February 14, 2006
A Tale of Two Strategies
Posted by Ronald Mann

Two different stories about open-source business strategies hit my front page today.  One is another in the continuing series of stories about Oracle's actual and potential forays into the acquisition of open-source firms. The other reports a deal between HP and Novell under which HP will put Novell-branded Linux software on HP servers.  The fact that these large corporate players investing in open source should not be at all surprising.  As I detail in a recent working paper, open source business models increasingly are used by the largest companies in and around the software industry.  Large firms use open source business models to leverage their proprietary offerings, and are able to do so because they are much less dependent on patents as a way to appropriate the value of their innovations.  So, for example, IBM, clearly the master of open-source strategy, has invested large amounts of money and time in projects like Linux and Apache.  But the payoff for IBM has been increased sales of servers (that run Linux) and proprietary software (like Websphere) built on Apache.  IBM cooperates in the production of a high-quality commoditized product and extracts profits at a different level of a value chain that depends on the commodity.  The paper details many other examples.

The HP-Novell story seems to fit precisely within that story.  HP gets access to a nicely branded variant of Linux, which will assuage the concerns of large corporate customers -- brand, it so happens, is very important in the marketing of open-source software.  This will allow HP to sell more servers and then to sell the services necessary to make those servers function sufficiently well to satisfy high-end HP customers.  A great deal for HP, it would seem.

The Oracle deals, by contrast, are puzzling.  To be sure, they face growing competition from open-source firms like MySQL, and from proprietary firms selling services related to open-source (like Austin's own Pervasive Software).  But it is harder to see how these acquisitions will advance its competitive position.  At least in this set of stories (as opposed to their PeopleSoft venture), they are not buying any of the firms that are serious competitors for market share.  Nor can they expect to sell a lot of the products these firms produce -- the products are open-source products that can be acquired for free.  I suppose they might improve their own products by integrating the open-source code into their projects, but lots of other firms (Apple, for example) have managed to do that without paying for the equity in the open-source firms.  My best guess is that Oracle hopes to gain service revenues from installations of these products, but, again, I still don't understand why Oracle needs to spend so much money to acquire the companies. What am I missing here?

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