Someone is going to win big in Hadoop. The overall victor remains to
be seen, but Wall Street’s paltry $659 million valuation of Hortonworks
suggests that a Red Hat-esque approach to big data isn’t a winning
hand.
That isn’t to say, however, that Cloudera’s more proprietary
approach will prevail, either. Arguably the right way to consider
winners and losers in the Hadoop market is by analyzing who can afford
to invest most in making it simple to use.
Jumping the gun
But
first, the obvious: Hortonworks never should have filed to go public.
In his roadshow presentation, the Hortonworks CFO tries to color the
company’s numbers as successful according to “nonstandard optics.” But
in reality, the balance sheet is bleeding red,
much of its revenue is tied up in only three big customers, and 43
percent of all revenue is derived from low-margin professional services,
Hortonworks should have waited before going public.
Why didn’t it wait?
According to Gartner analyst Merv Adrian,
“The answer may be really simple.... If not now, when? There may not be
a better time.” Others argue that the decision to file early was meant
to get out in front of an impending Cloudera IPO, which will generate
more than $100 million in revenue in 2014. Cloudera claims to have twice
the number of customers as Hortonworks and narrowing losses.
This
isn’t to suggest Horton works is struggling. Despite seeing its
valuation plummet to $659 million from a reported $1.1 billion at its
Series D financing in March, Hortonworks has been growing revenue fast,
generating more than 100 percent year-over-year growth.
But while
Hortonworks CEO Rob Bearden previously claimed it would finish 2014 “at a
strong $100 million run rate,” the reality is that it fumbled its third
quarter, generating a mere $12.8 million in revenue, or roughly half of the promised $100 million run rate, as The Wall Street Journal reports.
The problem may come down to business model.
Infrastructure: Open by default
For
years Hortonworks has touted its business model as its not-so-secret
sauce. Like open source powerhouse Red Hat before it, Hortonworks
open-sources all its software and charges customers for professional
services and support subscriptions.
Hortonworks can be forgiven for believing the Red Hat model would work. After all, as Cloudera co-founder Mike Olson observes, “No dominant platform-level software infrastructure has emerged in the last 10 years in closed-source, proprietary form.”
If
you want to play in the infrastructure space, you have to be open
source -- period. Hadoop is the heart of data infrastructure. Of course
it has to be open source.
There are a number of reasons for this
insistence on open source, but the rising importance of developers
offers perhaps the most cogent explanation. Developers expect open
source. While a business user may be content to pay for her apps, the
developer wants her software to be free, available under flexible
licensing terms.
Open is not enough
The problem, however,
is that “open” can’t be the complete answer, not if we want the software
developers to remain in business long enough to write the software.
As Olson points out:
It's
pretty hard to build a successful, stand-alone open source company.
Notably, no support- or services-only business model has ever made the
cut. Red Hat, the apparent exception, isn't: The company rode its
closed-source Red Hat Network offering to dominance, effectively
crushing the competition before releasing that hosted infrastructure as
open source in 2008.
As such, Cloudera has tried to strike a balance between
proprietary software and open source. Having walked this same tightrope
for years, I know how difficult it can be. But I would also agree with
Olson that it’s essential.
At least, it's essential for the
businessperson. But what about those developers? I asked Doug Cutting,
Hadoop’s founder (and Cloudera executive), what he thought about this
blending of proprietary and open source code. His answer is
illuminating, as it suggests that both Hortonworks and Cloudera may be
right, albeit at different times:
Over time enterprises
will realize that a high-quality support offering has unique value and
is worth a premium. In the pre-open-source-software world this was
clouded by inflated software licensing fees that subsidized support
costs. As licensing fees now shrink, enterprises still need just as
much vendor attention, including bugfixes and development of new
features.
Payment for that needs to come from
somewhere, and it will gradually shift from software licensing fees to
support subscriptions. But that change won't happen overnight and may
never be total, so in the interim, it may be wise to adopt a hybrid
strategy like Cloudera's.
Halfway open source
So
far, the market seems to favor Cloudera’s model. Cloudera raised its
last gargantuan round of financing at a valuation of more than $4
billion. But it’s not yet clear that these billion-dollar unicorns will
fly, especially if fueled by the promise of customers paying for free
software.
While Hortonworks points to its 100 percent open source
policy as a market strength, Wall Street’s $659 million valuation begs
to differ. In part this is because Hortonworks may be putting too much
faith in the “Expand and Renew Phase” of its business model (screenshot taken from its roadshow presentation), the very phase that 451 Research analyst Matthew Aslett called an “open source dilemma” years ago. The
cause of this dilemma? Early subscription revenue is highly
unprofitable because the early years of the subscription are when a
customer needs support the most. But eventually they grow comfortable
with the technology and stop renewing ... exactly as the customer
becomes profitable.
This led Olson to conclude, “You can no longer
win with a closed-source platform, and you can't build a successful
stand-alone company purely on open source.” Perhaps Hortonworks will
eventually reach the same point.
Hello, my name is Mohd Azahar. I'm a self-employed Pivrate from the India.
No comments:
Post a Comment