Is open source a business "megatrend"?


Image credits: Lighting in a bottle by Libby Levi
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I recently attended a session of the Megatrends in Business speaker series hosted by UNC Executive Development and the MBA for Executives Programs at the Kenan-Flagler Business School. The session I attended was entitled The Trends and Paradoxes of Business Strategy with a presentation delivered by Dr. Albert H. Segars, Faculty Director of the Center for Sustainable Enterprise, RBC Bank Distinguished Professor and Chair of Strategy and Entrepreneurship at UNC Kenan-Flagler.

Dr. Segars was previewing a Harvard Business Review article that he co-authored with fellow Kenan-Flagler professor Dan Cable to be published in Spring 2010. I found the presentation to be extremely engaging and relevant, with particular relevance to the ideals of the open source way and the megatrends that they represent.

The presentation centered around the concept of trends, and the ability of successful companies to not only recognize emerging trends but to leverage them in creating new and innovative business models. Apple has translated such megatrends as personalization, mobility, convergence and simplification into the development and launch of the iPhone. FedEx and UPS, with their online package tracking, has recognized the emergent trends of transparency and outsourcing customer service to the customer. The entire gaming industry has ridden the trends of community and interactivity to take online gaming to new levels. And we all know that sites like YouTube, MySpace, Facebook, Twitter, and even Wikipedia have been wildly successful because they tap into the trends of unconventional knowledge, learning by seeing, and, much like reality TV, the concept of "life as art".

As I listened to Dr. Segars continuously reference megatrends such as community, transparency, and personalization, I was able to see that the very hallmarks of open source are finally being recognized as a way of gaining competitive advantage in many industries outside of technology.

Drs. Segars and Cable developed a system of classifying innovative business models that are harnessing the power of emergent trends. They assert that all business models are comprised of two components: theory (i.e. what conventional wisdom says should work) and numbers (what is actually working). Illustrated by a simple 2x2 matrix, the system defines four types of business models:

  1. Yellow Brick Road – business models that, in theory, should work and in reality do work

  2. World Turned Upside Down – business models that, in theory, should work yet in reality do not

  3. Lightning in a Bottle – business models that, in theory, shouldn't work yet in reality do work

  4. March of Folly – business models that, in theory, shouldn't work and in reality do not

Of particular interest to me was the quadrant that the authors named “lightning in a bottle”. In fact, this is the quadrant around which much of Dr. Segars' talk centered because, as he asserts, most companies that have leveraged trends to develop a new, innovative, and successful business models can be classified as "lightning in a bottle". The examples given were Southwest Airlines, Cirque du Soleil, and the entire bottled water industry.

I couldn't help but think that Red Hat would be classified in this quadrant as well.  After all, in theory, it doesn't seem to make much sense to build a profitable business around the commercialization of freely available open source software. But you cannot argue Red Hat's success. And I believe Dr. Segars would maintain that this success is due, at least in part, to Red Hat's (and open source's) ability to tap into some of society's more relevant emergent megatrends.

If you'd like to read more, stay tuned for the publication of Dr. Segars and Dr. Cable's article in the Harvard Business Review this spring. In the meantime, do you believe that the open source way is a manifestation of megatrends? How do you see this concept being applied in your company or industry?

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7 Comments

Connie's picture

Hi John,
I'm taking a look at the site to help out a friend there at Red Hat. First of all, great stuff. Love the feel of the graphics at the top. I am curious if this article is a true example of content you'll post? One thought if it is...make sure your leads on articles that are main content cut to the 'lead' of the story...right now the top part of the article that shows (before the "read more" link) is all set-up...to get to the good stuff (and there is really good stuff in this article) I had to click read more. Increase click-throughs and interaction through pulling the lead into the first paragraph and putting the credibility pieces (all that great context info) in paragraph two or so...get people hooked first. For example, your first sentence in paragraph three would be fantastic as the lead sentence. Just a thought.

j_q_adams's picture
Open Minded

Thanks so much for the feedback, Connie. It was a great reminder of one of the basic principles of blog writing. I'm still learning, so I appreciate the suggestion! I'll surely keep it in mind for my next post.

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As Red Hat's resident Brand Manager, John Adams strives to both protect and advance the Red Hat brand every day.

benwerd's picture

Open source has been around for decades, but its success has only accelerated explosively - particularly in the consumer market - since the advent of the Internet era. In fact, the most widely-known project is probably Firefox, Mozilla's open source web browser.

Over the last decade we've begun to communicate in new ways, dispensing with established gatekeepers and forming ad-hoc communities where the need arises. You can see the effects of this - positive and negative - in the music industry, in publishing, and in the current US administration. Indeed, governments are realizing that they must provide more transparency because of these issues. As individuals, our democratic reach is increasing.

Open source is a perfect fit for this. Users are discovering that they can have more control over the software they run: one size doesn't have to fit all. Communities can come together and create something that works better for them. An obvious example is the kind of enterprise software that Red Hat supports, but this is happening in all markets, increasingly for all people.

I'd call it "global community", and hopefully it'll be a mega-trend for some time to come.

Ben Werdmuller
benwerd.com | @benwerd

sdoherty's picture

John, thanks for the article. What I'd like to learn more about, and I'm hoping it's in the HBR article this spring, is the author's definition of a business model that 'shouldn't be successful'. The three examples given in this article, I'd argue, do make sensible business models--it's just they were different than 'old school' thinking. It seems what they have in common aligns with something that I'd read about regarding Sony and their invention of the Walkman.
Essentially, no one needed a Walkman, but in a very short period of time, everyone *thought they needed a Walkman*. No one really needed bottled water, but gosh, that sure changed quickly. I'd say Southwest Airlines did the opposite...people thought they needed an assigned seat, but realized they really didn't--especially if it'd cost more.
I think the big difference with open source software, and open source *thinking* is that there is no need for a marketing gimmick. There is simply no disputing, under virtually any set of circumstances, that open is better than closed when it comes to technology, thinking, acting...
Red Hat didn't make money 'selling free software', as much as we'd like to say that's the case. Red Hat found (and continues to find) ways to add value to an enterprise and charged a fair cost for that value.
In the end, that's the business model that should always succeed.

darryl's picture

Ive been looking and doing my own research on possible Free software business models.
And to be honest, It's very very hard to do, the result of this research ment looking at Red Hats financials, and market performance.

Also looking at where the profits from RH come from.

"But you cannot argue Red Hat's success."

Well yes, actually I can, I look at RH's financial history and share price, and market performance, and I do not see a pretty sight. (do you?).
I see RH listing at about $42, then quickly jumping to over $60 during the .COM boom, then dropping to $3.50 in the .COM bust.
And to date it's never been able to achieve even it's IPO list price.
I see VERY high P/E values, very low ROE, and a present stock price of $27.69 and falling.

I also note some financial analyists put RHT in the bottom 10 performing companies.
And I see RHT as one of the very few companies trying to monetize Free software.

But I would like to see some of these issues addressed, and what RHT intends to do to sure up it's future. At the present time it seem RHT is a possible takeover target, and this should worry RHT's management.
So mabey the CEO can address some of these issues, and explain why 48% of money generated at RHT is from "other" non core business activities, and talk about exposure that may be a risk to RHT continuance.

Then explain on that basis why you can say:

"But you cannot argue Red Hat's success."
But I can, (and have).

If these issues are not addressed then people are left to draw their own conclusions. RHT has chosen to play with the big boys by listing on the NYSE, so we would expect you to be accountable to you're shareholders and address some of the concerns and issues relatating to the company. and it's prospects.

Yahoo finance:
Last Trade $27.69
DOWN 0.04 (today)
P/E 67.37 (bigger is badder)
EPS 0.41
DIV $ Yield N/A

Return on assets: 3.32%
Return on Equity 7.3%
Profit margin 11.11%

Oracle Corp: ORCL
P/E 21
EPS: 1.15
Div&yield 0.20
Profit margin: 24.98%
Return on Assets 11.47%
Return on Equity 23.05%

MSFT: Microsoft
P/E 19.05 (nearly 70 for RHT)
Profit margin 24.46%
Operating margin 34.57%
Return on Equity 36.82%
Revenue per share 6.324
EPS 1.54

Does RHT have it fundamentals correct, and what is you're plan to ensure you're continuing existance, and to ward off hostile takeovers ? and meeting investors expectations. ?

dragonbite's picture
Open Minded

You can have a great model, but if you cannot execute it properly it doesn't matter, does it?

I'm still trying to get my head around the entire open source business model and am hoping that this site may help with some insight.

Good start!

john-smith's picture

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