This weeks look at the marketing mix is a casestudy on distribution, in particular the open source database market where the product is becoming a commodity and database vendors need to consider the customer relationship carefully.
The market demands greater efficiency in all sectors of the economy. Industry reacts to that demand with initiatives such as ‘outsourcing’ and ‘consolidation’ to reduce the cost of production and pass that benefit back to the consumer. One efficiency initiative that has seen particular growth in the software industry has been the ‘open source’ business model. The premise is that making the code openly available to all will enable the user base, or community, to set the direction for the product making it more customer focused. The efficiency benefit to that same community is that the product will be license cost free, reducing the total cost of ownership (TCO) significantly.
The software industry value chain can be broken down into three segments. The first and the most mature is storage, which includes database and database tools vendors. The second is middleware, where the application server and security vendors play. The final segment is the application layer which can be web based or client / server architectures. Any technology solution will encompass each part of this value chain, and with thousands of vendors the network of relationships is becoming more and more important.
This article will explore how open source vendors, particularly those in the storage and middleware segments, must take advantage of their network of technology partnerships in the value chain. This maximizes the efficiency in their operations and in turn passes that benefit back to the market in the form of cost reduction and customer focus.
The Hungarian writer Frigyes Karinthy first coined the phrase ‘Six degrees of separation’ with the hypothesis that each person on earth could be connected to everyone else by no more that six associations. In 1967, American sociologist Stanley Milgram devised a new way to test the theory, which he called "the small-world problem". He randomly selected people in the mid-West to send packages to a stranger located in Massachusetts. The senders knew the recipient's name, occupation, and general location. They were instructed to send the package to a person they knew on a first-name basis who they thought was most likely, out of all their friends, to know the target personally. That person would do the same, and so on, until the package was personally delivered to its target recipient. The result in all cases was that the recipient was reached within six people associations.
What this experiment was able to demonstrate was the strength of ‘weak ties’ or the ‘network effect’. In finding a solution to this problem (sending a package to an unknown recipient) the sender could not use his best friend but had to use his most appropriate associate. In this case someone who lived closest to the recipient.
Now consider the software industry and in particular open source software vendors. The value chain with its three basic segments creates degrees of separation from the consumer. We can look at these degree of separation as choices that can be made by software vendors as they hunt for more efficient ways of engaging the consumer.
The relational database market is mature to the point that analysts often use the term ‘commodity’ when referring to this sector of the software industry. There is very little growth and very little opportunity for new business. To satisfy shareholder requirements for increasing returns growth has been achieved through merger and acquisition activity for the larger players.
In the growth period for this layer vendors had a direct relationship with the customer or one degree of separation which was most effective and maximized profit margins. Today the database industry looks very different. New database sales, with one degree of separation, mostly happens if the salesman can displace the incumbent vendor. Migration costs and internal politics makes this a challenge. Add to that the price pressure in a commoditized market and the sales model with one degree of separation is too high a cost and won’t scale readily.
After the rise of the storage industry, then came the growth in middleware; managing and delivering integration of business processes. The customer had automated the storage market and now turned to their IT processes. This lead to the rise of application server vendors and placed two degrees of separation between the storage vendors and the customer.
The middleware vendors now interface with the customer, reducing both the logistical and marketing costs for the storage vendors. In turn the storage vendors are benefiting from the network effect of this separation from the consumer. The focus for the storage vendors is then to build a strong channel management program so that they can benefit from the weak ties that exist in this new network.
Customers, in general, don’t buy new databases; they buy applications with databases embedded in the solution. The application is the ‘touch point’ for end users; it’s where they see the most value and, because of the process improvements, will deliver significant ROI.
There is no commoditization in the application space. It is relatively immature with high growth rates. With this third layer or three degrees the network effect is amplified again, allowing the storage and middleware vendors to really explore the strength of weak ties. Once these three layers are integrated we see the emergence of technology stacks giving customers a true end to end solution.
Combining these three layers in a single solution has benefits for both the vendors included and the consumer. The storage and middleware vendors (storage in particular) benefit from the weak ties and network effect that is generated. This reduces their sales and marketing costs significantly which is a benefit that can be passed to the application layer and in turn to the consumer as a lower cost of ownership.
This ‘packaging’ has lead to the emergence of technology stacks in the software industry, providing true efficiency gains in the value chain. Technology stacks enable the rapid deployment of applications and reduce the on-going maintenance costs of those technologies.
Reducing the sales and marketing overhead within open source vendors is critical to the commercial success of those organizations. This is driven by the lack of license revenue, which would ordinarily be the major contributor to overhead. The benefits of weak ties and the network effect both help achieve this but open source has another card up its sleeve.
The challenge in exploiting weak ties is to build open and common standards for all participants. This is the crucial ingredient that will allow vendors in each layer of the technology stack to build solutions that customers want and in a timeframe that they desire. Software has traditionally been built in a proprietary manner, so that vendors could benefit from protected differentiation and remain competitive. This has lead to many different platforms and standards being offered to customers who then have the challenge of integrating those products into a single solution. In this situation there is no benefit of weak ties. Open source vendors now have the opportunity to provide a true open and common standard for the software industry. The future for software vendors is less likely to be maximizing IP value and more about how they “go to market”. In this case having open standards allows the market to benefit from the network effect. Vendors can execute faster and more efficiently; consumers have solutions that are truly integrated. In this regard, open source vendors are leading the way.
Chris.
