Software Pricing and Business Models Maido Käära, Rando Mihkelsaar, Martin Raie, Lauri Vare, Rainer Villido

Software Economics - Homework 4 Software Pricing and Business Models Maido Käära, Rando Mihkelsaar, Martin Raie, Lauri Vare, Rainer Villido 1. In 2003, Scalix delivered zero revenues. Identify and analyze the possible reasons for this failure. In 2003 Scalix sales strategy was built around the notion that there were plenty of medium and large enterprises who were not satisfied their current e-mail system. There was two major companies offering e-mail solutions and switching to Linux-based e-mail solution was expensive. Also administrators didn't have skill set or the comfort to move to Unix-based e-mail systems. Because Scalix was a start- up it faced with the challenge of establishing credibility. Pilots showed that the product wasn't mature - users wanted more functionality (for example single-sign-on, Active Directory, Windows-like graphical administration environment support) compared to Microsoft Outlook. 2. Who were the target customers of Scalix as of June 2004? What obstacles was Scalix facing in June 2004 and what were their options for overcoming those obstacles? The target customers before were medium and large enterprises looking for a corporate messaging solution. Large enterprises had lack of trust in Scalix as a small start-up that had not gained any customers. Until June 2004 the only customers they had were from mid-market public sector deals like city of Bloomington, Indiana with about 800 seats and the county of Pottawattamie, Iowa with about 300 seats. They also tried to extend their business to international market and small enterprises. There were two main obstacles for Scalix. First one was selling to international customers. Because setting up an European telesales organization was difficult for a number of reasons they overcome that problem by signing up resellers to focus on the German small enterprise market. Second problem was with domestic small enterprises like Cincinnati Financial which is a holding company with subsidiaries which underwrite fire, automobile, casualty and other forms of insurance. They had 3000 employees and were vigorous Linux adopters. Problem was that Scalix didn't have everything in place by that time, like 24/7 support which is very important for a company that size. Also Cincinnati Financial didn't really like the idea that Scalix didn't have any other clients their size. To overcome their problem they needed to get more clients and get their services like 24/7 support up and running. The main problem was a lack of trust caused by lack of customers. In order to gain trust, they needed to gain more customers to use their solution. Open sourcing would be a way to penetrate small enterprise market by letting the product to be free for small enterprises. That way, they would get more users to their solution and would build up their trust in large enterprises to whom they could sell their corporate product. 3. Using the framework exposed in the article by Rajala et al., analyze the business model of Scalix Corporation at the time the case study was written (2005). The framework described in the article is used to analyse software companies' and their business models. The categorization of different business models is based on the following four features: "product strategy", "revenue logic", "distribution model", "services and implementation". The values of those four features for the Scalix Corporation are as follows: ● Product Strategy - Uniform core product Scalix is an enterprise e-mail, calendar and collaboration software solution. ● Revenue Logic - License sales and royalties Revenue is collected from licenses sold (per seat pricing) and yearly maintenance fee. ● Distribution Model - Direct contact with customers Direct contact between customers and Scalix's inside sales representatives and field sales representatives. ● Services and Implementation - On-line services, Self-services Software is deployed and maintained by customers themselves. Scalix offers on-line technical support. 4. In July 2006, Scalix adopted an open-source strategy. Analyze the open-source strategy of Scalix, the reasons for adopting this strategy, and the impact of this strategy on the business model of Scalix. Scalix now has dual licensing model. The Scalix Public License is based on the Mozilla Public License and is a non-permissive license. There is also a commercial license for the Scalix enterprise product. The Community Edition is a product for organizations that don't need the Enterprise Edition and can still use the messaging solution. Since they had difficulties building up their customer base and many new customers wanted to see larger customer base before they agreed to adapt to Scalix. They didn’t trust a start up without customers. Open Sourcing lesser version (Community Edition) of their product would help them gain customers from smaller companies so that larger companies would follow with paying for the enterprise license (Enterprise Edition). According to Scalix, the product has rapidly gained popularity after the open source version was released. Becoming more popular and widely used would make them more trustworthy for larger enterprises as selling enterprise licenses, proprietary components, product support and training are the main sources of revenues for Scalix. Before open sourcing, the successful sales have been with mainly smaller companies (and in public sector) who consciously want to adopt Linux and cut costs on IT spending dramatically (like Pottawattamie County for example). Very often these companies have people in their IT staff (so called Linux guys) who know more about Linux and are more likely to prefer Linux over Microsoft. The smaller the companies are, the more likely techies can influence decision making. Many customers had discovered Scalix on their own and not with help of intensive sales force. This was a new market segment for Scalix that provided new opportunities. Also, many new competitors from Linux world were emerging. Companies like Novell (with their GroupWise enterprise collaboration solution), Stalker Software, and Bynari all provided their own Linux-based messaging solutions. Scalix product was further behind than his competitors and something needed to be done about that. Being open source, Scalix can have relationships with other related open-source communities to support the product, like support for anti-virus, anti-spam etc. As a result of open sourcing their product, Scalix gained more popularity and trust in their product and can sell it more easily to the enterprise customers who are willing to pay for the enterprise license and additional services. These customers are their main target market. 5. In July 2007, Scalix was acquired by Xandros. Analyze the business reasons behind this acquisition both from the viewpoint of Scalix and that of Xandros. How has Scalix been integrated into Xandros? In different news about this acquisition the representatives of both parties tell why this deal was good for them. We don't know the actual business reasons behind this but according to the news it seems that it was meant to be and both parties are pleased with it. Even the FAQ-s on Scalix's home page say that it was natural to explore the acquisition - Scalix and Xandros have already had close engineering and executive level working collaboration. Scalix wanted to expand their business but they seemed to have not enough resources for that. They were too small to make large enterprise customers trust them. Acquisition by Xandros increased their credibility. It also gave them access to much larger financial and engineering resources and significant new technologies in order to maintain, develop and enchance their products. Furthermore, Scalix will continue to operate independently and their products will continue to be developed with the same vision and roadmap as planned and the interoperability of Scalix on Xandros, RedHat, SUSE Linux and other distributions will remain exactly the same. Xandros will also continue Scalix-related open source projects. Scalix customers will benefit from strengthened support and service offerings provided through a larger combined reseller and partner network. With more offices around the world they would get new customers more easily too. So, from Scalix's point of view everything seems to be great. The only negative side is that they don't own the company anymore but the money they got from the deal should have compensated this. Even the sales support and engineers staff stayed on with Xandros, although vice president of finance left the company. The President and CEO Glenn Winokur stayed through the transition and became a member of Xandros' advisory board. From the viewpoint of Xandros, the aquisition was quite good as well. Xandros was looking to build up their solution stack. They already had desktop, SMB and advanced enterprise servers and management tools to run these. But they felt that one of the most important components of an end-to-end solution is e-mail. Having an e-mail server would be a huge benefit. And since Scalix had been the leader on open source market it was the best choice. Now all important elements of their solution were under one roof. Xandros had already integrated Scalix into their desktop and server but now they were looking to add significant dimensions to it. Mainly they have brought out the fact of fulfilling their vision of being an end-to-end solution company. Now they just had to make their investment to earn back. Otherwise the acquisition would not have been that good. The current tight integration of Scalix within the Xandros Server provides an all-in-one groupware solution that can be centrally administered through the remote, all-graphical Xandros Management Console. The combined solution provides business clients with scalable industrial strength world-class e-mail and calendaring, with choice for a wide array of e-mail rich clients, including Outlook, Thunderbird, the AJAX-based Scalix Web Access Client, as well as various popular wireless handheld devices.

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