Monday, January 12, 2009

A 'permacheap' winner and a new contender

The same week that analysts cut expectations for MSFT, Red Hat announced strong performance for its fiscal Q3 (revenues up 27% when taking into account currency fluctuations) and guidance that Q4 should be within the range previously communicated to analysts.

As many of you know, Red Hat is best known as a Linux distributor, and has expanded up the software stack into middleware. The stock has doubled since mid-November and its financial metrics are a throwback to what we became familiar with during the heyday of software/internet growth; trailing P/E 38x, Price/sales 4.7x.

The New York Times on Sunday profiled Ubuntu and their version of Linux too. With more than 10% of computers sold by IBM, HP and Dell shipping with Linux installed, it is logical that other suites of Open Source Software, not as widely known, will follow the trend. Expect vendors/organizations, such as the following to accelerate market share capture:

Drupal
Firefox/Thunderbird
Asterisk
Clamwin

It's interesting that so many of the Open Source articles highlight how satisfied users are with the code, and the community support is lauded. Price seems to be something that gets the software in the door, and quality and low(er) cost of ownership keeps them there. I suppose there's a bit of self-selection inherent in early adopters taking an extra dose of pain, but it's clear that this is exactly the environment where mainstream customers are open to trying new things; especially, when vendors of the ilk of IBM, HP, and Dell lend their brands/trust to the effort.

It's a well trodden path that application vendors follow the success of OS and middleware vendors, so folk, such as SugarCRM. would logically see positive momentum too.

These subjects have been widely followed in the press for the past few years. What is now different and to me significant, however, is the ability to discover, materialize and assemble the various components that developers use to build applications suited to particular needs of organizations.

The open source movement has been conservatively embraced by hundreds of thousands of programmers who have developed countless components that are embedded in applications and systems throughout the world. In a similar way that end users now customize their home pages, organizations will demand the same flexibility, at reasonable cost of ownership to do the same with their applications. To achieve the dual objective of flexibility and cost savings, it's critical that engineers have ready access to leverage the work of others. They need to understand what components are available, what's their quality, and are there any dependencies in the underlying code. These, and many more questions underlie trust.....'if I use this code, rather than developing my own, or buying a proprietary system, will it work?'

Systems such as Krugle or Google's Code Search address the 'find' part of the issue. A second generation of companies, such as Cloudsmith, where I am an investor, delves more deeply into the aforementioned elements that build trust (community ratings, popularity, dependencies, etc). Grab a look at one of the posts by fellow investor, Chris Horn, founder of Iona, who speaks eloquently on the topic.

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