, the Linux operating system is the most serious competitor to Microsoft’s operating system business. The fact that it is supported by IBM, Intel and other large companies is a further testament to its competitiveness and value. Although the Linux code may be contributed by corporate employees, the Linux operating system is continues to be distributed at no charge under the GPL: it is truly an “open source” program.  Moreover,  Linux users do not care whether the contributors are corporate employees or individual “volunteers”.  And Linux has succeeded where proprietary operating systems from major companies, such as IBM’s OS2 failed.

The final part of the article continues the unfortunate pattern: it suggests that the sale of open source companies to larger traditional software companies is a failure of the “open source business model.” It is not. This conclusion fails to consider that more than 90% of venture backed software companies in the past three years have been acquired rather than gone public, whether they used an open source or a proprietary development methodology. These acquisitions prove little about the viability of the ”open source business model” or open source software companies. In fact, they suggest that sophisticated companies are willing to pay a substantial premium for such companies.

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