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$60B less for proprietary software = $60B more customer value

Dave Rosenberg has picked up the story being spun by The Standish Group that says

Open Source software is raising havoc throughout the software market. It is the ultimate in disruptive technology, and while to it is only 6% of estimated trillion dollars IT budgeted annually, it represents a real loss of $60 billion in annual revenues to software companies," said Jim Johnson, Chairman, The Standish Group International, Boston, MA

I agree with Dave's take, which is that this story is very much a glass half-full/glass half-empty story.

To wit, if open source software really does permit the global IT customer to trim $60B from their IT budget, then we really are delivering $60B worth of value that the proprietary industry is not. Now, there was a time when $60B might not have seemed like money worth saving, when corporations were raking in so much profit from so many sources that CEOs had the discretion to decide what cash to book from what source in which quarter. But now things are different. Greater transparency, greater scrutiny, and much less cash means CEOs are looking for value wherever it may be.

Another way of looking at this number is to consider how much more value open source could unlock from the IT budget. In an interview with Stephen Shankland, former Delta COO Jim Whitehurst talks about his experience of feeling forced, year after year, to spend $500M/year on IT software and systems that did not track the value potential implied by Moore's Law:

I think I finally get the joke. I was a senior exec, and like every other senior exec I had a huge IT budget. Mine was as large as Red Hat's revenues last year. You sit there and say, "Why are my IT costs going up, but I'm getting less and less functionality?" Every IT professional says the same thing: my lights-on costs are going up. But wait a minute! I bought a laptop, and it cost me half as much as it did three years ago, and my costs are going up? I get the joke now.

If you look at the S&P 500, seven of the top twenty companies are tech, and other than Google, they're not high-growth. But they're just printing money because switching costs are so high. There's this incredible amount of residual goodwill to Red Hat because we're seen as an alternative to that. Oracle announced a 20-something percent price increase just as the economy starts heading south. How can you do that unless you're pretty sure nobody can switch? High switching costs led to infrastructure cost creep. Once you get hooked, you can't get off.

What the Standish Group is finding is that despite even monopoly power, open source is becoming a viable replacement for entrenched proprietary solutions, returning billions of dollars of values back to the customers who use it. And this trend represents a remarkable value capture opportunity. In another study, The Standish Group numbers support the idea that there is at least $386B/year of dead loss spending that could be returned to the IT user as value, and another $400B/year that, while not completely wasted, is not coming in on time, on budget, or at an acceptable level of quality. By those numbers, the $60B number shows that open source has barely scratched 10% of the waste prevalent in the proprietary software world today. Waste that proprietary software vendors largely count as revenue and profits.

Given these numbers, I think we're going to see two major open source plays emerge. The pure play, which is dedicated to recovering and restoring value to the customer. It is easy to see why I think that's so attractive and sensible. But there is also the another play, coopted by proprietary software companies who want to retain as much of the power and profit that they hold today, regardless of the damage it does to the customer or the economy. In the past there was no choice. But now, you, too, can get the joke. Be a part of the restoration of $60B-$600B of annual cost savings and you can laugh all the way to the bank. Or party with somebody who just got paid $100M to reverse this course and let them do the laughing for you. After all, its your money.