On May 1st, Sun Microsystems released its quarterly earnings which were below expectations. The company returned to quarterly loss after 5 consecutive quarterly profits. Sales in the US were down by 10%. Personally, it wasn't something we, from product division at Sun were expecting. Even as employees continued with their normal daily business, the hot topic of discussion amongst them was the quarterly results combined with the announced reduction in work force. These discussions led to some interesting thoughts which I thought I blog about.
The question we all had was what could be going wrong and what could Sun do to bring in more revenues. This question led us into trying to understand Sun's strategy towards revenue generation and what it believes would bring in more. Most of the major events at Sun are about open sourcing its products - which includes its flagship product Solaris. This raises the question, would OpenSource products ever generate revenue for the company? Could this be the cause for a bad quarter? The answer is - NO, for which we need to understand the relation between OpenSource and revenue generation - the model I believe Sun is hedging its bets on. In today's highly competitive market, companies are doling out software for free and transitioning these costs into services and support fees that the customers are more willing to pay for. Given that customers absolutely require professional services and support to implement the product in their IT division, they end up paying for the product eventually but in the name of services. One advantage here with OpenSource is the customer has an option of taking the risk to go alone which would not be available in the traditional sales model. Anyway, this posting is about analyzing different revenue models and will continue into details later in the post.
'Community brings revenue' seems to be the strategy that few companies including Sun seem to believe in. The traditional model for revenue generation has been Sales. Sun has indeed been very successful in building a community around Java which in turn generates a decent amount of revenues, albeit not as much as BEA or IBM make. The community approach, also called as bottom up approach is a slow process and can be categorized as a long term strategy.
This leads to the thought how the two revenue generating models - traditional sales and Community match up against each other.
One of the most widely employed and proven model is the Top-Down approach where the vendor's sales executives approach targeted customer's management echelons and clinch the deal. Since executives have a good understanding of - historical business trends, current state of business and future directions of the organization added to which is the financial strength, it is largely considered that they are most apt in making the decision. The primary drivers of this model are the Sales people who are highly valued for going out and clinching the deals. From product perspective, based on some of my experiences in the software industry, the product may not be production ready before the Sales team successfully demonstrates a POC to the customer to clinch the deal. Once the deal is clinched, the Engineering team accelerates the development phase for delivery. Typically there is a buffer time available for Engineering before delivering the product. Most of these deals are clinched based on personal rapport built at the customer end. On the flip side of adopting this model is, Sales executives are very competitive and cut throat, especially the ones from large corporations. Your product has to either be a revolutionary, or have a strong reference from internal or external source or have any other un-balancing factor to push the deal through. In an equilibrium situation, where the benefits in one product are balanced by benefits in the other product, the probability of competing and clinching the deal over a large competitor could be very slim.
The other mode of sale is by reference where an existing customer can recommend the same to its friendly or associated companies. This model has been applied heavily in the direct-2-customer approach where products are bought based on good reviews received from friends, family etc.. This model is pretty rampant on the internet where most or all of the online stores have the option to provide feedback and rating of a product. We will undoubtedly see this grow further on the internet with Social networking catching up quickly where the ratings and reviews you receive are from trusted and known sources instead of the unknown. For eg: as a happy owner of Bravia TV, I could recommend the same by post positive reviews on my social network account. To go one step further, the social networks could also have provision to share notes on the product. The major draw back to this approach is its limitations on its application to products that are largely sold directly to end consumer.
The contrarian model to traditional Sales model is the 'Community brings revenue' model - the bottom up approach where the product is given away for free to attract more developers and user for the product. This model has proven to be successful in the software industry especially. Eg: JBoss, RedHat, MySQL etc.. As the user base grows, word spreads faster through blogs, discussion forums and other means resulting in wealth of information being available for every one and eventually leading to increased industry adoption. Here the potential customer's developers recommend to their management the benefits of the product. Management in turn purchases the product and its services resulting in revenues to the product manufacturer. Customer benefis in many ways - free software, open code with more eyes on the source, collaborative effort where customer can participate to make the product better, if the company ever goes belly up, the product is still available with the source & many other benefits. The negative side of this could be - Is the management willing to take what the developers recommend depending on business policies and future directions, business politics, price etc.. How many of these truely translate into revenue for the company? The developers at the customer end may be willing to support the product on their own.
Comparing the Sales and Community models over a period of time, how would the costs and revenues outweigh each other is the big questions. It would be interesting to see a mathematical model that builds a linear expression for the same. Using my wild imagination below is a graph I believe when revenues are plotted over time.
As you may note, the revenues for Sales model flatten or saturate over time while in the community model revenues are slow to come at the begining but over time the revenues increase exponentially. Again the above graph is a wild imagination and I do not have any statistical data while I would be very interested in seeing such statistical data.Even if the above graph could be true, the challenge of generating or converting community leads to revenues could be daunting and more work is probably required on various strategies that can be employed as part of this model - evangelism, participation in various conventions etc.. I believe Sun is looking towards a long term strategy and will continue to consolidate its operations and product offerings.
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