RedHat acquires JBoss - open source consolidates

CNet reported today that Red Hat has acquired JBoss for approximately $350M. Open Source software is attracting lots of attention from the big players and VCs. There have been several acquisitions recently and probably a few more to come.

There was speculation that Oracle would acquire JBoss after recently acquiring open source database companies SleepyCat and InnoDB. The Open Source business is consolidating into a few big players. MySQL is probably the largest independent open source company remaining.

JBoss is an open source application server company founded by Marc Fleury. InfoWorld estimated that JBoss did about $20M in revenue last year and might do $50M this year. Assuming $50M revenues, and a $350M acquisition price, that yields a 7X forward revenues multiple. Marc Fleury reportedly owns 50% of the company. VCs David Skok of Matrix and Peter Fenton of Accel were lead investors in the company. JBoss has 150 employees.

The Open Source software market is consolidating. There will be a few winners and many "also-rans" that never really make it. In an earlier post "Open Source - the Darwinian approach to software" I talked about the odds of success for open source projects.

Open Source projects must pass the Darwinian test (only the fittest (most interesting) survive) to attract developers and contributors to the project. Maybe 1% of all Open Source projects attract more than 30 developer/contributors. Then the user community applies its own Darwinian test to that 1% of projects, as only the most useful and supported projects attracts a significant user community. The Open Source projects you read about are the ones that passed the Darwinian tests. Yet, the media would have you believe that Open Source is a sweeping movement.

There are VERY few VC investment opportunities in Open Source. There will only be one or two winners in each space, and the larger spaces are already covered. Linux has already been covered by Red Hat, IBM, HP, Novell, and others. Apache is also supported by many companies including Covalent and Microsoft. The database space is already covered by MySQL, Postgres, Ingres, SleepyCat, BerkleyDB, and 4dbObjects.

Oracle, Red Hat, IBM, Novell, and other large players are busy acquiring the most successful open source companies. How will this affect the open source community? Will the acquired companies remain open source? Will business models change? Would you bet your company on open source? Would you build mission critical applications on open source? Questions to consider for entrepreneurs and  IT executives.

Comments

[Nicholas Goodman]

Don... Long time listener, first time caller. Or whatever the blog equivalent is. :)

To answer your questions:

>How will this effect the open source community?
Positively by bringing revenue to the talent.

>Will the acquired companies remain open source?
Yes. Otherwise previously mentioned talent will fork 'em.

>Will business models change?
Yes. No company, err, successful company sits still while the world changes around them.

>Would you bet your company on open source?
Yes. If it's good enough for Fortune 1000's, Amazon, Google, etc. it's good enough for most businesses.

> Would you build mission critical applications on open source?
Yes. In fact, the question should be inverted... Why would you build the lifeblood of your enterprise on anything except an open platform?

This is grand... Chasm, crossed. Consolidation, ongoing. Open Source continues to fulfill its potential. Solving real customer problems using an exceptionally democratic and open collaborative community.

I dig that... Solving real customer problems (ie, actual value), not JUST cool technology. :)

[Jason Wood]

Don,

Actually on the call yesterday Red Hat guided JBoss' contribution as:

$40 million in CY06 revenues
$60 million in CY06 bookings
$80 million in CY07 revenues
$110 million in CY07 bookings

I'll be very impressed if they deliver on that kind of growth, particularly in '07, much of that will depend on whether Red Hat's current partners (MSFT included) views this move as a game changer and is more willing to step away from the JBoss offering now that it's inextricably linked to a competing OS.

Here's my take if you're interested:
http://woodrow.typepad.com/the_ponderings_of_woodrow/2006/04/jboss_gets_acqu.html