Open Source Company as Costcoparallels weak and strong

Heather Meeker just shared a recorded talk for the ZOOOM Conference on YouTube. It’s worth watching.

A few quick thoughts of my own:

Parallels

First, I think this is a really interesting work of parallel-drawing. On the tactical level—marketing, hiring, reputation—I suspect comparisons can be really fruitful. It’s tempting to draw a broad distinction between go-hard-go-fast and steady-slow companies. We see companies succeed on both ends of that spectrum in software, too.

However, I think the broader analogy to Costco wobbles a bit, fundamentally. Costco charges membership fees. While revenue from sales make the big numbers on its financial statements, analysis I’ve read suggests most of its profits come from the fees. As Heather pointed out, they have millions of members. As I write, membership runs $65 per year, minimum.

The only thing I’m aware non-members can get from Costco is free entry to buy alcohol in some states, due to quirks of state laws. Otherwise, you have to buy a membership to reap any of the benefits of Costco’s selection, procurement, and pricing. That cost of entry is why Costco shoppers tend to be either relatively well off or businesses buying to resell.

Companies developing open source software projects charge customers, too. Their book of business may feel a bit like a club, especially as compared to the often larger group of “community” users. But the open source work that makes those companies “open source companies” aren’t club goods, but public goods, the kind with all the cursed funding problems.

I’m not aware that Costco offers any products or services gratis to any part of the public outnumbering its paid membership, other than at a huge leap up in abstraction, doing some corporate charity and being a business that buys land, hires people, and pays sales taxes, with publicly traded stock. To Heather’s point, Costco actually seems to do little if any cross-subsidizing on principle, with the possible exception of loss-leader hot dogs and perhaps rotisserie chickens. But even those eye-catching deals are limited to paying members. They’re benefits of the club—inducements to join, then to go to the store, then to wander through it once you’re there. Hot dogs are at the front. Chickens are at the back, past a lot of other merchandise.

At the risk of floating one bad analogy to sink another, imagine Costco announced that it would open a parallel chain of smaller corner stores in cities. The new stores would be branded “Costco” and follow all the same markup and stocking rules, but wouldn’t require any membership for shopping. Instead of selling items by the boxful, “Costco Corner” would sell small multipacks. They wouldn’t sell large items like furniture or electronics, but would carry more snacks and personal items.

Arguably, Costco Corner would not inhabit the same market segment as Costco Classic. Many of its potentially regular clientele—urban shoppers taking transit, single people, low-income renters—would not overlap with Costco’s membership. The store chains could be termed complementary, rather than competitive.

But I suspect critiques of Costco as a charity benefiting shoppers—not just paying members, but any shoppers—would gain more bite. Internally, I’d also expect more of the kinds of tensions and dramas we so often seen in open source companies: people working on the “business” side who’d rather work on the “open” side, fights about how much “closed” should spend on “open”, debates about whether new products or services should be paid or free, and, of course, questions from current and potential stock owners about whether the “open” sideline is really serving the business.

Costco is a members-only shopping club reselling physical goods made by others. It’s fun to say open source companies are somehow like Costco, because Costco’s doing well and people like it. It’s a lot harder to say Costco is much like open source companies.

Worthless IP

Heather shares an interesting cost-comparison table of SaaS sold by the seat, above free tiers:

This on her way to a point about the value of intellectual property: “Where are all the royalties for IP?”, she asks. Seen that way, the only IP that really matters is branding. IP as in trademarks.

But I can read this table another way: These companies aren’t failing to get money for their valuable IP, they’re failing to get the IP that’s valuable in the first place. The kind you can enforce to protect yourself from getting undercut by cloners. Cloners who don’t have to invest or recoup your research and development effort. Proprietary SaaS companies without meaningfully undercutting “open” competition don’t make this table by definition.

Advising companies, I also sing the song of reputation’s importance. Perhaps especially as a deals guy, it’s important to remind myself how much opportunity gets created, and business gets done, thanks to confidence that doesn’t need the clarity or enforceability of written contracts.

At the same time, “reputation” is comfortably fuzzy, like its cousin “goodwill”. It can be tempting to avoid hard, awkward accounting by incrementing a catch-all that makes everything just add up. It can be tempting to forget how fragile business reputation can be, or the edge hard times can bring to the soft and cooperative luxuries of business that grow plush in a good economy. There’s real money to be made simply being the person or team who is willing and available to do a thing, even a thing others could step up and do, and maybe would if the money were better. But having a more established defense than that—building a “moat” of the IP kind or some other—is better than not having one.

It’s well within a businessperson’s discretion, and not unavoidably wrong, to choose to forgo “strong IP” and other heavier-handed advantages. But we should all be clear when that’s what’s going on. There are plenty of software offerings out there without more “open” competitors. Some of those are charging a lot more per user, in part because nobody else offers a substitute for less. At least not yet.

A cooler financial climate has historically meant customers willing to look deeper into offerings for the sake of cost-savings. It has also meant customers revisiting products, services, prices, and vendors, sometimes switching to cheaper, less savory knock-offs, just rewards be damned.

Your thoughts and feedback are always welcome by e-mail.

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