Can Sun make MySQL pay?
By Jeff Gould (Peerstone Research)
How can an open source software company with $70 million or so in revenue and no profits to speak of be worth $1 billion? That's the question Sun CEO Jonathan Schwartz has been trying to answer since he bought MySQL last week.
The question is not how can Sun make any money from MySQL – this is after all a commercial company that already has an established business selling enterprise support subscriptions – but rather, how can Sun make enough money to justify that incredible price? To get a feel for what a reasonable answer to this question would look like, let's consider the valuation the stock market places on Sybase, which is the only publicly held pure play database vendor still around. Right now Sybase's enterprise value is around $2 billion, or roughly double its current annual sales. By this measure, Sun would have to grow MySQL's revenues to $500 million per year to bring it into sync with the purchase price. Somehow that doesn't seem very likely, at least not in the foreseeable future.
Not surprisingly, Schwartz's first defense is that Sun will get its own back indirectly, by selling more servers, storage and networking gear to data centers deploying MySQL. That makes sense, because you can't run a database without hardware. What's not so clear to me though is why large numbers of MySQL users who have been happily using some other brand of hardware until now will suddenly switch to Sun. Sure, owning MySQL will open a few doors for the guys selling Sun boxes, and that may lead to a few extra sales. But it's hard to see how these relationships can translate into the large and sustained stream of new revenues Sun would need to make the acquisition numbers work from hardware alone.
So the question boils down to this: how can Sun hope to wring a lot more subscription sales out of MySQL than MySQL could by itself? Schwartz has a ready answer here. He says plenty of Fortune 500 CIOs are eager to use MySQL for mission-critical applications but have hesitated until now because they wanted the reassurance of support from another Fortune 500 company. One like Sun. This argument seems undeniable, as far as it goes. But I'm still left wondering, can Sun make MySQL subscription sales rise far enough and fast enough to justify that humongous billion dollar price tag?
Only time will tell. But in my humble opinion, MySQL's open source business model will make Sun's road to payback a lot steeper than if it had bought a software company with conventional revenues and profits. To see why this is so, we have to drill down a little into MySQL's business model.
Like most commercial open source companies, MySQL makes money by enticing well-heeled customers to pay for an enterprise version of its product that comes with more bells and whistles than the community version it gives away for free. Both versions are available under the GPL, but MySQL also offers a commercial license aimed mainly at OEMs and ISVs who want to bundle MySQL with proprietary software packages. Like Red Hat, MySQL limits access to the binaries of its Enterprise version to paying customers. If you want a free (but unsupported) copy of MySQL Enterprise Server, you'll have to compile it yourself.
Unlike Red Hat's RHEL and Fedora versions of Linux, however, MySQL's two versions are built from exactly the same source code, although their binary versions are not guaranteed to be identical at any given point in time. Fedora is a fast moving beta version that lets users try out new features before they are rolled into the more stable and less frequently updated RHEL. MySQL Community Server, by contrast, is updated on a slower and less regular schedule than MySQL Enterprise Server. Only Enterprise subscribers get the latest binary patches immediately. Free users have to wait for the next Community release (published at unpredictable intervals), or else recompile the updated source code themselves, or hope that their Linux distributor picks up the patch from MySQL. These differences of course have been cunningly designed to make the hack-it-yourself Community version an unattractive option for any enterprise running big time business applications in a production environment. Don't get me wrong. I'm not saying this is an unreasonable strategy for MySQL to adopt. After all, it's damn hard to make money if nobody ever buys your product.
It appears though that the additional features of the Enterprise version are not enough to compensate for the revenue-destroying effects of the free Community alternative. What else could explain the surprising fact that MySQL has quietly filled out its open source portfolio with a closed source proprietary management software tool known as Enterprise Software Monitor? This technically impressive product has a growing feature set that includes the ability to monitor and manage multiple MySQL instances from a single web console. The basic version of it comes bundled with the $1,999 per year Silver subscription to MySQL Enterprise Server. More feature-rich versions (including replication and memory usage management) come with the $2,999 Gold or $3,999 Platinum subscriptions.
The fact that the second most famous open source company on the planet has been busy selling closed source software has attracted remarkably little critical notice from the usually vocal open source community. I don't think it's because people are applying a double standard to MySQL. Rather, it's simply that they haven't noticed. This is not completely accidental – you will look in vain on the MySQL web site for any explicit acknowledgement that Enterprise Software Monitor is not an open source product.
Again, don't get me wrong. I see absolutely nothing wrong with MySQL selling closed source software too, especially since their open code is a full featured version of their mature flagship product and not some truncated subset (a la SugarCRM) or bleeding edge beta (a la Fedora). I do find it amusing though that the company's marketing mavens obviously don't think it's a good idea to tout this aspect of their strategy. This only goes to show how much of the open source movement is driven by political correctness and hipper-than-thou posturing rather than business reality. Let's face it, open source is a gutsy, ingenious and entirely legitimate way for marginal software players to break into a market dominated by powerful closed source incumbents such as Microsoft, IBM and Oracle. It is not, however, a viable political or economic philosophy – last time I checked, there is still no such thing as a free lunch. Nor is it a way of saving the planet or even, sadly, the whales.
The reality is that – despite or more likely because of – its open source business model, MySQL wasn't growing fast enough or making enough money to entertain the prospect of an IPO. Its venture capitalist backers, in for many tens of millions of dollars, were no doubt getting nervous as they realized the company was never going to be another Salesforce.com or VMware. Of course, as Jonathan Schwartz recounts in his blog, people have been making private offers to acquire MySQL for years, and these offers have always been declined. But this time the owners – the VCs, founders and executives – agreed to sell. No doubt they concluded that, on the eve of a possible slowdown in IT spending and with a strategic buyer like Sun willing to pay many times the company's paper value, they weren't likely to see a better offer in the foreseeable future. I'm pretty certain they were right.
Jeff Gould
in Open Source, Sun, MySQL
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Reader Comments (25)
It would seem that rather than raising a question - this purchase provides an answer. That being, "Oh- this is why Sun has struggled so."
I find this article to be somewhat off the mark. The author is simply using Sun and MySQL as a way to attract people to his soapbox, and once the audience is there he trumpets his opinion that open source has no value.
On the other hand, $1 Billion ought to put an end to what was a continual din from the Postgres community, which was always claiming that MySQL was merely a toy and not a real database.
CTOs (not CIOs) would continue to use a completely open source (read free) software stack. But like their counterparts (CIOs) in large enterprises, they too would like some reassurance that their free software stack is backed by a reliable and respectable vendor with proven track record, who also incidentally provides all the hardware for the data center.
These are the decisions that would continue Sun towards being a market leader in the new world.
Why noone says a word about Oracle? Isn't that number 1 player in databases? what if Sun wants to promote MySQL further, fine-tune it to run EVEN faster and stabler than Oracle (on Sun's hardware, of course) and win the market ?
Consider the following.
First, the net present value of MySQL - a $70m company growing 50% p.a., doing some basic Excel math with an anemic terminal value... $900m. Standalone. That's why they were interested in an IPO.
Second, the impact Sun can have on that business, given a global, professionally supported service for MySQL? Additive - probably more than doubles their value.
Third, the impact the MySQL coffee mug has on Oracle's predatory pricing, relieving pressure on Sun's hardware sales by giving money back to their customers to spend more on Sun? Another $1b, easy.
Fourth, the "would you like a server and some storage" promotion to millions of MySQL deployers across the globe? Another $1b.
Seems like Sun got MySQL on the cheap... seems bloody obvious to me.
It's a striking example of an article saying "I don't understand how it works so it must be wrong."
The author doesn't consider the fact that MySQL became what it is because it was open source, not that it was great software first and for charitable reasons became open source later.
The main point of the acquisition is to place Sun behind the DB as an enterprise guarantor for critical missions. It may not be much of a change technically but I can see how it'd matter in the decision chain say for a bank to have software supported by MySQL vs Sun...
Your comments about the Enterprise Service Monitor being closed source are off-base. This functionality is based on open source systems management software Hyperic. MySQL is an OEM partner of Hyperic.
Interesting points you brought up.
However, the comments associating open-source and free software speaks more about the massive confusion business people have about "open source". Open source has never been about "free" as in "free lunch". Instead, it has been about freedom. Freedom has a price. In the case of open-source, that price is technical proficiency. Without the ability to understand software, most of that freedom is irrelevant.
Look at it from the side of the customer (I guess Sun did that).
You need a mid-size database server. You want a solid solution, no experiments, no headaches. What are your options?
a) buy Oracle for $X, add HW servers and storage (Sun/HP) for $x.
b) buy an IBM+DB2 package for 2 times $X
or
c) here comes good old Sun sales rep to offer you everything for $X.
What would you do?
I didn't see anything in there about how quickly Oracle threw Sun under the bus when Lintel became a reality. You couldn't pick up any industry rag without Larry or someone else from Oracle touting their Lintel strategy and why would anyone stay on expensive, proprietary Sun hardware. I'm not a huge fan of Jonathon Schwartz, but it's nice to see Sun get some hudspa vis a vis Oracle. They certainly deserve to have a free or near free, well supported alternative chewing up their revenue like Lintel chewed up Sun's. Now let's see the quotes from Sun about why you would pay for a proprietary, expensive database when you could have an open, inexpensive alternative.
Let the games begin!
Rock baby, rock!
I concur with all of you elucidating the author's extreme/almost irrational bias against open source software. I would highlight his calling IBM a "powerful closed source incumbent" and point out that they are one of the bigger drivers of open source software as we speak.
What is funniest to me about these M$ cronies, is that the argument is that the model (open source that is), cannot be profitable. When it proves to be profitable, they point out how said profitable company "isn't really that open source". When people argue that they are again wrong, it turns into bizarre benchmarking algorithms that are incredible off base to prove the competing closed source technology is at least competitive. To quote Mahatma Ghandi, "first they ignore you. then they laugh at you. then they fight you. then you win".
cheers.
Anonymous respondent ig accuses me of promoting the view that open source has no value. Um, ig, the article was about an open source software company that just sold for $1 billion, in case you didn't notice. So take my opinion of what open source is worth, throw in your own plus $10, and you've got enough to buy a ticket to see Angelina Jolie in Beowulf. Maybe Sun will get its money back, maybe they won't. But MySQL's owners will be depositing some serious coin in their bank.
In response to Interested Observer, I'm not sure if MySQL was growing at 50% per year. We might find out in Sun's quarterly conference call tomorrow (Jan 24). But even supposing they have been growing at this rate, your net present value calculation assumes they will continue growing at this rate for the indefinite future. That seems a stretch.
BC's comment that I don't understand how this deal works is fair. I admitted as much in the piece. But that doesn't mean I think the deal is bad news for MySQL users or even necessarily for Sun. All I'm saying is that the financial return for Sun is uncertain at best. Once you put that aside (and it's really only a question for Sun's shareholders), the benefits for MySQL and its customers are obvious. The most widely used open source database just got a huge boost in long-term credibility. Risk averse CIOs who until now went with Oracle or SQL Server will listen a lot more carefully when their CTOs propose MySQL. There are also strategic benefits for Sun. I don't buy the fairy tale about Sun making its money back from extra hardware sales, and there's no way they'll make it back from MySQL subscriptions (just look at how hard Red Hat is struggling to grow JBoss sales). But if you look at it purely as a strategic move for Sun, a kind of attention-getting loss leader or even a form of advertising, then maybe it makes sense. It's kind of like putting your corporate brand on a football stadium. It's hard to calculate the ROI on that, but big successful companies do it all the time, so maybe there's hope for Sun.
Dear starry-eyed idealists who go into conniptions whenever someone dares to bring up the subject of money while discussing open source, I kindly suggest you take a look at what Marc Fleury has to say in his blog about the MySQL deal (http://marcf.blogspot.com/2008/01/sun-acquires-mysql-day2.html):
Some of my open source friends seem to be strong on passion but a little challenged in the hard facts and numbers department. Enterprise Hammer, for example, cites my calling IBM a "powerful closed source incumbent" as an example of my "extreme/almost irrational bias against open source software". Yikes! Extreme Hammer, I hope you don't go in for witch hunting, because I can already smell the sulfur fumes. You remind me of an old colleague back in the UK who used to address people by the third person even when they were sitting right in front of her. You wouldn't have an axe to grind by any chance, would you? The fact that IBM has been a generous if highly calculating supporter of Linux and other open source projects (Eclipse, Apache, etc) does not somehow cancel out their huge proprietary software business. In fact, dear E. Hammer, if you ever consider stopping by planet Earth again, please do keep in mind that Big Blue sold no less than $20 billion worth of closed source software last year, of which 35% was profit. If that doesn't make them a powerful incumbent, I don't know what does (the dirty little secret is spilled in all its gory details here: http://www.ibm.com/investor/4q07/presentation/4q07.pdf).
Interested Observer,
Your $900M estimate seems unlikely to be correct, for several reasons:
1. It doesn't make sense to do a DCF on revenues, as revenues != cash flows. Put more simply, you can't eat revenues, and DCF analyses are designed to value a stream of free cash, not revenues out of which expenses have to be paid on on which invoices have often yet to be collected. MySQL doesn't appear to have any net profit at this point, so while they may be generating cash, it's nowhere near $70M per year.
2. Very few businesses, even in the tech industry, have grown at 50% per year for sustained periods of time. This is especially likely to be the case a mature market like databases, where MySQL would have to take share from an existing player vs. rising with the tide of an expanding market.
3. Any company with no history of generating free cash from operations requires a very sizable discount rate to match the risk of the future cash flows actually appearing. So a discount rate well north of 20% is probably fair, which would require massive future projections to reach a $900M number.
There may be other reasons SUNW is willing to pay $900M, but a strict DCF analysis on MySQL alone (not counting incremental cash from synergies with existing SUNW businesses) is probably not one of them.
Humphrey Bogus, thanks for spelling out the Discounted Cash Flow implications. From what I hear, MySQL was not profitable and maybe not even growing (Fleury claims in his blog their sales were flat, but he admits being envious about the price). In any case, the $70 million revenue number is only an estimate. We'll probably get the real numbers in the Sun Q4 07 earnings call. By the way, Sun's stock symbol is no longer SUNW. Jonathan changed it to JAVA a few months back, believe it or not...
PostgreSQL is better
MUCH better.