Though version 2 was first released to the public on December 31, 2005, I waited until the bugs-worked-out 2.0.4 version was released on July 29 to actually upgrade my blog’s WordPress software (and, then, late at that!). I thank BrightPlanet‘s most able sys admin, Kevin Klawonn, for doing the actual upgrade. As usual, Kevin, much thanks!

As early readers of this blog know, I have been recounting my blogging and software experiences in a series of posts, now distributed as the popular Comprehensive Guide to a Professional Blog Site. It would thus only be fair to congratulate the WordPress folks for a very smooth upgrade installation. Until last week, I had been using version 1.5.2. Kevin threw the switch on the WordPress 2.0.4 (http://wordpress.org/development/2006/07/wordpress-204/) upgrade last Friday according to the very able instructions in the Detailed Instructions or How to Upgrade in Five Steps.

Like desktop productivity software such as MS Office, I reluctantly and rarely upgrade, and then only to stable versions that have been proven for some time in the marketplace. A six-month time between a major upgrade release such as WordPress 2x and its more stable follow-on is not atypical.

So far, I generally like the new version. (I discuss later the new rich text editor, TinyMCE, and some quirks about how WordPress handled its integration.) I like the posting preview feature and the (apparently better, I haven’t yet pulled the trigger! Yikes, make sure backups exist!) permalinks options. I also like the fact this new version is much cleaner in producing valid XHTML v. 1.0 code.

It truly is amazing the quality of open source software now available, isn’t it? Thanks, WordPress!

NOTE:  This is an update of an 2005 post.

There has been a massive — but little noticed — shift in enterprise software expenditures and software company revenues in the past decade.  A "typical" enterprise software vendor could expect to obtain 70% or more of its total revenues from software license fees a decade ago.  Today, that percentage is about 35% with statistically significant trends heading toward below 10% within the decade.  These trends have signficant implications on the emerging business models necessary for software companies to be successful.

The Trends and Data

The figure below provides software license revenues as a percent of total revenues for about 120 different software companies over the past decade.  No matter the sample, there has been a steady — and signficantly strong — trend to declining license revenues.

The three sources for this figure are:

• Search – my own values for Autonomy and Convera from SEC filings
• Top 100 – these are listings compiled by Culpeper and Associates[2]
• MIT – these values are from the MIT Sloan School of Management, using eight leading companies as referenced by Michael Cusumano [3]

The trend lines indicate continued percentage declines in the importance of software licensing. Based on these teyear trends, by 2008 conventional software licenses will account for less than 10% of total revenues for all software companies, and less than 20% for leading enterprise search vendors (Verity [now part of], Autonomy, Convera).  These trends have very high R² values.  Seven-fold or greater drops from a position of dominance suggests a sea change is taking place in the revenue mix for software companies and the expenditure mix for enterprises.

These trends can vary significantly by software company, as the comparison table I constructed from recent SEC filings below shows:

These values are derived from the most recent SEC filings (10Ks or 10Qs).  This table shows that companies that can truly "package" shrink-wrapped software can maintain the highest percentages of software license revenues; vendors that rely on the subscription model have the lowest percentage, often going to zero.  Large, traditional software vendors such as IBM or Oracle are below industry averages for the percent of software license percentages.  This trend is remarkable given that these larger vendors obtained 70-80% or more of their total software revenues from license fees a mere decade ago.

The abiding trend appears to be the shift from software to services, but the picture is considerably more complicated than that.

Other Software Licensing Studies

At least two comprehensive studies have been issued in the past year or so regarding software licensing trends.  The first, from IDC that involved Delphi interviews of 100 large customers and 100 major software vendors, was conducted with the support of 11 major vendors and the Software and Information Industry Association (SIIA). [1]  This study sees subscription licenses having increasing importance to vendor revenues.

This study shows that companies today budget 20% for maintenance contracts, 32% for new licenses. IDC projects that maintenance expenditures are likely to increase, license to decline. With an increased reliance on a subscription model, maintenance in fact increases as a source of revenue to the vendor. IDC projects 34% of revenue to come from subscriptions by 2008. Though the worldwide software market was about $200 billion in 2003, growth will continue, with changing fractions of the sources of revenue. Besides subscription models, maintenance fees and consulting and service fees are projected to increase while standard license fees decrease.  Vendor drivers for these trends include the long lead times of traditional enterprise software license sales and the need for more predictable revenue streams.  Customer drivers for these trends are demands for lower overall costs, a better alignment of value, and the requirement for smaller upfront costs.

The second study from Macrovision used a questionnaire methodology directed to a larger group of software executives and a similar number of customers. [4]  This study, too, was conducted in association with SIIA.  This later study, completed in late 2004, also sees subscription licenses increasing. Vendors reported a trend to subscription licensing to become 67% of license revenues, though customers exhibited more reluctance to embrace the subscription model.

Both studies showed maintenance fees to average 20-22% of initial software license fees.

What Changing Business Models are Emerging?

While the trend moving away from standard software licenses is clear, what that means in terms of winning next-generation business models is less clear. The software industry thus appears to be in flux with a period of experimentation with alternative business models prevalent.  It may be a year or three before which of these alternatives begins to emerge as the clear business model winner.

So, what are these alternatives:

• Services – many large traditional vendors, including Novell, IBM, HP and Oracle, have seen massive percentage shifts from software licenses to consulting and services revenues.  This trend is linked both with related open source trends and the increasing need to engineer and deploy interoperable systems from multiple software vendors
• Open Source – after steady trends to Linux in the late 1990′s and dominance of open source for Internet servers, most recently there has been an increase in open source applications and interoperable systems.  The general importance of open source trends is documented in many of the current and pending AI3 blog posts
• Outsourcing – the outsourcing of many traditional IT and backoffice functions is a well-documented phenomenon, and
• Subscription – though the earlier buzz for application service providers (ASP) has waned in the past two years, a similar model has emerged under the subscription or Web services monikers.  As noted above, there may be a doubling in importance of this revenue model in relation to traditional software licensing within this decade but customer enthusiasm is questionable.

The heyday for complete, turnkey enterprise software systems and the highwater mark for enterprise software budgets appear to have passed. Both customers and vendors are trying to bring more rationality and predictability into the IT software cost equation. The specific mix and nature of these changing models is still unclear.

Some Venture Implications

The major casualty from these trends is the idea of the enterprise "killer app" and its ability to become a virtual money printing press. The dominance of this myth can cause some significant mis-steps and misunderstandings in putting together a successful venture:

• Waiting to get packaging and configuration right delays time to market and incurs higher development costs in the absence of supporting revenues. There is a need to get customer exposure and input earlier with less developed solutions.  Shattering the myth of the packaged software printing press for money is important to change attitudes and immediate priorities
• VC support may be deferable with lower needs for upfront development dollars, and, in any case, venture support should shift from packaged "products" to interoperable and modular technologies 
• As Eric von Hippel points out in his recent book, Democratizing Innovation [5], early and constant involvement of the customers and the market are keys to innovation and suggest business models that are more experimental and open source, and
• It appears the days — at least for the foreseeable future — of the "killer app" are over in the enteprise setting. Companies and enterprises are demanding more accountability and justification for expenditures; software vendors are realizing that at the enterprise level "cookie cutter" approaches work relatively infrequently.

It is seductive to think that with the right packaging, the right interface, and the right combination of features and functionality that it then becomes possible to turn the crank on the money printing press.  After development and packaging are complete, after all, the cost of the next incremental unit for shipment is close to nil. But enteprises rarely can adopt commodity approaches to unique situations and problems.  Customization is the rule and the environment is never the same.

Understanding these secular trends is important for software entrepreneurs and the angels and VCs that may back them.  The common theme returns: choice of business model in response to market conditions is likely more important than technology or innovation.

IBM has announced it has completed the first step of making the Unstructured Information Management Architecture (UIMA) available to the open source community by publishing the UIMA source code to SourceForge.net. UIMA is an open software framework to aid the creation, development and deployment of technologies for unstructured content. IBM first unveiled UIMA in December of 2004. The source code for the IBM reference implementation of UIMA is currently available and can be downloaded from http://uima-framework.sourceforge.net/ . In addition, the IBM UIMA SDK, with additional facilities and components, can be downloaded for free from http://www.alphaworks.ibm.com/tech/uima .

UIMA has received support from the Defense Advanced Research Projects Agency (DARPA) and is currently in use as part of DARPA’s new human language technology research and development program called GALE (Global Autonomous Language Exploitation). UIMA is also embedded in various IBM products for processing unstructured information.

Earlier posts have noted the near-term importance of the federal government to integrated document management and integration of open source software.  A recent article by Darryl K. Taft of eWeek.com titled "GSA Modernizes With Open-Source Stack" indicates the lead role the General Services Administration will play, at least on the civilian side of the government.  According to the article:

George Thomas, a chief architect at the General Services Administration, said the GSA is leading the effort to deliver an OSERA (Open Source eGov Reference Architecture) that will feature foundational technologies such as MDA (Model Driven Architecture), an ESB (enterprise service bus), an SOA (service-oriented architecture) and the Semantic Web, among other things.

OSERA deserves close tracking as the federal government implements these standards. GSA has set up a Web site on OSERA that is still awaiting content.

There was an interesting exchange between Martin Nisenholtz and Tim O’Reilly at a recent Union Square Session on the topic of peer production and open data architectures.  Martin was questioning how prominent “winners” like Wikipedia may prejudice our view of the likelihood of Web winners in general.  Here’s the exchange:

NISENHOLTZ:  I sort of call it the lottery syndrome.  There was a Powerball lottery yesterday.  Tons of people entered it.  We know that someone won in Oregon . . . we also know that the chances of winning  were one in 164 million . . . .I guess what I’m struggling with is how we measure the number of peer production efforts that get started versus Wikipedia, which has become the poster child, the lottery, the one in 164 million actually works.  Now it may not be one in 164 million.  It may be one in 10.  It may be one in 50, but I think that groups of people like [prominent Web thinkers] tend to create the lottery winner and hold the lottery winner up as the norm.

O’REILLY:    Look at Source Forge, there’s something like 104,000 projects on Source Forge.  You can actually do a long tail distribution and figure out how many of them — but … I would guess that one in like … 154 million are probably out of those 100,000 projects, there are probably, you know, at least 5,000 who have made significant reputation gains as a result of their work.  Maybe more. But, again, somebody should go out and measure that.

It just so happens that I had recently done that SourceForge project analysis in June, which is mostly still relevant since only a few months old.  That info is reproduced below.

Strong Growth for Open Source Projects

In open source there are some big visibility winners and lots of activity. (For an excellent overview of the leading and successful open source projects, see Uhlman.[1]) The numbers of these projects have grown rapidly, increasing by about 30% to 100,000 projects in the past year alone. However, like virtually everything else, the relative importance or use of open source projects tend to follow standard power curve distributions.

The truly influential projects only number in the hundreds, as figures from SourceForge, a clearinghouse solely devoted to open source projects, indicate. There is a high degree of fluctuation, but as of May 2005 there were on the order of perhaps 13 million total software code downloads per week from SourceForge (A). Though SourceForge statistics indicate it has some 100,000 open source projects within its database, in fact fewer than half of those have any software downloads, only 1.7% of the listed projects are deemed mature, and only about 15,000 projects are classified as production or stable.[2]

But power curve distributions indicate even a much smaller number of projects account for most activity. For example, the top 100 SourceForge projects account for 60% of total downloads, with the top two, Azureus and eMule, alone accounting for about one-quarter of all downloads. Indeed to even achieve 1000 downloads per day, a SourceForge open source project must be within the top 150 projects, or just 0.2% of those active or 0.1% of total projects listed.[3]

Similar trends are shown for cumulative downloads. Since its formation in 2000, software code downloads from SourceForge have totalled nearly one billion (actually, an estimated 892 million as of May 2005) (B, logarithmic scale). Again, however, a relatively small number of projects has dominated.

For example, 60% of all downloads throughout the history of SourceForge have occurred for the 100 most active projects. It can be reasonably defended that the number of open source projects with sufficient reach and use to warrant commercial attention probably total fewer than 1,000.

Open Source is Not the Same as Linux

Some observers, such as for example the Open reSource site[4], tends to equate open source with the Linux operating system and all aspects around it. While it is true that Linux was one of the first groundbreakers in open source and is the operating system with the largest open source market share, that is still only about one-half of all projects according to SourceForge statistics:

Windows projects have been growing in importance, along with Apple. In terms of programming languages, various flavors of C, followed by the ‘P’ languages (PHP, Python, Perl) and Java are the most popular. Note, however, that many projects combine languages, such as C for core engines and PHP for interfaces. Also note that many projects have multiple implementations, such as support for both Linux and Windows installations and perhaps PHP and Perl versions. Finally, the popularity of the Linux – Apache – MySQL and P languages have earned many open source projects the LAMP moniker. When replaced by Windows this is sometimes known as WAMP or with Java its known as LAMJ:

Because of the diversity of users, larger and more successful projects tend to have multiple versions.

Few Active Developers Support Most Projects

Despite source code being open and developers invited for participation, most mature open source projects in fact receive little actual development attention and effort from outsiders. Entities that touch and get involved in an open source project tend to form a pyramid of types. This pyramid, and the types of entities that become involved from the foundation upward, can be characterized as:

• Users — by far the largest category, users simply want use of no cost software or some comfort the code base is available (as below)
• Serious downloaders — there is an active class of Internet users that spend considerable time downloading application, game or other software, installing it, and then removing it and moving on. The motivations for this large software grazing class varies. Some are interested in seeing new software ideas, installation methods, user interfaces and the like; some are consultants or pundits that want to be current with new systems and trends; others simply are the Internet equivalent of serial mall shoppers. Whatever the motivation, this class of users acts to inflate download statistics, and sometimes may be key influence makers or spreaders of word-of-mouth, but are unlikely to establish a lasting relationship with a project
• Linkers and embedders — these users are at the serious end of the actual user group and have clear ideas about needed functionality and will expend considerable effort to link or embed a promising new open source project into their current working environment. This level of engagement requires a considerable amount of effort and acts to increase the switching costs of later moving away from the project
• Extenders — these individuals create the wrappers and other APIs for establishing interoperabiltiy and use between existing components in currently disparate environments (Apache, IIS or Tomcat; Windows, Linux; PHP,  PERL or Java, etc.) or critically bring the project to other languages, human or programmatic. They are perhaps the most attractive group of users from a project influence standpoint. This category is the major source of external innovation
• Active developers — this is the standard assumed class of developers who actually sign-up and do major work on the initial project. But a surprising few number of developers participate in this category, and this category, like the next one, is close to non-existant for open source projects that follow the license choice model as proposed for BrightPlanet below
• Code forkers — some mature and larger visibility open source projects (not including the license choice model) may witness a major breakaway in development. This can occur because of some differences in philosopy (some of the Linux variants), loss of interest by the original sponsor (HTMLarea WYSIWG editor, for example), or branching to different programming languages (many of the CMS variants). Code forking can be a source of innovation and use expansion, but also can serve to kill the original branch and leave existing users at a dead end.

Most effort around successful open source projects is geared to extending the environments or interoperability of those projects with others — both laudable objectives — rather than fundamental base code progression.

Mature Projects are Stable, Scalable, Reliable and Functional

David Wheeler has maintained the major summary site for open source performance statistics and studies for many years.[5] In compiling literally hundreds of independent studies, Wheeler observes that “OSS/FS [open source software/free software] . . . is often the most reliable software, and in many cases has the best performance. OSS/FS scales, both in problem size and project size. OSS/FS software often has far better security, perhaps due to the possibility of worldwide review. Total cost of ownership for OSS/FS is often far less than proprietary software, especially as the number of platforms increases.” However, while obviously an advocate, Wheeler is also careful to not claim these advantages across the board or for all open source projects.

Indeed, most of the studies cited by Wheeler obviously deal with that small subset of mature open source projects, and often surrounding Linux and not necessarily some of the new open source projects moving towards applications.

Probably the key point is that even though there may be ideological differences between advocates for or against open source, there is nothing inherent in open-source software that would make it inferior or superior to proprietary software. Like all other measures, the quality of the team behind an initiative is the driving force for quality as opposed to open or closed code.

[2] I’d like to thank Matt Asay for pointing the way to digging into SourceForge statistics. It is further worth recommending his “Open Source and the Commodity Urge: Distruptive Models for a Distruptive Development Process,” November 8, 2004, 17 pp., which may be found at: http://www.open-bar.org/docs/matt_asay_open_source_chapter_11-2004.pdf

[3] Of course, downloads may occur at other sites than SourceForge and there are other proxies for project importance or activity, such as pageviews, the measure that SourceForge itself uses. However, as the largest compilation point on the Web for open source projects, the SourceForge data are nonethless indicative of these power curve distributions.

[4] See Open reSource http://sterneco.editme.com/

[5] D.A. Wheeler, Why Open Source Software / Free Software (OSS/FS, FLOSS, or FOSS)? Look at the Numbers!, versuion updated May 5, 2005. See http://www.dwheeler.com/oss_fs_why.html. The paper also has useful summaries of market informatin and other open source statistics.