Why Alfresco follows the same strategy as closed source commercial software companies

soundwalk_by_finishing-schoolMy friend and colleague, Peter Löfgren, recently wrote a blog post on what he sees as the two possible strategies Alfresco could pursue. He describes the two approaches as follows:

Vertical: You try to get as many as possible Community installs be converted to paying Enterprise customers. Convert from the bottom and up if you so like.

Horizontal: You try to get as many as possible to run Alfresco, even if they run the free Community version. A fair share will always want commercial support to have a professional backing. A broad approach, where you get market presence and self-sustained marketing.

Peter argues that, to date, Alfresco has used a vertical approach, which is really about pushing Enterprise Edition and begrudgingly acknowledging that Community Edition is an acceptable alternative, only when the client can’t currently justify the expense of an Enterprise Edition license.

Peter observes that the vertical approach pits Alfresco Enterprise Edition squarely against Community Edition making it very tempting for Alfresco sales people to badmouth Community Edition, because they often see it as cannibalizing their revenue. I actually don’t see this happening much anymore–sales people know that denigrating Community Edition is counter-productive because customers are savvy enough to know it is the same software and a good portion of the sales team understands the bigger picture.

Before I go any further, I should refer you to a blog post I wrote about a year ago called, “The plain truth about Alfresco’s open source ethos“. In it, I argue that Alfresco’s marketing strategy isn’t the community’s concern, and that the company is basically a “normal” software company that won’t ever be the dogmatic open source company many of us wish it was.

But Peter brought it up and I like discussing such things, so I’ll ignore my own advice and provide my take on why I think Alfresco will continue to ignore the horizontal strategy and will continue to basically act like any other traditional software company…

Here’s my take

First, let’s compare Alfresco with another commercial open source company, Elastic. Elastic is the company behind the popular search engine Elasticsearch as well as a variety of related big data and analytics tools such as Logstash, Kibana, and Beats. Like Alfresco, Elastic makes money from support, and their incentive to get people to pay for support is to offer a set of products they make available only to paying customers. Unlike Alfresco, Elastic ships a single distribution of their products. For a given release of Elasticsearch, for example, there is no difference between what a paying and non-paying customer downloads and runs. It’s just that if you want some additional value-add on top of what’s freely-available, you have to pay.

So this is an example of a horizontal pursuit as Peter describes it. The reason it is working for Elastic, though, is that their offerings are much more horizontal than Alfresco’s. Elasticsearch is more popular and more widely used in all kinds of use cases. Their download stats are impressive and increasing steadily.

Alfresco, on the other hand, is niche software. It is quite narrowly focused on document management. Yes, there are a lot of use cases within that, but it isn’t something that you see embedded in all sorts of applications like you would a database, a workflow engine, or a search engine. I suspect download stats are flat or maybe even decreasing, although this is a bit of an apples/oranges comparison as the two products are in different phases of maturity and adoption.

The other issue is one of leadership. Elastic’s CEO, Steve Schuurman, exudes open source. He was a co-founder of SpringSource, for example. Both he and Shay Bannon, the creator of Elasticsearch, have said repeatedly that Elastic will always be open source and that they’ll never have an Enterprise-only distribution of their core software. That’s the kind of leadership I expect from a commercial open source company.

Contrast that with the current leadership at Alfresco. When former CEO John Powell announced his retirement, the board could have chosen someone with open source credibility like Elastic’s Steve Schuurman. Instead, they went with Doug Dennerline. He and his lieutenants have next to zero open source credibility or experience. It is clear they were brought on solely to take the company public. For them, open source is not a driving part of their worldview. Instead, their focus is simply to build a software company and take it public, employing whatever strategy gives them and their shareholders the biggest revenue numbers year-after-year. (I don’t mean to paint this in an overly-negative light–it is what it is. I’m just trying to point out the stark contrast in motivation and philosophy between the two leadership teams).

Unfortunately, a horizontal strategy does not necessarily equate to those kind of numbers. With Red Hat as the notable exception, it is hard to find a commercial open source company with financials that Doug, the board, and investors are looking for.

Do the math. Let’s assume there are 50,000 installs of Alfresco Community Edition. I have no reason to believe that is accurate–this is just an exercise. What kind of conversion rate would you expect? You’ll probably guess too high, forgetting that Alfresco is now very expensive, even for modest installations, and that the company is still working to add more differentiation in its paid offering compared to the free product. Let’s use 2%. So that’s 1,000 paying customers, which is roughly the number John Newton disclosed publicly in a keynote several years ago. It’s probably higher now, but remember that there is attrition we haven’t accounted for and those customers have to be earned year after year.

Now, what do you think the average sales price of Alfresco is across all of their paying customers? Again, just spit-balling, let’s say it is $100k annually. Multiply that times 1,000 and that’s “only” a company with $100 million in annual revenue. If you’re looking for a $1 billion IPO, that’s not enough. (If EMC sells Documentum to someone for 10x revenue I’ll have to update this post, but I think I’m pretty safe).

In a horizontal strategy, those are your levers: Total installs, conversion rate, attrition, average sales price. For example, using the horizontal approach, to increase revenue from $100 million to $300 million you would have to triple the number of Community Edition installs from 50,000 to 150,000. Alternatively, you could keep CE installs steady at 50,000 and instead triple your conversion rate from 2% to 6%. Which seems easier?

My bet is that rather than increasing total Community Edition installs, Alfresco will find it easier to increase the conversion rate by increasing differentiation between the two products, cutting attrition by implementing “customer success programs” and consulting, and continuing to put upward pressure on the average sales price by charging more for the core product and finding new paid add-ons to sell.

The horizontal approach Peter advocates may be the one we all wish would work, but I think that ship has sailed.