Countdown - Open Source Style

I am a big fan of top 10 lists... particularly humorous ones a la David Letterman. While I can't claim that any of the top 10 list below is humorous, it does paint an interesting picture on the status of open source in the top 10 companies (by market cap) in the Software Application Industry (Technology Sector) of the stock market.

These 10 companies represent over 96% of the market capitalization in the Software Application category. At the end of each entry, I give the company a (purely subjective) grade reflective of its efforts, commitment and contributions to the open source community.

So, here we go...

10. Sybase ($2.7B) - Database Management, Information Management and Business Intelligence Software. Sybase appears to have made at least a minimal effort to embrace open source. It even has an OSI approved license (the Sybase Open Watcom Public License). More important is how many of Sybase's competitors have serious open source credentials ... MySQL/Sun, Pentaho, JasperSoft, GreenPlum. Grade - D.

9. Nuance Communications ($4.1B) - Speech and Imaging Solutions Software. A search for "open source" on the company website results in 0 hits. Enough said. Unfortunately, there are no open source options. Grade - F.

8. Red Hat ($4.2B) - Linux and JBoss Provider. Red Hat, as we all know, is one of the premiere examples of open source software industry success. Enough said. Other Linux providers exist, as do other OS providers, but Red Hat is the go-to open source vendor. Grade - A.

7. BMC Software ($7B) - Enterprise Management Including Application & Database Management. As with Nuance, a search for "open source" on the company website results in 0 hits. However, BMC has a developer network with various, small-scale open source projects. Grade - D.

6. Intuit ($9B) - Personal Finance, Small Business and Tax Software. Intuit does not appear to have any significant involvement in open source and this probably is not the type of software that has attracted a developer community to create open source alternatives. Grade - F.

5. CA ($12.3B) - IT Management Software. To my surprise, this 30+ year old company has embraced open source in a significant way. For example, CA has supported the open source industry's patent pledge for several of its patents. Grade - C.

4. Adobe Systems ($21.6B) - Creative, Knowledge Worker and Enterprise Software Applications. Facing the commoditization of it biggest revenue generating applications (Photoshop and Acrobat), Adobe has taken the initial steps it needs to diversify its business into open source in a significant way. Grade - C+.

3. SAP. ($60.1B) - Business Operations. SAP has dabbled in the open source world, partnering with MySQL on database technology. Overall, however, SAP hasn't made many significant contributions to the open source community. Grade - D.

2. Oracle ($111B). Database, Middleware and Enterprise Management. Oracle might be described as the Jeckyll and Hyde of open source. While it distributes several open source applications (such as Sleepycat and Innobase), it also actively challenges other open source providers (such as with Unbreakable Linux) and would likely acquire competing open source companies to eliminate a business model that threatens its own. This duality makes it hard to settle on a grade. Grade - C-.

... drum roll ...

1. Microsoft ($277B). It's no surprise that Microsoft is in the number one spot (even on Letterman the #1 is always anticlimactic). In spite of making substantial contributions of code as open source, Microsoft is the big bad wolf of open source for good reason... among other things, it has a very proprietary stance on patent licensing for open source projects. Grade - D.

Some other companies that didn't make the list due to technicalities are:

• Google ($178B) - would be the clear number 2 if it were in the "Software Application" category. Google would receive a B for OS Effort (knocked down from A because of its deceptively not open Android platform and other calculating open source strategies).
• Sun Microsystems ($10.2) - would be at number 6 if it were in the "Software Application" category (though its software business is probably valued at closer to $4B, which would drop it a few spots on the list). Sun would definitely receive an A for OS Effort as the largest open source software provider.
• Still other companies like HP and IBM have been long-time contributors to the open source movement, but are not reflected here.

I find it very interesting to note that of these top 10, only 1 got a grade better than C. In addition, one estimate of the total value of the open source industry ($60B) would place the entire industry at only number 3 on the list (though without an objective market cap value, it's hard to draw many conclusions from this).

On the other hand, if we add Sun and Google (two of the top open source contributors) we come closer to a critical mass of open source presence on the list, and lest we forget that numerous open source companies with no market cap at all (because they aren't listed on a stock index) are providing strong, competitive alternatives to the software and solutions provided by the companies on the list.

What can we conclude from all this? First and foremost, we can safely conclude that I am not a mathematician, statistician, or financial analyst, as evidenced by my loose use of numbers and grading to make my point.

More important, even a pessimist would have to say that the presence of a company like Red Hat on the list means open source is making significant inroads into the traditional software industry. The amount of innovation and competition presented by companies not yet public or too small to make the list yet indicates that the trend is strongly pointing towards greater adoption of open source. It might be only a handful of years before all of the top 10 companies on this list receive A's and B's.

Commercial vs. Free: Not a Zero Sum Game

Think back to 1991 and the release of GPLv2 ... the open source software community was abuzz with great anticipation that the goals of the "free software" movement would soon be achieved. Now fast forward to present day ... the open source software business is potentially worth as much as $60 billion, a small Linux provider named RedHat has grown into a successful public company, and an open source database company named MySQL has been purchased by Sun Microsystems for $1 billion. Does this prove the success of the commercial open source movement? Of the failure of the free software movement?

If the recent firestorm in the community over Sun's proposal to sell closed-source add-ons for the open source MySQL database is any example, then the open source community appears to have concluded that the success of one is only at the expense of the other. (In the interest of full disclosure, I am a MySQL/Sun employee, and these opinions are mine alone.) The community would rather punish MySQL, one of the pillars of open source movement, than applaud the prominence it has helped bring to open source through its innovative open source and business strategies.

This "zero-sum" attitude is not only wrong, but also harmful to the open source industry. Instead, the open source industry must accept that both open source purists and commercial opportunists can co-exist in the same environment without forcing an absolute choice between them. Though it appears more open source "rationalists" are reaching this conclusion, the community needs to start acting based on what is good for open source as a whole, not just the purist forms of open source.

The viability of this type of co-existence is well proven in other contexts. Take the example of environmentalism and the "greening" of the business world. Groups like the not-for-profit Sierra Club operate on the same playing field (though at the opposite end) as companies that use the "green" label as an insincere marketing ploy (I won't point any fingers). The business world accommodates this range of diversity allowing groups interested in societal change to organize as not-for-profit entities, which allows them to focus on their chosen area of social good without being subject to income tax. Entities like the Apache Foundation, Linux Foundation and Free Software Foundation play this role in the open source world by focusing on open source for the public good (and get a tax relief too).

At the same time, though commercial entities are primarily motivated by profits, the community pushes them to be "good citizens". We see the pressure the community puts on companies these days to pursue environmentally friendly policies in spite of (or sometimes in support of) their profit motives. Similarly, commercial open source companies perform good citizenship by acting in support of open source ideals, which not only builds community goodwill but also allows them cash in someday.

To make this drive to good citizenship most effective, communities need a way to differentiate commercial entities by evaluating them both their effectiveness and sincerity in pursuing. Many environmental groups act as watchdogs and standard setters for their commercial counterparts. Similarly, the open source community has taken a new focus on improving upon the traditional benchmarks of open source (choice of an OSI approved license and release of copyrighted code) with proposals to include patent and trademarks as well as business and development models in the standard definition of "open source". Another proposal is the creation of an independent body that would objectively grade companies on their "openness". While these are great solutions, they are not likely to reach their potential for effectiveness until we all recognize the importance of co-existence.

Just as we don't hold commercial entities to the same standard of environmental purity as we do the Sierra Club, the open source community must strike the right balance between pursuing its passion and pushing commercial open source companies to act in "acceptable" ways. It must not forget that open source advocates, and good ideas that can further the open source movement, can come from virtually anywhere in the open source spectrum. While it's useful to distinguish between commercial open source companies based on openness, the community must begin acting as if we are all in this together. If we don't learn to co-exists, we risk an irreparable fracture in the movement that we all support.

Trade Secrets: Which Secrets are Worth Keeping?

Trying to understand the impact of intellectual property rights on an open source company can be intellectually challenging. We saw this quite clearly in the complicated discussion of patents in the last post. I think it's the right time to take a break and tackle a subject that is far less controversial and mentally demanding -- trade secrets.

The concept of trade secrets is straightforward... an intellectual property right designed to protect economically valuable information that a company attempts to keep confidential. It can be applied to all types of information from marketing strategies to manufacturing techniques. Trade secrets, like copyrights, trademarks and patents, can provide a valuable means of differentiation, but in different ways. While copyrights, trademarks and patents provide differentiation through unique product features and branding, trade secrets do so by preventing competitors from using a company's business operations to their own advantage.

Open source companies might be tempted to ignore trade secrets on the grounds that the term "secret" is the antithesis of "open," but this would be a mistake. Instead, open source companies should use trade secrets to their advantage as a core element of their business strategy in much the same way as their proprietary counterparts. Proprietary software companies protect virtually all information by treating it as secret unless the company specifically authorized for disclosure. This is consistent with the proprietary license strategies they employ, which withhold intellectual property rights until a customer purchases a license.

This blanket approach will not work for open source companies. Because the company's source code is publicly available and development ideas and techniques are freely discussed within the community, much (if not all) of the company's technical information is not even eligible for trade secret protection. As a result, open source companies must clearly distinguish between technical and business information. Business information worthy of trade secret protection might include the next vertical market to be targeted with a marketing campaign, the unannounced release date of a closed-source add-on to the open source software, or the fact the company expects to close a significant deal by the end of the quarter. As business information, these examples do not directly impact the community, and release could potentially put the company at a disadvantage with respect to its competitors.

This is not to say that all technical information should be open, or that all business information should be closed. Open source companies should use this as a guideline in determining which secrets are worth keeping. Once an open source company makes this determination, it should use non-disclosure agreements aggressively to protect that information.

This is the final of 4 posts in a series aimed at providing practical consideration for open source companies with respect to intellectual property rights. As alluded to in the post introducing this series on intellectual property rights, I will soon tackle other aspect of the open source business that touch on legal issues including relationships with customers, partners and employees, as well as deciding when to shift legal work from outside to inhouse counsel.

Patents: More Than Meets the Open Source Eye

Copyrights and trademarks are important assets in the software industry and their use is well-accepted by the open source community. By contrast, few software issues are more controversial than patents, and the open source community has been particularly vocal in advocating for the elimination of software from the scope of patentability. Though it would be easy for an open source company to translate the community's views into a belief that patents are not relevant to its business, such an approach would ignore the reality of patents in the software industry and place the company at great risk. A better approach is to create a patent policy that acknowledges the status of patents in the industry, implements appropriate measures to incorporate patents into business strategy, and clearly explains a company's position on software patents to the community.

As with copyrights and trademarks, patents can be tools for differentiation. Proprietary companies often pursue differentiation by collecting patents (either by harvesting them internally, purchasing them, or licensing them). These companies often choose to wield their patents offensively, affirmatively license them for a fee, and/or license them for free (or at least promise not to assert them). This is a core element of their business strategy. Community reaction to these policies usually has little impact on proprietary companies.

By contrast, open source companies often do not include patents as a core element of their business strategy, influenced in large part by their communities.The open source community (and many members of the proprietary "community" for that matter) objects to software patents on philosophical grounds, and also for the practical reason that patent threaten the very survival of popular and innovative open source projects and companies. In fact, many members of the community will not consider a company to be “open source” if it opens it copyrighted materials while claiming patents on the same technology (even if only for defensive purposes). As a result, the traditional approach for open source companies has been to establish a policy against software patents that might also include associated lobbying efforts, or to allow use of patents only for defensive purposes.

Notwithstanding the community bias against patents, open source companies should consider the benefits of differentiation that patents can offer. Once a company determines that patents are critical to its business strategy, it must decide whether to use those patents offensively and/or defensively, grant free patent licenses or covenants not to sue, or submit patents to shared pools. In fact, at least one purported open source company is experimenting with a business model under which it withholds patent rights for commercial use unless a customer purchases a license (though it appears the community will react negatively if the proposed business model becomes reality). Even when an open source company decides not to collect patents in the ordinary course of business, it should still consider whether to collect patents (or licenses) strategically on a case-by-case basis for defensive purposes. Use of patents in these ways might pass community muster if explained properly.

Finally, open source companies should be aware that their actions might define their patent policies without intending to do so. For example, adopting GPLv3, and the patent licensing obligations therein, as the licensing vehicle for an open source project implies that patented materials should not be included in community software unless there is no threat they will be enforced. While use of the GPLv3 is accepted by the community, open source companies should ensure that the patent provisions therein are consistent with its patent policies and objectives before adopting the license.

On first glance, the expense of obtaining patents, and difficulty in enforcing, protecting and exploiting them, as well as the community bias against software patents indicates that collecting patents is of little value to open source companies. However, patents can be valuable tools for differentiation, which might justify the effort and expense. In any case, there are other compelling reasons to think carefully about a patent policy and strategy. Regardless of what policy or strategy an open source company decides upon, it must always recognize the reality of patents in the software industry and consider what the community will tolerate.

In my next blog posting, we will leave the the complexity and controversy of patents behind for a discussion of trade secrets, and we will ask, "how 'open' should open be?"

Trademarks: Pointing to Quality in Open Source

In my last two posts we have seen that intellectual property rights are important to open source and proprietary software businesses alike. Specifically, copyrights are not only relevant to the open source business, but copyright ownership is critical to differentiation, particularly within the dual-license and service-oriented business models, which are among the most prevalent in open source today. Another important means of differentiation is trademarks.

Protecting trademarks and branding might be the single most important action an open source company can take with respect to intellectual property rights. For open source and proprietary companies alike, trademarks associated with quality products can make a company or product stand out in a sea of customer choices. This effect is even more pronounced for open source companies, where the value of a product offering is often either software code that is freely available under an open source license or a service offering for open source code. In fact, in the open source world, a trademark might be the only means of significant differentiation.

In addition to the obvious differentiation benefits in branding, strong trademarks create other differentiation opportunities that benefit open source companies. The players in a competitive open source category will have access to virtually the same software with a focus on differences (minor in scope, but meaningful in substance) that might improve performance or add valuable functionality. These types of improvements can be done by the copyright owner itself, or by other related parties such as known developers and trusted partners. No matter who creates the improvements, an open source company will want to tie the good ones back to its own product offering by implementing a certification or partner program that establishes minimum qualifications and guidelines for use of the open source company's trademarks, with accompanying logos indicating compatibility and quality. Trademarks are the best way to tell customers they are getting the best product possible whether offered by the trademark owner directly or through partners.

Open source companies also need to devote time to developing a two-track branding strategy -- one naming scheme for proprietary offerings and another for open source projects. Without such a strategy, a company's efforts to establish strong trademarks that result in significant differentiation could be eroded, both in marketing and legal terms, by the community. Without proper usage guidelines and accompanying enforcement, use of a brand names on products modified by community members will confuse end users as to the origin of the product.

Registration and protection of trademarks is a relatively simple, low cost process and should be a primary focus of all open source companies. Because of this simplicity and low cost, open source companies should register names, brands, logos and other items in as many top tier jurisdictions as practical, and a significant effort should be made to establish certification programs that use special logos. Because trademarks can be so valuable, open source companies should also devote resources to policing and enforcing trademark rights.

Now that we have discussed two types of intellectual property rights that have great utility in creating differentiation and are relatively easy to protect and exploit, the next post in this series will focus on patents. No matter what philosophical position an open source company takes on patents, each must create a patent policy that is consistent with its business objectives and the expectations of its community.

Copyrights: Alive and Kicking in Open Source

As mentioned in my previous post, this is the first in a series of posts about the role of intellectual property rights in open source businesses. Copyrights and copyright ownership are a significant part of all open source businesses and are as relevant today as ever before.

In a world where the most popular open source license (the GNU Public License) embodies the philosophy of "copyleft," it would be easy for an open source company to ignore the value of copyrights and copyright ownership. It is even easier to ignore copyright ownership with the great success of a company like Red Hat whose business is built on a foundation of software with so many copyright owners that the concept of ownership becomes virtually irrelevant. In spite of this, open source companies must make copyrights and copyright ownership a top priority, and must implement business policies that protect and exploit copyrights as necessary to make their chosen open source business models effective.

Copyright ownership seems "old school". For decades, proprietary software companies have tightly controlled their copyrights in, and generated revenue by, granting limited scope usage rights to customers. The rise in popularity in open source business models in recent years has changed the way software companies use copyrights and the rights they grant to customers. Companies that license their software as open source, by definition, can't prevent others from exploiting their copyrights to make a better product, or by setting up a consulting or service business based on the same software. Differentiation is the only way an open source company can survive in this environment, and copyright ownership is a critical element of differentiation for any open source business models.

Most open source business models roughly fall into two categories: dual-license or service-oriented. Open source companies that retain ownership of copyrights (either by creating code themselves or through an assignment of rights from contributors) can implement a dual licensing model. While the purists in the open source world might see the use of closed source value-add components as a contradiction to the open source values, realists recognize that the value and quality of open source software cannot be sustained unless a revenue stream accompanies it. The dual license model gives open source companies that own copyrights incredible flexibility. Not only can they license their software to companies that would not typically entertain use of open source software by providing a closed source license, but they can also develop add-on components that retain the open source nature of the core software while generating value that was not previously there.

Open source companies that implement a service-oriented business model can also benefit from copyright ownership and differentiation. These companies can extend the value they provide beyond their services by creating their own add-on components for which they own the copyrights. These components can be licensed as closed source, or under a dual-license model, which gives an open source company a new level of flexibility.

Open source companies with all levels of revenue can enjoy the good news that copyrights are generally easy to protect and exploit. They are created spontaneously upon creation of copyrighted work and can be exploited through basic license agreements or through transfer of ownership. Registration of copyrighted material, which enhances a company's ability to enforce copyright infringement claims, takes very little time or money. Even in cases where copyright ownership is not deemed important as a primary business strategy, open source companies should pursue ownership and protection of copyrights to the greatest degree that makes sense for the chosen business model to preserve flexibility and enable differentiation.

In my next post, we will look into possibly the most important intellectual property right of all for open source companies: trademarks.

Practical Legal Considerations for Open Source Success - Intellectual Property Rights

This is an introduction to a series of upcoming postings on this blog dedicated to practical legal considerations for open source software companies from the perspective of inhouse legal counsel. My goal is to cut through the cloud of thought that often arises when people try to meld “open source” with “the law” and shine the spotlight on some of the critical, unique legal issues around intellectual property rights that open source companies face when defining their business strategies.

Open source software companies relish their role as disruptors and believe their business models lead to better quality software than their proprietary counterparts. While this often seems to be true, for all their differences, open source software companies rely on the same intellectual property rights for the foundation of their business as do proprietary software companies. The fundamental difference lies is how they protect and exploit those assets.

No matter how "pure" its open source beliefs, each open source company must carefully consider the role of intellectual property rights in its business. For some companies, this focus on intellectual property rights will be motivated by financial considerations. Without a solid foundation in intellectual property ownership and well considered intellectual property policies, investors (including venture capital firms and investors who purchase stock after an IPO) will be less confident about return on their investment. On the other end of the spectrum, even the purest of open source companies can benefit from clear intellectual rights policies by creating a more sustainable open source project.

The upcoming series of posts will touch on the four basic areas of intellectual property rights: copyright, trademark, patents and trade secrets, and later posts will expand this theme further to other aspects of open source businesses. As you will see in the first post, copyrights and copyright ownership are as relevant today in the open source world as ever before.