[via Bernard Golden]

An absolute must-read. Lot of very interesting inputs, totally aligned with what we would like to do in ecenter solutions.

Ray Lane outlined the miserable state of the software industry: 5,000 private and public companies, of which the top 15 account for 85% of industry revenues; of that 15, three represent 75% of all profitability, and one (Microsoft) is responsible for 50% of total industry profitability.

Even worse is the fact that each year venture capital firms plow another $5 billion into software startups, further increasing the pile of zombie companies all desperately scrambling to get the attention of an increasingly inattentive end user population.

Underlying all of this activity is a blood lust for the single most thrilling aspect of the software industry: enormous margins. Margins higher than any other industry ever invented. Margins so high that successful software companies can spend – literally – billions of dollars on pointless initiatives with scant regard for normal returns on capital (can anyone say MSN?).

For software, that perfect meeting was the substitution of automated processing for increasingly expensive manual labor.

Less recognized is the software scarcity present in the user base. Here, in a mirror image of the vendor side, is a skill shortage. Not only in the easily-understood capabilities of programmers, system administrators, and capacity planners needed to install, configure, and manage the software, but in more fundamental capabilities like understanding what the most appropriate applications for a new technology are; high ROI scenarios for the technology; how to integrate the new technology into existing business processes. In other words, the scarcity on the user side isn’t just about specific technical skills; it’s much broader, implying a shortage of general knowledge about how the new technology can be used at all.

There’s only one problem with this scenario: we’re no longer in a time of software scarcity.

On the user side, software is now a regularized process. With over twenty years of experience in creating and implementing systems, users are very familiar with software and need much less hand-holding in terms of education and selection. Most companies (certainly those of a size to represent quota-busting deals) have large IT staffs skilled in architecture and design. So now, instead of seeking guidance from vendors, they are much more likely to be focused on the lowest price to meet their self-defined needs. In any case, they’re sick of the vendor-knows-best, sign-here, best-of-luck-with-the-implementation software business model.

It’s on the vendor side, however, that the biggest changes have happened. The capital costs for software development have dropped through the floor.

Which means the business proposition for software has to change. In a time of scarcity, customers are willing to pay nearly anything – up front – in the hope of solving their problem. In a time of glut, customers will pay nothing until it’s clear that the software will actually solve their problem.

In other words, customers will only part with money once the system is in production. Put another way, since they have so many choices, until they’ve actually got one in and running – and they’re dependent upon it reliably working — they don’t need to pay anything.

Which means the primary task for any open source company seeking to make money from software is to make it as easy as possible for customers to adopt their software. Reduce the barrier to adoption. Anything that doesn’t contribute to that is, at best, a distraction, and, at worst, counterproductive.

The rules have changed in the software business. The only way to make money is to solve real customer problems. And you don’t get paid until you accomplish that task.

So what’s an open source company to do? It’s clear that business only comes from people committed to using the product – and only from a minority of them (estimates of the percentage of customers using an open source product in production that actually make some sort of purchase range from one in 10,000 to one in 100). So focusing on those users who download the product and go on to put it into production is vital.

First, make the product as easy to install and configure as humanly possible. Because we live in a time of software glut, if a user can’t get the product up and running quickly, they’ll move on and download another product. Poor usability is like throwing marketing leads away.

Second, make all your interactions with the user meaningful. If you offer webinars, have them deliver actionable information. This typically means technical information targeted at extracting maximum value from product use. MySQL does a good job at this; every week I get an offer to learn things like how to set up a clustered architecture – key teachings to help me get more value from their product.

Third, and most important, help people use the product. This means participating in the support mailing lists and forums and assisting people struggling with the product.