Is Open Source Recession-Proof?

Lofty oil prices. Sub-prime mortgage woes. Financial companies (Citigroup, Etrade) stumbling badly. Ouch. Ouch. And Ouch. Whispers of a potential recession ahead continue. That made The VAR Guy wonder: If the U.S. heads into a recession soon, are open source companies better positioned to weather the storm than their closed source counterparts? Let’s take a look.

At first glance, open source companies have the upper hand against their closed-source counterparts during economic slowdowns. Big businesses already are migrating their Unix-based systems to more cost-effective Linux servers. One could argue those migrations will accelerate if corporate IT budgets get cut. And for new projects, IT departments would likely look at open source first because of its initial (and potential long-term) cost advantages over closed-source alternatives.

In theory, open source companies also win on the employment front during difficult economic times. By leveraging a worldwide community of developers committed to the open source movement, they often don’t suffer from the big salary structures seen within Microsoft, Oracle and other traditional software providers.

While companies like Symantec continue to cut staff heading into 2008, nimble open source providers continue to recruit employees. So far, so good for open source companies.

Now For The Bad News

Still, perhaps things aren’t so cut-and-dry. When stocks tumbled in 2001, Red Hat shares fell far further than those of Microsoft and Oracle.

Take a look at this chart tracking Microsoft, Oracle and Red Hat shares since 2000. Red Hat investors certainly didn’t think the company was recession proof when shares fell from $95.12 in January 2000 to $7.10 in December 2001 (adjusted for splits). Of course, Red Hat shares were also suffering from irrational exuberance ahead of the downturn.

Even so, The VAR Guy believes open source companies like Red Hat, MySQL and SugarCRM are in far better position — during strong and weak economic times — than their legacy software counterparts. After all, it’s hard to bet against a global software movement where thousands of talented developers lend a hand … at little or no financial expense.

One prime example: Marten Mickos, CEO of MySQL, estimates that the open source community has 1.2 million full time equivalent (FTE) employees writing code. In stark contrast, Microsoft has 71,000 employees, Mickos noted at a recent conference. Which group would you bet on over the long haul?Before you answer, consider this: SurgarCRM has experienced record growth in recent months. And MySQL continues to monitor financial markets for an opportune time to launch a potential initial public offering. If MySQL finds the courage to go public during a soft economy — or even a recession — it will be the ultimate vote of confidence in the open source business model.

Oh, and one piece of full disclosure: The VAR Guy owns a few shares in Red Hat, but certainly not enough for him to kick back and relax during good — or bad — economic times.