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Open-source pioneers shake up bigger rivals : New wave hits software industry

By KEVIN J. O'BRIENNOV. 30, 2004

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BERLIN: — MySQL, a software maker based in Uppsala, Sweden, is giving away five million copies of its best product: a database so powerful that global banks use it to track their credit risks and scientists rely on it to catalog the chain of chromosomes that make up the human gene.

The generosity is the same at Trolltech in Oslo, where 4,400 companies, including Siemens, IBM and Sharp, have downloaded a free product called Qt, a software toolbox that their developers can use to create functions that work across the mix of operating systems in their corporate networks.

For a decade, the ideological pioneers of the open-source movement, who gave away their software and its underlying source code, derived great satisfaction and little else for their efforts.

But recently, a second generation of companies like MySQL, Trolltech and the American companies Sleepycat and JBoss has emerged, making millions in sales, and, increasingly, profits, from open-source software.

As software vendors end a second year of single-digit growth, MySQL and other second-generation open-source companies are booming.

Most are doubling sales annually and adding staff as they transform the industry by distributing basic, powerful software for free or at a small fraction of the market price.

"We are already seeing quite profound effects from some of this open-source competition," said Gordon Haff, senior analyst at Illuminata, a research firm that is based in Nashua, New Hampshire.

"In the database arena, it's one of the main reasons that Oracle has shifted its strategic focus" to more complex software that allows companies to tap multiple databases through a single server, he added.

In a report to the U.S. Securities and Exchange Commission on Sept. 1, Microsoft warned investors that competition from open-source software might begin to erode its sales and profit.

"For fiscal 2005, we believe industrywide factors such as PC unit growth and the success of noncommercial software could significantly affect our results of operations and financial condition," the company said.

On the growing use of Linux software in servers, Microsoft cautioned, "To the extent open-source software products gain increasing market acceptance, sales of our products may decline, which could result in a reduction in our revenue and operating margins."

Marten Mickos, president and chief executive of MySQL, said, "This is a far-reaching phenomenon that is going to change many parts of the software universe." In 2005, Mickos said, MySQL should return to an annual profit, after four years of losses. Sales this year are expected to double, for the third year in a row, to about $18 million

But some analysts expect the big players to adjust.

"Certainly all of the major vendors will have to change their licensing models to take on this threat," said Mike Thompson, principal analyst at Butler Group, an industry research company based in Hull, England. "The advantages companies such as MySQL have at the moment, I think, are purely based on the low cost of their products."

Over time, Thompson said, the large makers of name-brand software will effectively lower their prices — giving customers greater flexibility to mix all types of software — and undercut the threat posed by MySQL and others open-source vendors.

"My belief is that the advantage they have is temporary," he said. "The big vendors will adjust their prices and reassert themselves because their products, generally speaking, have greater functionality."

For the second-generation companies, the key to making money in the open-source universe is simple: Give and ye shall receive.

Unlike the developers of the open-source operating system Linux, companies like MySQL, Trolltech, Sleepycat, which is based in Lincoln, Massachusetts, and JBoss, which is in Atlanta, all own the intellectual property rights to their software. But instead of selling it, they give away more than 90 percent for free under open-source license deals.

Companies that weave MySQL's free database, JBoss's application server, Trolltech's Qt software toolbox or Sleepycat's Berkeley DB developer database into their own software products must distribute them for free under open-source contracts. But typically, 10 percent of these customers — mostly large and midsize companies — do not want to disclose their own source codes.

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