There Will Be Multi-Billion Dollar Open Source Companies

by Ostatic Staff - Jun. 11, 2010

Glyn Moody has a highly interesting post out today, where he asks the question, "Why No Billion-Dollar Open Source Companies?" The post follows a meeting that Moody had with Jim Whitehurst, the CEO of Red Hat.

Whitehurst, of course, has done a good job of steering one of best capitalized and most successful open source companies, and one of the only public U.S. companies still squarely focused on open source now that Sun Microsystems has been swallowed up by Oracle. Whitehurst made the comment to Moody that for Red Hat to become a $5 billion company it would have to be “replacing $50 billion of revenue” currently enjoyed by other computer companies. What does that mean?

Moody explains:

"What he meant was that to attain that $5 billion of revenue Red Hat would have to displace software that currently costs $50 billion. Selling $50 billion-worth of software – even if it only costs $5 billion – is somewhat hard, which is why it will take a while to achieve. I think this is the first time I've heard someone as senior as Whitehurst admit something rather profound: that open source solutions save money for customers by doing away with the fat margins for existing computer companies – and thus shrink the overall market."

Wow is there a lot in there for commercial open source players to think about. Moody is right that Whitehurst is making some interesting admissions here. In particular, those who oppose open source software in businesses often argue that it shrinks the overall market for fee-based software and damages the software ecosystem. That's behind the historical opposition that companies such as Microsoft had toward open source.

While I think Moody analyzes the whole issue of what it takes to be a multi-billion dollar open source company well, I would note that investor and user perceptions have a lot of sway when it comes to market valuations. Red Hat went public years ago, directly during the frothy stock market that surrouned many dot-com companies. In fact, the venture capital firm that funded Red Hat was Benchmark Capital, the powerful Internet-focused Silicon Valley firm that is lionized in the book eBoys. Benchmark was also the VC behind eBay, Webvan and many other dot-com companies.

With Benchmark's backing, Red Hat actually did have about a $5 billion market capitalization upon its IPO, and then that valuation settled down along with the rest of the market for technology companies. There will be open source-focused companies with multi-billion dollar market caps. There will be better times for technology companies. There will be inflated perceptions of technology stocks again. These things go in cycles, and my bet is that Whitehurst knows that his company stands a great chance of becoming a multi-billion dollar, public open source-focused leader.