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Is open source a bubble ready to burst?

Martin LaMonica CNET News.com

Published: 07 Nov 2005 15:30 GMT

Open source business models are booming in the software industry, a rapid rise that has some experts wondering if it's a bubble that will burst.

Venture capital firms are pouring more money into start-ups that adhere to open source practices, such as giving away technology for free. That rush could result in an investment bubble, similar to that seen in the early days of the Web, several industry executives cautioned at the Open Source Business Conference last week.

For an open source business to work well, a start-up needs a number of attributes that a closed-source software company doesn't, executives said.

In particular, they have to combine their pursuit of profit with active involvement in a vibrant "community" of open source users, some of whom are not paying customers. Not all open source companies are hitting the right balance between commerce and community, analysts and executives said.

"Too many of these companies [now forming] are being funded without a community," said David Skok, a venture capitalist at Matrix Partners. "If a community doesn't form and form fast, then they're going to burn through their venture capital, and they're going to be disasters."

Open source companies typically give away their software with source code to potential customers and either charge for a more functional version or charge for ongoing support services.

Over the past two years, a number of companies have chosen variations on that business model to try to unseat incumbent software providers. The pace of investment in those start-ups has also picked up.Until the end of September this year, the amount of venture money that went to companies with "open source" in their business description was $144m (£81.8m). That's more than double the total for the whole of last year, according to research from the National Venture Capital Association, PriceWaterhouseCoopers and Thomson Venture Economics.

In addition, a conservative estimate is that there have been at least 18 open source companies funded in the first three quarters of 2005, compared with 12 last year, a NVCA representative said. Among this year's top investment recipients were XenSource, which landed $23m, and SugarCRM, which got third-round funding of $18.7m last month.

Demand for open source
That pull toward open source is fuelled in large part by corporate customers, said Kim Polese, chief executive...

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Its the applications and device drivers that run on windows that cement its dominance. How many people would fork out hundreds of pounds for Vista if Linux ran all the software and kit they wanted to use.