Part two: Are open source vendors more capital efficient?

In my previous post, I compared Red Hat’s financials to Microsoft’s results to test whether open source vendors are more capital efficient than commercial vendors. I was not able to conclude that they are.

However, Zack suggested:

I’m not sure this is a fair comparison. Microsoft’s scale is several orders of magnitude larger than Red Hat. If you want to do a fair comparison, use companies with similar scale in terms of revenue, employees, etc.

Very valid point. So I quickly looked at Tibco, a commercial software vendor whose revenue is within $150 million of Red Hat’s, have a similar employee base of approximately 2,200 and were founded within two years of each other. Here’s what I found (percentages are percent of total revenue):

Red Hat’s operating expenses are 87 percent of revenue compared to 90 percent for Tibco. If Tibco did not amortize acquired intangible assets, then the operating expenses would be 87 percent in FY2008. Both vendors spend just over 35 percent of revenue on sales and marketing and a little more than 17 percent on R&D. Tibco appears to have a more slightly efficient organization as their general and administrative costs are 8 percent of revenue, half of Red Hat’s 16 percent. Keep in mind both vendors have the same employee size and close to the same revenue base.

Based on this comparison, I still can not conclude unequivocally that mature open source vendors are more capital-efficient than commercial software vendors.

p.s.: I should state: “The postings on this site are my own and don’t necessarily represent IBM’s positions, strategies or opinions.”