The return of open source software

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Open source software is on fire this year. Before this weekend, we had seen:

  1. Microsoft purchase GitHub, a code-management service, for $7.5 billion.

  2. Salesforce purchase MuleSoft, technology integration software, for $6.5 billion.

  3. Cloudera and Hortonworks merge in a deal worth $5.2 billion.

Each of these deals was dwarfed on Sunday when IBM announced plans to acquire Red Hat, an open source software company, for approximately $34 billion. If the deal is finalized, this would be the third largest technology acquisition in US history.

There are two things that jumped to mind when I saw the news:

  1. Technology valuations are getting out of hand. Red Hat made $259 million on $2.92 billion of revenue in their last fiscal year. This values Red Hat at 131 times profits or 11.6 times revenue. For a business growing revenue only 20% year-over-year, it is obvious we are “late cycle” for technology valuations. In my opinion, these market conditions will be hard to sustain for a long period of time.

  2. Enterprises are starting to understand the power of open source. Few companies understood this previously, but it wouldn’t surprise me if Bitcoin, blockchain, and cryptocurrency have brought the “power of the crowd” to the attention of corporate boardrooms. The ability to incentivize and organize thousands of software developers around the world becomes much more important in a global, digital world.

The open source software movement is as old as computers. Software engineers originally shared their work publicly so that the entire community could improve the code and push the industry forward. Commercialization of proprietary software became popular in the 1970’s and 80’s, which led to the creation of the largest companies in the world.

We are slowly watching the return to open source software as the default though — (1) Consumers are quickly losing trust in centralized services, (2) developers are remembering the power of open collaboration, and (3) entrepreneurs are figuring out sustainable business models around open source software. These three trends are hard to ignore, so centralized corporations are attempting stay ahead of the curve by purchasing open source communities.

Unfortunately they can’t purchase the software itself, but they can purchase the tools developers use (Github), the services wrapped around the open source code (Red Hat), or the communities focused on specific open source applications (Cloudera). Maybe these “picks and shovels” acquisitions will better position corporations for a world dominated by open source software. I wouldn’t count on it though.

Open source software, just like decentralization/blockchain/crypto, is just as much about the ethos as it is about the code. Corporations with short term stock price pressure have a bad track record of successfully honoring non-financial ethos in the technology industry. This should lead to more entrepreneurs leveraging open source software, but in a decentralized world.

Corporations will eventually figure out that you can’t purchase market share in the decentralized world — you either build or fade into obscurity.

-Pomp

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