Software companies build business on model of free
The profits lie in related support services
In its first seven years, Aras Corp. grew slowly, with a handful of sales people selling its proprietary software to manufacturing clients.
Frustrated by the slow pace of business, founder Peter Schroer had a realization: “Selling corporate software was not profitable, and the scalability of the business was limited to the number of feet on the street.”
So, in 2007, Schroer took a gamble and embraced the open-source model of software that was sweeping corporate computing. He fired the sales teams and started giving away Aras’s software; the company would make money through services, such as technical support, security updates, training, and related consulting work.
Clients could use, modify, and share the software as they saw fit, while buying from Aras the kind of 24/7 support that services manufacturers expect from vendors.
Since then, Aras’s revenues have increased 50 percent each year, on average; client downloads of Aras software are up tenfold, to more than 1,000 companies each month, from 100 in 2007.
The workforce has quadrupled to 68 employees.
“The difference has been night and day,” said Schroer, Aras’s chief executive.
Aras, of Andover, is among a number of Massachusetts companies following the pioneering path of Red Hat Inc., and basing their businesses on open source software, where the underlying source code to run applications is available for free.
Another is Acquia Inc., of Burlington, which provides support for an open source content-management system developed by its cofounder.
Moreover, the trend of migrating corporate computing systems to offsite “cloud” systems could accelerate the use of open source products, creating even more business for those firms.
“If you have an open source system in the cloud and it needs to grow, you just add another server,” said Jeffrey Hammond, principal analyst at Forrester Research Inc., in Cambridge. “You don’t have to worry about adding another license, because it’s free. That’s very appealing.” He said open source software has become “absolutely mainstream” and that Forrester’s survey of software developers indicated 80 percent use of it in some form.
Though based in Raleigh, N.C., Red Hat maintains a research and development operation in Westford, with more than 400 employees.
The company distributes and supports versions of the open source Linux operating system, which is at the heart of many corporate computer systems. The company is expanding in Westford, to more than 700 employees over the next few years, largely because of the growing use of open source software in cloud computing.
“Open source is free, which is very attractive,” said Brian Stevens, chief technology officer. “But companies still need a relationship with someone who can help make it work, because software is very complex and constantly moving.”
Acquia’s product is Drupal, a content management system used to manage websites. Drupal was launched in Belgium as a free, open source project in 2001 by Dries Buytaert. It now has more than 870,000 registered community membersin 228 countries, who use it to create websites and develop related tools and applications.
In 2007, Buytaert and a cofounder launched Acquia in Massachusetts; its customers include Twitter, Warner Music Group, Turner Sports, World Economic Forum, Stanford University, Mercedes-Benz, and NPR. Revenue in 2011 was $21.7 million, a 150 percent increase from the previous year.
The company has 230 employees.
The trick to building a company in the open source business, said Acquia chief executive Thomas Erickson, is “to identify your value-add.”
In Acquia’s case, Erickson said it is serving as a guide to corporate customers through the sprawling Drupal community, which is constantly adding tools, fixing bugs, and creating applications, called modules, that extend and customize what Drupal can do.
“There are more than 16,000 modules available to use with Drupal,” he said. “People need to know where to start, whom to trust, how to put these things together. They also want someone to call when something doesn’t work as expected.”
Acquia’s business model is similar to Aras’s and Red Hat’s: It sells support services and products that are related to Drupal, such as Web hosting and training.
One client is Maxim, the monthly men’s magazine, which uses Drupal for its website.
“We wanted to go the open source route,” said Michael Le Du, Maxim’s chief technology officer, “but we needed expertise when we hit a wall. That’s what Acquia gives us.”
Meanwhile, among Aras clients is Carestream Health, a provider of medical imaging technologies.
Its chief information officer, Bruce Leidal, had conducted a “bake-off” among Aras software and similar proprietary programs, and chose Aras for the lower cost: under $200 per user, with Aras support, versus $350 per user for the proprietary systems.