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When the (OpenStack) consolidation comes...

Nick Chase - April 14, 2015

“Building an open-source company requires operational excellence and staying power, not just genius hackers with a vision of taking down VMware," Mirantis co-founder and chairman Alex Freedland told Techcrunch this week. As much as we'd like for open source to be about passion and changing the world, the reality is that virtually all of the thousands of people who are contributing to OpenStack are getting a paycheck, and that money has to come from somewhere. 

For businesses such as IBM, HP, Red Hat, and so on, that money comes from other areas of the business. For startups such as Mirantis, Piston, CloudScaling, and so on, that money comes from venture capitalists. But whether those venture capitalists recoup the returns they're looking for has to do not just with OpenStack itself, but the playbook they follow on the way. "Startups and VCs that run the company by the innovation playbook fail," Freedland said, "while those that focus on expertise first — and thus the open source playbook — do well. This is what we are witnessing in the OpenStack space.”

In response to a BusinessInsider article wondering about the state of OpenStack venture capital investments, Freedland explained that some open source companies miss the mark because they choose the wrong business model, following an "innovation" playbook (creating a differentiated product with an eye towards a relatively quick return) rather than an "open source" playbook (a combination of products and services, with a longer-term outlook).

The last year has been one of consolidation for OpenStack, as one startup after another has been acquired by larger companies. Cloudscaling went to EMC. Metacloud went to Cisco. eNovance went to Red Hat. As Paul Miller pointed out in Forbes, "A solid acquisition by a bigger company looks like – and gets reported as – failure. It’s not. It’s consolidation, and it’s sensible."

And then there's Nebula. Almost two weeks later the industry is still reeling from the OpenStack appliance maker's closure, which has given fuel to the naysayers who think that OpenStack isn't living up to its potential and contributes to an air of negativity. The same goes for Piston's move to add other services to its CloudOS offering.

But both are exceptions that prove the rule; Nebula offered an inflexible appliance that didn't take advantage of OpenStack's modularity and freedom of choice to a market that was, as many pundits pointed out, not yet ready for it. Piston's move does just the opposite; it moves from a similar inflexibility in its OpenStack deployment to a more flexible stance that enables users to change out components (at least on the non-OpenStack side of the process). Both show an acknowledgement that OpenStack's value is in its ability to adapt to different environments.

Even Storm Ventures Managing Director Ryan Floyd, who was quoted in the BusinessIntelligence article, speaks positively of OpenStack's maturity. On a podcast the week before Nebula's announcement, Floyd  said he believes there’s lots of opportunity for startups and large companies to help enterprises implement OpenStack and deliver value on top of the open source core. that contrary to belief, OpenStack is mature. “While OpenStack is still relatively still difficult to use, it’s not simple, I would argue today it’s mature. I would argue today you can put it in production, for people that know what they’re doing, and they can get it to work. And we couldn’t say that easily two years ago.”

So where does all this leave the state of OpenStack investment?  If it's any indication, just 12 weeks ago OpenStack provider Blue Box closed a $14 million investment round. But the "irrational exuberance" we saw in earlier stages may have given way to a more sensible -- some may even say "boring" approach.

The successful open source playbook, Freedland said, followed by companies like Red Hat, Cloudera, and Hortonworks, is to sell services engagements around the ecosystem and build customer intelligence, invest to build influence in the upstream communities by contributing directly to the code base you’re betting your business on, offer training, and add commercial packaging of the technology. “The differentiation is not in the technology you build; it is in the process and expertise that you slowly amass over an extended period of time."


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