Ready to Invest in Open Source CMS?

Commoditization has invaded one of the wealthiest segments of information technology. The $2.5 billion dollar enterprise content management market is being tossed on its head because commoditization means narrowing of profit margins. However, the good news is that recent developments in the market illustrate how open source will provide a solid foundation for investment going forward.

The Current Scene

Content management has become a mature market in the last ten years. Today the field is characterized by lots of activity at the bottom while, at the same time, a continuing influx of money coming in at the top. This reflects enduring interest in content management solutions across a wide spectrum of customer requirements. It also demonstrates an ability to generate wealth that makes it an attractive area of investment opportunities.

As a VC where do I place my bets?

A venture capitalist (VC) looks for innovation that can be leveraged into rapidly growing business opportunities. Is Alfresco, the latest open source content management system, such an innovation? Accel Partners of London seems to think so. In June, Accel ploughed $2 million dollars into Alfresco.

“A new investment mantra for the VC is taking shape.”

Alfresco’s business model is compelling. It combines the strength of high-quality open source code with the industry expertise of the founders and their business savvy in the enterprise market. It tries to strike the market at a point different from other open source CMS projects — entering the market from top down rather than from bottom up. Its target is to compete with high priced, proprietary products like Oracle and Documentum right off the bat. In short, Alfresco combines sophisticated open source software, recognized vertical expertise, and a top down sales approach.

How is this model different from the others?

The proprietary vendors are expensive and have saturated the high-end of the market with their current offerings. The open source vendors are inexpensive but lack critical mass as well as many of the high-end features needed to win enterprise customers. In the open source CMS market, many projects support commercial services but lack the sophistication of the proprietary vendors. Therefore their ability to drive commercial value is limited. The Alfresco model seeks to remedy these shortcomings.

Alfresco’s model offers the best of both worlds — an inexpensive toolset with high-end features along with proven expertise to provide services for customization, integration and deployment that are commonly demanded by the enterprise.

In the CMS market, sales of expensive licenses and growth of associated services has been limited by new trends in the overall software industry. Customers are beginning to realize a growing freedom of choice, in part because of the commercialization of open source solutions. The same trend that has occurred in the market for server operating systems (Linux, *BSDs) and for relational databases (MySQL, PostgreSQL) is now happening in the content management market.

Taking advantage of the demand for radically cheaper solutions and commoditization of software in a maturing market, the Alfresco open source model provides the same solution value but at a lower price. By utilizing the framework of a lower margin business and easier customer experimentation and adoption, this model allows Alfresco to expand into customer opportunities in the middle tier. This middle tier is inaccessible to the high-margin proprietary vendors and equally inaccessible to the less sophisticated open source projects.

New Game

The investment mantra for the VC is simple. The companies to invest in are those that will survive in a proven but maturing market by extracting value from the twin dynamics of software commoditization and expanding customer choice. The returns on investment for the successful players can be high because market penetration expands many times over. Meanwhile the old money in the market fails to grow and is even wasted as legacy businesses spend more and more to prop up their shrinking high-margin market segment.

For these legacy software markets, a business model that works today is to use low-cost, innovative open source software as the technology base and combine it with strong sales and deployment management expertise to provide enterprise level services. It is working for Red Hat, Novell, IBM, HP and others. It is working for MySQL. Let us see if it works for Alfresco. As we build our software investment portfolios, finding opportunities that reflect this new model may just be the key to high returns.