Upstart Figures Out How To Make Money From Open Source

Yet for many VARs, open source inspires that quintessential bottom-line question: How do you make money off of this stuff?

Ask Gluecode, an upstart software company in El Segundo, Calif., whose business model relies on using open-source products from the Apache Software Foundation to serve as the underpinnings of the company's own software offerings. Gluecode has created portal-, BPM- and workflow-server software on top of Apache source code, saving itself time and money not rewriting infrastructure pieces that are already out there. This strategy also enables Gluecode to develop and sell its own branded software and services, but do so via a one-time open-source license fee. It adds up to a far cheaper price-tag than the bill attached to major commercial players' per-user or per-CPU licenses.

Gluecode calls its model "managed open source," and the company's, CEO Winston Damarillo, asserts that he is offering a credible open-source alternative to J2EE infrastructure vendors like IBM, BEA and Oracle. Some might scoff, but Damarillo is undaunted.

"We are educating our buyers that this is a better way to buy software," he says. "Customers get no less than what they get from BEA or other J2EE vendors, but they also get the source code along with it, to modify as they like. And they don't have to worry about the number of CPUs or users they are licensing."

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Because Gluecode subscribes to the Apache licensing model"BSD licensing, as it is called"the company is not under any obligation to resubmit its own code back into the open-source community. In other words, what Gluecode adds on top of Apache source code to create its portal server remains its own intellectual property. Likewise, when Gluecode's partners and customers customize Gluecode software, they are free to retain their modifications in-house. To Damarillo, that's the beauty of the BSD-type license"it affords you greater control over the quality and integrity of your software (something open-source naysayers often cite as lacking) and provides a nice avenue to make some money. This, he says, stands in contrast to the open-source general public license (GPL), which is widely used but requires that changes to its code base be made available to the developer community at large.

"The GPL is constraining," he says. "If you don't let a free market take open source, customize and monetize it, then you won't get a healthy market."

So far, Gluecode's approach seems to be working. The 3-year-old company grew 100 percent in terms of revenue from Q1 2003 to Q1 2004, according to Damarillo. And the average deal size has crept up to $100,000, far short of a typical Big Blue engagement, but not shabby at all.

Wisely, Gluecode has recognized the need to gain the confidence of many ISVs, integrators and CIOs by operating to some extent like their commercial-software brethren. That means offering 24/7 technical support services. Additionally, Gluecode promises to test any source-code alterations undertaken by partners and customers to ensure that the resulting software works with new releases of the company's products. Gluecode sells subscription-based maintenance contracts as its primary revenue driver.

Open-Source Force

Meantime, as further evidence that open source is becoming a force in all layers of the software stack, the Apache Software Foundation is getting set to release an open-source J2EE application server, dubbed Geronimo, a development project on which Gluecode engineers played a role. Gluecode plans to incorporate the app server into its own product offerings going forward. The release is a key step in the broader commercialization of open source in the marketplace, according to Apache officials. Geronimo now joins well-known JBoss and the forthcoming Red Hat Application Server to form a troika of open-source rivals to commercial app servers such as WebLogic and WebSphere.

Geir Magnusson Jr., chairman of the Geronimo project at Apache, says he is aiming to get J2EE 1.4 certification for the application server by the third quarter of this year. From his vantage point, open-source options are moving well beyond the realm of core infrastructure.

"You can see us working up the stack," Magnusson says. "You can see a trend where what you do on top of something like Linux is what makes it valuable."

More choices mean good news for ISVs and systems integrators, in particular, who now have much cheaper options on top of which to build and run their applications"and to offer customers.

Mike Dewey is one believer. As CEO of eBuilt, a longtime IBM partner, Dewey says he is seeing increasing push-back from clients about licensing fees. His company, which does custom app dev and integration solutions, is partnering with Gluecode, using its infrastructure products as the foundation for eBuilt's projects. eBuilt is also selling Gluecode's software to its customers, which he says can save them"and himself"up to 20 percent of the cost of the commercial alternatives.

"There is a real distaste for paying outrageous licensing," Dewey says. "And open source is becoming a much more viable, more frequently examined solution for customers."

While Dewey acknowledges that Gluecode is just a fraction of his business at present and that "IBM and BEA aren't going anywhere," he is nonetheless thrilled at what the lower price point does to his own margins.

"If you have a customer with $600,000 to spend, and they have to divide their budget between my services and buying those software licenses, well, that tells me pretty quickly the size of my pie," he says. "If the licenses are 20 percent less, then that leaves me more room to play."