It's Channel Time For Linux

A new wave of emerging Linux application providers are doubling and even tripling their channel investments this year as they move to take Linux from a cult status relegated to business niches to a mainstream end-to-end solution stack.

Among those rolling out new channel programs in recent weeks are vendors in the most explosive solution segments, including PBX/VoIP luminary Digium, database mainstay MySQL and CRM fast-mover SugarCRM. And other open-source vendors, including SwitchVox, Astaro, Zimbra and JasperSoft, are dramatically increasing their channel spend and the number of partners in their stable.

An informal CRN survey of open-source vendors found that channel investments are going up an order of magnitude this year. The uptick is aimed at taking open-source solutions beyond a small group of Linux specialists to a broad and deep partner network that can cover small business to the enterprise.

The partner push represents the biggest influx of new channel dollars in many, many years. Even more impressive: The new channel programs are backed up by 30 percent to 50 percent solution margins vs. typical 5 percent to 20 percent margins on old-line solutions from application vendors that have gorged themselves for years on hefty software license and maintenance fees.

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The Linux application offensive covers every segment of the solution stack—with open-source vendors in areas such as VoIP and CRM facing off against one another to compete for solution provider share. This may spell trouble ahead for Windows and Unix app vendors that have stood by while their partners' profit margins have plunged into the single-digit range in recent years. What many of these margin-starved partners have been waiting for are viable Linux channel programs. Now they are here.

A Watershed Year

Prophet Network Integration (PNI), a Phoenix-based solution provider that has partnered with mainstays Cisco Systems, Hewlett-Packard and Microsoft, is one of the partners expecting big things from the new Linux channel programs this year. PNI has been selling Digium's Asterisk open-source PBX without the benefit of a channel program for about a year and half and has built a $500,000 business around the product. But with the scalable service, support and sales boost provided by the new channel program, PNI expects to double its Digium solution business to $1 million this year. And it expects to double it again to hit $2 million in 2008.

The open-source channel revolution is changing the financial character of PNI. Two years from now, the company expects one-third of its business to be open-source solutions. "That's not even being extremely ambitious," said Art Tarsha, technical director at PNI. "Open source is completely unstoppable."

Solution providers say this year is a watershed one for Linux application vendors now moving beyond viral downloads aimed at the technical elite to a full-fledged sales channel chartered with driving mainstream adoption in businesses of all sizes. That involves new products, too. Huntsville, Ala.-based Digium, for example, is bringing to market a hardware appliance aimed at small and midsize businesses to move the product from what Digium Asterisk open-source PBX inventor Mark Spencer calls the early adopter phase to the early majority. That means a full-fledged reseller effort with its first-ever channel program, 10 channel reps and a dedicated technical support hot line for VARs.

"It's really important for open-source vendors to introduce these programs," Tarsha said. "Instead of staying in the shadows with leading adopters, they are moving these great products into small and [midsize] businesses by providing competitive pricing and support. Now I have a baseline that I can work off to build implementations on. And with a formal program, my profits are obviously going to increase significantly."

Next: More Channel Launches

Digium isn't the only Linux player launching a new channel program. With the launch of its MySQL Enterprise Connection Alliance channel program, MySQL is aiming to increase the number of partners in its stable from 20 to 200 this year. The open-source database maker's aim is to triple channel sales from 10 percent of revenue to 30 percent.

Paul Weinstein, executive vice president of business development at MySQL, said the Cupertino, Calif., company has moved to a channel-neutral compensation model to help drive partner business. "That is a massive change," said Weinstein, who helped drive the channel model at Check Point Software Technologies before taking the MySQL job. "This is a radical disruption in the marketplace. The database tax is traditionally 20 [percent] to 40 percent of an application. We believe that is ridiculous. Open source is a tidal wave. If you don't get on the bandwagon, your customers are going to go somewhere else. Why pay $100,000 for something when you can get it for $10,000?"

The dramatic differences in the price of competing enterprise CRM solutions also is driving growth at SugarCRM, which just launched a three-tier channel program with beefed-up training for partners. SugarCRM said it aims to quadruple its number of partners. Part of that includes adding formal certification and training to its top-tier Gold partner program, said Jeff Campbell, director of channel sales at SugarCRM, Cupertino.

SugarCRM also is mounting an aggressive partner search for VARs interested in private-labeling or reselling its hosted on-demand solution to go against the likes of "The channel phone is ringing off the hook," Campbell said of partner interest in the open-source CRM vendor's wares. "You won't find a CRM solution out there at this price point. Open source gives our partners the ability to deliver more and better services within the budget that the customer has set for the overall project."

In competitive CRM implementations, software licensing eats up the majority of the client's IT budget, hampering the ability to deliver a completely customized solution, Campbell said.

That is also true in the bread-and-butter small- and midsize-business segment. SwitchVox, for example, expects to increase its channel budget several times this year as it moves to boost its active reseller ranks by 25 percent to 250 partners this year.

Gregory Boehnlein, vice president at N2Net, a Cleveland-based provider of mission-critical hosting for voice and data services that is a SwitchVox and a longtime Linux proponent, said he is regularly coming in at half the price of a Cisco or Avaya PBX solution and still making 40 percent margin. The channel programs from SwitchVox, San Diego, and other open-source players such as unified threat security vendor Astaro, Burlington, Mass., have helped significantly increase his profitability on each and every Linux solution sale, he said. "These programs are not only bringing the cost down to the end user, but making the profit margin for us higher," he said. "We're able to deliver a more cost-effective solution to the customer and make more money at it."

Boehnlein said his sweet spot is small businesses that range from 10 to 200 seats and are put off by Cisco and Avaya "sticker shock." Another big reseller advantage with SwitchVox, Boehnlein said, is he isn't dragged down by heavy sales requirements to maintain reseller certification. Boehnlein is so pumped up about the Linux open-source VoIP opportunity that he and a number of partners formed a new company last year, EToneConnect, which is aimed at delivering VoIP services across private networks by recruiting VAR partners. "This is going to far outshadow N2Net this year," he said. In fact, he predicts that EToneConnect will hit sales of $12.5 million this year. "We are building EToneConnect as a distributor of these products to a whole gaggle of smaller guys like me whose current service providers are not giving them the margins they need to survive," he said.

Astaro, meanwhile, is increasing its total channel spend by 50 percent this year as it moves to double its sales this year, said Astaro Vice President of Sales Alex Quinonez. That means also doubling the number of Astaro partners in the United States to 900 this year, he said.

The Linux channel revolution means businesses of all sizes are no longer tied to corporate giants for robust enterprise-class solutions, Quinonez said. Those old-school vendors are offering solutions that are at least double the cost of an Astaro unified threat management solution, he said.

"The beauty of our solution is there is so much room for margin and growth," he said. "Your typical VAR sells a Cisco solution at 4 percent margin. That's a commodity. They can sell our solution at 30 percent margin and build a security practice focused on small to medium-sized enterprises."

Next: Facing Realities

Facing Realities

Linux solution providers say they believe the larger vendors ultimately will be forced to adapt to the economic realities of open source and will need to adjust both their product and channel strategies.

Dave Gynn, director of enterprise tools and frameworks at Optaros, a Boston-based solution provider specializing in enterprise open-source projects, said every software vendor is going to have to come to the table with an open-source strategy. "The model of pure proprietary software companies that don't interact [with open-source developers] or have any kind of collaborative development process or open-source licensing is going to go away," he said. Gynn compared the open-source revolution to the impact the Internet—and before that client/server—had on business. Optaros, in fact, was started by an executive team that built big services businesses around both of those paradigm shifts.

Open source is another one of those huge shifts that impacts all vendors, Gynn said. Just how big is it? Optaros said there are more than 140,000 open-source projects in existence, and it has catalogued more than 260 of them with ratings on functionality, community support, maturity and enterprise readiness (the ratings do not include channel programs or offerings).

"There is an open-source alternative for every packaged version of software," Gynn said. The 260-plus projects catalogued by Optaros include everything from infrastructure offerings such as databases, to security offerings including identity and access management databases, to enterprise content management and search machines. Optaros is driving its business purely on consulting, services and solution development rather than reseller product fees. Gynn said the open-source application movement is allowing midsize and even smaller businesses to look at enterprise-class custom solutions that were simply out of their price range years ago. What's ironic is many companies are spending the same amount they would have years ago on an out-of-the-box software solution that just did not fit the business process.

What's more, he said, about 25 percent of his time as a solution expert would be spent resolving technical product issues with a vendor. "Now I'm spending a negligible amount of time on that," he says. "I can't imagine going back to the old way."

Even The Enterprise

The open-source channel offensive is even taking hold in the most robust enterprise application segments of the market such as ERP and business intelligence. Nearly all of open-source business intelligence vendor JasperSoft's sales were direct last year. But with the formal launch of its JasperSoft partner program late last year, the company aims to receive as much as 20 percent of its sales from channel partners this year, said Don Wight, vice president of worldwide field operations at JasperSoft, San Francisco. That means doubling its partner base this year.

Wight estimates that in the typical business intelligence solution sale the software license accounts for as much as 50 percent of the solution sale, while in the JasperSoft open-source model, only about 20 percent is related to software licensing. That leaves a whopping 80 percent of the IT budget for high-margin consulting, Wight said.

Ron Bongo, CEO of Corratech, an open-source solution provider in Montclair, N.J., said his company just completed a deal where the cost of the software license from a traditional business intelligence vendor came in at more than $100,000 compared with $20,000 for JasperSoft. "What can you do with $80,000 if you reallocate that to gain a strategic advantage?" he asked. "You can integrate more, customize more and build that into the overall project." Corratech even uses software calculators to drive home the dramatic cost differentials. For example, the company's CRM calculator asks users to input the number of users and estimated integration hours. The calculator compares a Centric CRM solution coming in at hundreds of thousands of dollars less than proprietary offerings.

Bongo said he sees the new formal partner programs helping to drive significant growth this year for Corratech, a former Microsoft .Net partner that moved into the Linux open-source business in 2003 after seeing the significant gains that could be produced for clients using open-source software.

"We just saw great software being produced that we could use to deliver e-commerce solutions much more easily than building them from scratch," he said.

This year, Bongo expects to double sales from 2006, when sales were up 40 percent. "Open-source vendors are adding significant resources, helping the channel produce more results," he said. "A lot of [open-source] vendors have formal partner programs and are even completely dedicated to the partner strategy. The current acceptance of open source and the commitment by vendors to work side by side with us and avoid the channel conflict that can occur with proprietary vendors is going to have a huge impact on our ability to generate revenue."