Open Source moves centre stage - Deloitte

TMT Trends: Predictions, 2006 - A Focus on the Technology Sector "The software world will likely see its dynamics continue to change, as open source becomes a growing threat to the established software business model, impacting both established software providers as well as end-users. Open source may well challenge long-established products and services in Customer Relationship Management (CRM), Enterprise Resource Planning (ERP) and other enterprise software infrastructure functions, in addition to its growing strength in server management, operating systems and office productivity software6. Open source’s key differentiation will likely remain the global community development model, which may continue to usurp the legacy approach of closed source software development, driven by a single company’s developers. As well as lowering R&D costs, the global collaborative effort of thousands of developers will be likely to be seen increasingly as a way of sharply reducing product development time frames."
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Open source moves towards center stage

2006 will likely see open source ramp up its challenge to the established software business model, impacting both established software providers as well as end-users. 2006 may well see open source challenge long-established and credible products and services in CRM, ERP and other enterprise software infrastructure functions, in addition to its growing strength in server management, operating systems and office productivity software²⁸.

Open source’s key differentiation will likely remain as its development model, which in turn changes the cost structure for software. Open source’s global community development model will likely continue to usurp the legacy approach of closed source software development, driven by a single company’s developers. As well as lowering R&D costs, the global collaborative effort of thousands of developers can sharply reduce product development time frames.

In 2006, open source’s growing adoption will likely cause many in the industry to take a different view towards the value of intellectual property, and how to best leverage it. Many established software players may well choose to provide previously proprietary intellectual property to open source communities, recognizing the power of the open source model as a distribution mechanism; and one which need not threaten the value of intellectual assets²⁹. As a result, it will likely become increasingly difficult to identify pure open source development projects.

The hype caused by open source will likely catalyze market entry, particularly encouraging start-ups building enterprise grade open source products. Some new entrants will likely focus on developing service and maintenance businesses based on open source software provided; others may develop integrated closed and open source software solution; others may rely on charged-for ancillary toolkits to generate revenues.

Bottom Line

The maturing and growing acceptance of open source will likely require considered responses from both established software suppliers and end-users alike in 2006.

Established software industry players should, if they have not already done so, develop an open source strategy that is agreed by the Board. Elements of this strategy may include identifying new areas to accrue revenues, if the belief is that the traditional charging model no longer applies. Alternatively some companies may seek out specialist niches in which the open source community would most likely have no interest, such as developing specialist software to reduce the overhead associated with regulatory compliance. All, however, should seriously consider the power of the open source model as a means of distribution in an increasingly crowded, competitive and complex market.

Businesses considering acquiring open source software should bear in mind its dynamics. While open source is sometimes mistakenly perceived as free, businesses should bear in mind that its ultimate impact may be to redistribute, rather than sharply reduce, the flow of revenues to the software sector. Ancillary products and services, from maintenance to developer tool kits, may well consume technology budgets, rather than the core product itself.

Furthermore, while the cost of software R&D – and hence the cost of products themselves – may decline in the short-run, as pride, rather than profit, becomes a major motivator for developers. In the long-run profit may resume its pole position as the principal lure for the best developers. This may well have a knock on impact on the cost of software.

Additionally, while key potential benefits of open source products include flexibility and lower total cost of ownership (TCO), the downsides include a potentially poorer quality product. Businesses should ensure that operations are not disrupted because of breakdowns in lower cost, but lesser quality, software. Moreover, businesses should think carefully about whom they contract to provide their software solutions. Just because a small open source company has access to worldclass code, does not mean it will be able to support its clients properly.

Finally, the open source community should start to broaden its reach. There remains a considerable opportunity to take open source code into new areas, including mobile smart phones, PDAs and even set-top boxes³⁰. As more and more devices become intelligent, the opportunity for the open source model will likely grow accordingly.

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