CNET has a decent article on Friday by Stephen Shankland about how Canonical, the company behind Ubuntu Linux, plans on building a global business by giving away its software and selling service, a strategy originally adopted by the current major Linux marketer, Red Hat (RHAT), which it has since rejected. The article takes a rather dim view of the approach, questioning whether that's going to make it for Mark Shuttleworth and his band of South African software revolutionaries.
Laugh on, CNET, but in China I don't think anyone would so much as giggle. As the nice folks over at Microsoft (NASDAQ:MSFT) and the Business Software Alliance will happily tell you, it's proving exceptionally hard to talk people in China into paying for software that can be downloaded in a zip file or shrinkwrapped and sold at a counter. I'm not sure it's going to get any easier.
It's the Service, Stupid
When I look around China for companies who are managing to make money in the software business here (with the exception of those who use strong-arm tactics to get users to cough up licensing fees - and we all know who we're talking about - or who have captive audiences), nearly all of them are doing so on the basis of delivering value that goes beyond the software itself.
You won't find very many people knocking off SAP (NYSE:SAP), Oracle (NYSE:ORCL), or IBM's db2 (NYSE:IBM) (or Lotus Notes, for that matter). All of these have a built-in service component, and frankly, the reasons a Chinese enterprise would buy something from SAP would be a) the industry-specific nature of the product, and b) the implementation process compels a company to adopt international practices that are going to make it globally competitive. When you can sell something that carries a value that is built into the process of adoption, for which help is needed, then you have something to offer.
Salesmen of China's local ERP software like UFSoft and Kingdee have been selling their software at cost, and making their profits on the service involved in customizing the software for a specific company. The value, UFSoft likes to point out, comes from the service.
The software is a loss-leader. The product is sold as a part of an overall package that includes customization, implementation, and support. Indeed, UFSoft likes to say that while the rest of the world began in The Age of Hardware (IBM as leader), evolved to the Age of Software (Microsoft as leader), and is evolving into the age of service (ERP, ASPs, and the like, no leader yet), China is leapfrogging the software age, going directly from the Age of Hardware to The Age of Service.
In other words, if you plan on making money in software in China, chances are you're going to spend a lot of money on lawyers and lobbyists on the road to profitability, and you may never make it into the black if you stay on that course.
Give Away the Razor. Sell the Blades.
This brings us back to Ubuntu. Will anyone make money on this? Absolutely. Look, just to play with Ubuntu on my Mac, I've laid out $15 for a copy of the software from Ubuntu, because I didn't have the time or patience either to download it or go and chase somebody at the Beijing Linux User Group for a copy.
I then bought two books - Beginning Ubuntu Linux by Kier Thomas and Ubuntu Linux for Non-Geeks by Richard Grant. There was some overlap, but Thomas focuses more on getting Ubuntu configured for your computer and providing a step-ladder to more complex stuff, like command-line work, while Grant is much more focused on using Ubuntu to get stuff done. Altogether I'm out around $90, and I haven't had any tech support (this also doesn't take into account the $79 I spent on Parallels to allow me to run Ubuntu in a window on my Mac.
If I were running a business, would I pay $250 for 18 months of support per seat? Definitely. That would still give me a lower cost of ownership than Windows.
At the same time, I think Canonical has to take a little page out of Microsoft's book if it's going to do well in China. Apart from offering superb local language guidebooks, Canonical should also run Ubuntu courses for everyone from users to CIOs, offer certifications on each version for local consultants, and offer custom implementations of its other products, thin-client focused Xubuntu Linux, and primary-education focused Edubuntu.
Unfortunately, Canonical has yet to even open an office in Asia, much less begin to understand what it can do to drive itself forward in China.
Come on, Mark. Cough up some cash and get your feet on the ground over here.