Mike Hendrickson - Economic Impact of Open Source on Small Business: A Case Study
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Open source is not only a catalyst for small business growth, but also a driver of future success for many startups today. Bringing together Bluehost anonymized customer data and trends with OReilly Medias job market data, along with other sources of trend data, this report captures the current state of open source as it relates to small to medium-sized businesses.
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This report was inspired by a conversation between Tim OReilly and Hari Ravichandran of Endurance International Group (EIG). Hari remarked that his web hosting business had been enabled by open source software, and that he wished he could find more ways to give back to the communities that have made his success possible. Tim suggested that a novel way to give back would be to work together on a study making clear just how much of a role open source software plays in the hosting industry, and by extension, in enabling the web presence of millions of small businesses.
Hari graciously agreed to provide data collected by EIGs Bluehost division as the basis for this study. What we have tried to do here is to help broaden the discussion of open source softwares impact beyond "the usual suspects" like Red Hat, MySQL, and other pure-play open source companies, and instead to focus on how open source has been a direct enabler not only of Internet companies, but of any business that enjoys an Internet presence.
One of our sayings at OReilly is "Create More Value Than You Capture." Open source software is one of the great examples of that principle. Rather than measuring the value captured by companies that provide open source software or services based on that software, this report tries to hint at how value is instead captured downstream by users of that software.
Open source developers are unsung heroes of our economy. It is not always the business titans, who have managed to extract a significant fraction of the value they have created, whom we should celebrate as the wellspring of economic growth. Those who have put their work into the commons, enriching the soil from which other businesses can grow, have an untold economic impact.
This study is an attempt to initiate a deeper conversation about hidden sources of value creation in our society. In a time when traditional ways of doing business have resulted in economic chaos, as financial companies focused more on extracting value from the economy rather than on creating it, it is worthwhile to reflect on what open source software can teach us about how to build a world in which, as Eric Liu and Nick Hanauer say in their book Gardens of Democracy, "We all do better when we all do better."
Because the Internets infrastructure is largely dependent on open source software and open protocols, its fair to say that open source has played a significant role in the economic impact of the Internet. This impact is both directin the revenues of Internet companies themselvesand indirect, in the increased revenues attributable to businesses because of increased visibility, efficiencies, or commerce on the Internet. But because open source software is not monetized directly by most of those benefiting from its use, it tends to disappear from economic analysis.
Web hosting shows how open source software impacts the economy: web hosting companies rely on open source software to provide the infrastructure required to generate monthly subscription fees, small and medium sized businesses (SMBs) get low cost access to the Web and the open source tools to build a web presenceextending access to customers and transactions for existing companies, and creating a new breed of company that could not exist without the Web.
In this report, we use a unique data set, as well as survey data, provided by the Bluehost division of Endurance International Group, a web hosting company that provides hosting services to over 2 million customers, most of them small and medium sized businesses. There are areas where we believe Bluehosts data provides a reasonable proxy for the SMB hosting market. The Bluehost data is used to analyze the actual software used by their customers, estimating the cost savings provided by open source software. We project the total economic impact of open source software as an enabler of the web hosting market as well as the economic impact on the SMBs who make up its customers.
Bluehost offer customers a web infrastructure and programming tools rich with open source components like PowerDNS, Linux, Apache, and MySQL, and open source programming languages like PHP, JavaScript, Perl, Python, and Ruby. Bluehost also offers open source tools like Content Management Systems (CMSs), dominated by WordPress, and e-commerce tools like osCommerce, Magento, and PrestaShop.
While offering open source software via web hosting and domain name registration is a multi-billion dollar business, we show how open source generates even greater economic impact by creating a platform fostering the increased success of the small and medium sized businesses that make up the majority of web hosting customers.
Here is some of what we learned from the Bluehost data and follow-on research:
- 60% of web hosting usage is by SMBs, 71% if you include non-profits. Only 22% of hosted sites are for personal use.
- 75% of customers build their own site using simple site-builder tools. Another 6% have it built by a family member. Only 13% use professional web developers.
- The majority of the websites are informational; only 14% have an online store (including non-profits that take donations online).
- Nonetheless, nearly 20% of businesses in the survey say they derive more than 50% of their revenue from their website.
- The majority of hosted businesses are very small. Only 15% have revenues in excess of $50,000/year, yet collectively, we believe these businesses represent a trillion dollars of economic output.
- PayPal is the dominant payment mechanism, outstripping direct credit card payments by nearly 2:1.
- WordPress is a far more important open source product than most people give it credit for. In the SMB hosting market, it is as widely used as MySQL and PHP, far ahead of Joomla and Drupal, the other leading CMSs.
- Languages commonly used by high-tech startups, such as Ruby and Python, have little usage in the SMB hosting market, which is dominated by PHP for server-side scripting andJavaScript for client-side scripting.
- Open source hosting alternatives have at least a 2:1 cost advantage relative to proprietary solutions.
By most traditional measures, pure-play open source companies appear to have had a relatively modest economic impact. Red Hat, the largest open source software company, had revenues of $1.13 billion for the fiscal year ending February 29, 2012, and a market capitalization of $10.8 billion as of June 2012. MySQL was sold for $1 billion to Sun Microsystems in 2008. After the sale of Sun to Oracle, MySQL has estimated revenues in the range of $171 million, and MySQL ecosystem revenue is expected to grow at a CAGR of 40% to reach $664 million by 2015 []. There are many smaller companies that directly monetize open source software programs, but none have achieved the scale of either of these market leaders.
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