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By | Matt Asay 2nd February 2015 10:45

How Pivotal cracked the one-billion-dollar code

Red Hat again?

Analysis For well over a decade companies have been trying to trade in open-source popularity for mountains of cash, and for well over a decade the vast majority of them have failed. Downloads, it would appear, aren’t readily convertible into dollars.

This has left Red Hat the only billion-dollar open source vendor, a distinction no one has seriously challenged.

Until now.

Pivotal’s Cloud Foundry, an open source Platform-as-a-Service offering, just clocked the largest first-year financial bonanza in open source history: spun out of EMC and VMware in 2013 and trading since February 2014 Pivotal pulled in $40m during three quarters of active selling it said last week. As good as this is for Pivotal, it’s perhaps even better for would-be open source entrepreneurs, who may finally have a blueprint for large-scale financial success.

Don’t follow leaders, watch your parking meters

Red Hat, the lone billion-dollar open source company, once promised to show the way to open-source riches. A range of open source startups launched under the premise of becoming “the Red Hat of X,” but failed to generate much more than a few acquisitions as larger, proprietary vendors sought to pay for developer love.

In fact, despite earning a boatload of cash by selling XenSource to Citrix for $500m (on roughly $0.00 in revenues), former XenSource chief executive Peter Levine later opined that open source “has largely been a failure from a business standpoint,” because “the business model simply does not enable adequate funding of ongoing investments” in product development.

This hasn’t dimmed open source’s value, of course. Far from it. As Redmonk analyst Stephen O’Grady points out, the open source development benefits far outweigh its revenue potential.

But what if you didn’t have to choose? What if you could have both a thriving open source development ecosystem and make obscene amounts of money at the same time?

Pivotal, an offshoot of VMware (which, in turn, is a subsidiary of EMC), may have cracked the code. Pivotal’s CloudFoundry just closed its financial year, generating $40m in bookings. That’s well below a billion, but there are reasons to suspect it’s on the right trajectory.

For starters, $40m is more than the vast majority of open-source companies ever reach, even after many years in existence. Even successful open source companies (and I’ve worked for a few) have taken several years to hit that $40m milestone.

On these numbers, Cloud Foundry is the fastest growing open source product in history, measured in terms of sales, with the largest first year sales results ever. That’s big.

Those sales numbers are fed by impressive customer traction. As Pivotal laid out in a blog, Cloud Foundry is being used by a bevy of BigCos, including two of the top three US telecommunications companies and seven Global 500 manufacturing companies for industrial Internet and Internet of Things deployments.

As impressive as this is, it’s even more telling that Cloud Foundry may well be the fastest adopted enterprise cloud platform in China, powering, among other things, a connected car platform for China’s largest automotive company.

Cracking the code

So why are Chinese companies, as well as companies on nearly every continent, willing to pay for Cloud Foundry?

One answer, as Pivotal executive James Watters told me, comes down to convenience. “We are a full solution that removes the need to integrate 10 different products to accomplish what we do.”

But this doesn’t fully explain the Cloud Foundry success. Convenience, after all, has driven the popularity of other open source projects, but these haven’t generated the same sales returns.

When prodded, Watters suggested that companies have been willing to pay because Cloud Foundry offers high value for mission critical use cases. Convenience, then, isn’t enough: that convenience has to be tied to “I’m going to get fired if this project goes wrong” intensity.

Watters adds, “Most importantly, it's not a cheaper version of an [existing] enterprise product.” Unlike JBoss, for example, which attempted to commodtise BEA Weblogic, Cloud Foundry breaks new ground, and is sold directly to executives rather than developers.

All of this should become even easier to sell once Cloud Foundry starts running its PaaS as a service, rather than licensing the software to allow others to do so. Running open source as a cloud service, as Levine declares, means that “companies can monetise open source with a far more robust and flexible model, encouraging innovation, and on-going investment in software development.”

Only Rich Kids Need Apply Before you get too excited, a caveat: your mileage in trying to be “the Cloud Foundry of X” may vary. While Watters can gush to me that “Nobody has ever built an open-source product this ambitious,” that very ambition is a blocker to most open-source companies. For reasons cited by O’Grady and Levine, most open-source companies simply can’t afford to invest enough in product development to justify big customer cheques.

Cloud Foundry, EMC’s spoiled grandchild, can.

And it has. Pivotal has invested heavily to create arguably the most complete container-based platform on the market, making it possible for enterprises to install a distributed platform and build their first application in under an hour.

That’s not cheap to develop, and it’s a big reason enterprises have been willing to pay.

To get to scale you may have to spend really big: the only way they are able to offer a platform people are willing to pay for is that they spent huge amounts of money on it. I'd argue that having the full backing of EMCs billions will have helped.

They've cracked the code, it seems, but it's a code only billionaires can afford to crack.

So while Pivotal’s Cloud Foundry may be the next to crack the billion-dollar barrier, it’s probably too soon to break out the champagne to celebrate your own startup’s success. Billion-dollar open-source companies, it seems, may require a billion-dollar sugar daddy. ®

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