Open source and the end of traditional sales and marketing

Larry Augustin (founder of VA Linux, creator of SourceForge.net, and board members of a handful of open source leaders) makes a number of good points in his piece "Time for a New Software Model". This pro-open source pitch is not new per se since Larry has been talking about the end of traditional sales and marketing in that context.

A few point of interest, even though I recommend reading the whole post:

• The problem is that the traditional enterprise software business model is broken. A rabid search for new customers and revenue growth has caused sales and marketing costs to spiral out of control. In fact, Rick Sherlund at Goldman Sachs estimates that in 2005 software companies will spend 82 percent of new license revenue on marketing and sales efforts. That's up from 66 percent in 2000.
• The Open Source model turns the marketing problem on its head. Customers can look at, evaluate and review software without contacting the company that will sell it to them. [...] The customer says, "I want something like that." He locates the Open Source version of the product, downloads it and is using it before the company is involved. [...] the Open Source solution, the CIO is happy with the software. But after using it for a while, begins to wish for documentation, a live-person to ask questions, a phone number for support, and so on. At that point, the customer calls the company saying, "I've been using your product for a year and now I need your help."
• The Open Source model likely delivers at best a 50% cost advantage in R&D. Most Open Source companies gain little community leverage developing the core of their application. R&D community leverage tends to come from testing, bug fixes, and interface/integration code. On the other hand, the savings in sales & marketing could be closer to 75 percent. Without the need to pay for large up-front sales & marketing costs, the vendor doesn't have to charge a new license fee up front. No more charging the customer to sell to them - the customers have to sell themselves - but they still come to the vendor for maintenance and support. And maintenance and support is how most software vendors make their living these days anyway.
• New license growth in enterprise software companies today is stagnating. By changing the revenue mix from primarily new licenses to primarily maintenance on already proven products, a typical enterprise software vendor's top line would drop by 25 to 30 percent. But the decrease in price and increase in market size will enable growth in those previously unreachable markets, creating a vibrant and growing company that will eventual pass its former revenue numbers.

The success of a number of companies like JBoss, MySQL and the potential of SugarCRM and Asterisk show that the model has some legs, and can build sustain companies with 40 to $50M in revenues. It will be interesting to see whether they can grow by an order of magnitude on the same model.