Milestone Group Quarterly: April 2004
Articles
CEO Hot Seat:
Julie Hanna Farris, Founder and CEO, Scalix
Milestone: The economics of building an enterprise software company have to date fundamentally been based on this notion of proprietary IP providing competitive advantage. The more of it you have in your product, the more you can charge. How do the economics of a software company shift when a large portion of that company’s underlying code is based on open source?
Farris: As an industry, we are still in the very early stages of understanding the role of open source and its implications. I believe that open source ultimately increases the revenue opportunities for software companies, not decreases them. One of the misnomers about open source is that if you make something open source you lose the IP ownership. This isn’t true. With open source licensing, the original author retains IP ownership. There’s a model of reciprocity in the open source world, which is, “I share something and make it available for others to benefit from, and if you take any benefit from that and you enhance it, then you have share what you did too.” That model of reciprocity accelerates the move up the value chain which creates more, not less, opportunities for creating value and differentiation. Another way to think about open source is as just another form of commoditization. We all have to think about the role or the implications of commoditization on our businesses. It’s important to step back and ask, “What is it that we build that’s truly valuable from an IP perspective vs. what’s commodity or should be or soon will be?” There are several interesting hybrid licensing models emerging, which represent the merger of the commercial software and open source worlds. For example, MySQL. If you use MySQL in certain contexts it’s free, if you use if for commercial purposes you pay a license fee. Then there’s the “software as service” model that companies like RedHat have pioneered. At Scalix, we have made parts of our platform open source because we believe those components should widely available, i.e. commoditized. Open source is a powerful vehicle for accelerating this process.
Milestone: Do CIO’s really care about Linux based messaging solutions? Hasn’t Microsoft already established the de facto monopoly with Exchange?
Farris: We tend to think of messaging as a mature product category where the market has consolidated, but on closer examination, a different picture begins to emerge. There’s a high degree of dissatisfaction and frustration with email. Most of us rely on mail more than we do the phone for doing business, yet we accept the fact that it’s not as reliable as the phone system. Recent analyst research indicates that 55% of companies would seriously consider changing their email platform if they could ensure continuity of service and functionality. That’s a striking number of companies. So why such a high degree of dissatisfaction? It’s frustration with high cost and complexity, lack of reliability and scalability, inflexibility, security, spam, just to name a few. These are all symptoms of the fact that we are breaking the back of the underlying messaging infrastructure as we attempt to use and extend it in ways never originally anticipated.
At the same time, there’s a broader frustration – frustration with lock-in, and it’s culminated one of the biggest disruptive platform shifts in computing, Linux and the Open Systems movement. A lot of people attribute the popularity of Linux and open source to the notion of free software, but free software isn’t what customers are after, its freedom and choice they’re seeking. The Linux/Open Systems movement is customers saying they want freedom of choice and more control over their destiny.
Scalix has taken advantage of this disruptive shift to pioneer a new generation messaging platform that’s solves today’s pain points, while innovating on the future of email and electronic communications. We’ve leveraged Linux and an open systems to give customers more flexibility, independence and choice than they have today.
Milestone: OK, let’s assume CIO’s do care for the reasons you’ve outlined. There is a big fight brewing with Linux intellectual property and SCO getting litigious. Is this keeping buyers on the sidelines?
Farris: There have been a number of surveys that indicate that the adoption of Linux has not been negatively impacted by the SCO issue. All of our customers, by definition are Linux adopters and we have stayed very close to them on this topic. Customers tell us they are paying attention, but it has not slowed down their adoption or the role they see Linux playing in their organizations. In fact, this question was posed to a CIO panel recently and to a person, they were bullish in their support of Linux and did not see the SCO issue as a deterrent.
Milestone: Speaking of SCO, what is the end game here? How does the drama of effectively suing customers pan out for them?
Farris: It’s not clear. As someone who spent seven years on the customer IT side, one of the most important things we looked for in a supplier was a trusted relationship that had the characteristics of a partnership. Whenever we felt that a supplier had a disproportionate amount of leverage over us, we would look for ways to decrease our dependence on that vendor. Customers need to feel that they, not their vendors, are in the driver’s seat. When the balance of power shifts away from this there’s typically a backlash of some sort. We’re seeing it now with the Linux and open systems movement. This movement is about customers reclaiming their place in the driver’s seat. SCO’s challenge will be to gain or regain the trust of customers. Given the imminent threat of litigation, this will be a tough turning point to navigate.
Milestone: An argument can be made that most technology buyers flocking to open source solutions are very cost conscious buyers. We’re already in a market with a lot of cost conscious buyers. Is commercial enterprise software based on open source fundamentally a low margin business?
Farris: Again, I contend that free or low cost software isn’t what customers are after with open source, it’s freedom and choice they’re seeking; freedom of choice, freedom from technology and licensing lock-in, and the flexibility to choose best of breed solutions. It’s the independence and control over one’s destiny that a customer gets. We have not had a single conversation with a customer where they have said, “because you guys are on Linux we expect you to be cheaper than the other guys.” As a matter of fact, we price right in line with alternative email products on non-Linux platforms. Having said all of that, I don’t know of any customer that isn’t cost conscious in today’s market.
Milestone: What trends do you see for other software companies to port their apps over to Linux? Is this a viable growth strategy for them?
Farris: The Linux movement isn’t just about porting apps to yet another UNIX variant. There’s something much more profound going on here. Linux and the broader open systems movement represent a disruptive shift that changes the rules for the industry. Whenever you have that kind of disruption it represents an opportunity to redefine a new generation of applications and services that take advantage of the fact that the rules of the game have changed. With Scalix, I saw an opportunity to solve not just today’s pain points and problems in email, but also to innovate and define the future of messaging and more broadly electronic communications. Another example of this kind of disruptive shift was the PC/LAN revolution in the early 90’s. At the time, everyone thought that the email market had matured and consolidated with IBM and DEC dominating. Then a small startup called cc:Mail leveraged the disruptive shift around the PC/LAN movement to create a new generation email platform, and LAN-based email was born. cc:Mail changed the rules of the game around email in a way that made it hard for 1st generation host-based email providers like IBM and DEC to compete. Similarly, this is the opportunity that Linux and open systems represent. It’s not just about porting existing applications to a new operating system. You have to innovate along the way in order to create new market opportunities.
Milestone: What do you make of the significant movement in many parts of Asia towards open source, particularly government backed initiatives in places like China?
Farris: Again, I see this as a movement toward choice and autonomy. It is an explicit statement by this market saying, “We want control.” We hear this consistently from customers in relation to their choice for Linux and open systems. CIO’s will tell you that they monitor the size of the check that they write to that short list of vendors that they have relationships with. What they are in effect doing is monitoring their dependency and their risk. It’s a risk management strategy. It’s about customers staying in the driver’s seat.
Milestone: We have all learned some lessons from the bubble and this swell economy. What do you think tech companies still need to learn?
Farris: That there are no shortcuts. It takes a long time to build an enduring business in any industry and technology is no different.
Milestone: What’s the best method you use to leverage your VCs operationally? How do you get them working for Scalix?
Farris: It all starts with thinking of your investors as true partners in the business and as members of your team. It’s also about the keiretsu, leveraging your investors’ network. One of the biggest challenges a startup faces is creating support and momentum, an eco-system of support for its products and services. Investor’s can play an important role in helping a startup gain early momentum and credibility from a marketing, sales, business development and recruiting standpoint. This early momentum creates demand and awareness on all levels and can do a lot of heavy lifting for a resource challenged startup This can be as simple as an investor publicly endorsing their companies and saying “here’s why I believed enough in this company to invest in it…” This helps an early stage company get above the noise and the credible platform it needs to tell its story.
Milestone: What’s the worst case scenario for Scalix? What keeps you awake at night?
Farris: This may sound simplistic but for Scalix it’s very much about successful execution and scaling the business. I acquired a technology from Hewlett Packard to start the company, so Scalix has inherited some characteristics of a spin-off – a proven product with referenceable customers, all of which has allowed us to accelerate our entry into a large established market where we’ve discovered a great deal of pent-up demand. Our challenge is to make our early customers successful and then scale the business to keep pace with demand.
Julie Hanna Farris is the Founder and CEO of Scalix. Julie has over seventeen years of experience in successfully building and growing businesses in electronic messaging. Julie founded Scalix in June 2002, during her tenure as an Entrepreneur-in-Residence at Mayfield, a top-tier Silicon Valley venture capital firm. Prior to Mayfield, Julie was a founding executive of three innovative and successful start-ups: onebox.com (acquired by Openwave), the industry’s first unified messaging service, 2Bridge, the pioneer in Enterprise Portal software, and Portola Systems (acquired by Netscape, now SunONE Mail), the first internet-based enterprise messaging system. Earlier in her career, Julie was a marketing executive at IBM/Lotus where she helped drive product direction and strategic marketing for the next generation Lotus cc:Mail and Lotus Notes product lines. Julie began her career at BellSouth, where she pioneered the design and deployment of one of the world’s largest distributed messaging and groupware environments.
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