In Open Source: The Model Is Broken, Stuart Cohen complains that the business model based on selling support and services around open-source software is “not meeting the expectations of investors”. In related news, the sky is failing to meet my expectations by not raining tasty soup.
Mr. Cohen notices that “Some have succeeded. Many others have failed or will falter, and their ranks may swell as the economy worsens.” Congratulations, Captain Obvious! Because, of course, there is no other economic sector in which the vast majority of business ventures fail.
I have to wonder what planet Mr. Cohen has been living on, and how he managed to miss it eight years ago when I warned everyone (in The Magic Cauldron) that the day of the high-investor-multiple software startup was over. Service businesses simply don’t have multiples as high as capital-intensive manufacturing businesses; not only was the decline in expected returns from startups completely predictable once they stopped being able to charge secrecy rent, I actually did predict it. Repeatedly and loudly.
Mr. Cohen also brings us the news that running a telephone support desk is a thin, low-margin business; and that successful companies like Red Hat find other ways to add value to their open-source codebases. Zounds! Captain Obvious strikes again! How does he do it?
Mr. Cohen is actually missing the biggest news, which is that “failing to meet investor expectations” is a good thing. Investors thrive on arbitrage — capital arbitrage, location arbitrage, time arbitrage, IP arbitrage. As markets and production systems get more efficient, they compete inefficiencies out of the system and both risk and opportunities for arbitrage decrease. This is why mature industries have the steadiest but lowest returns on investment.
Investor expectations about software-company multiples were formed in the industry’s squalling infancy and lusty adolescence. The “failure” to meet these is nothing more than a sign that, with open source, the software industry is finally growing up.