economic impact open source pdf pdf

  Economic Impact of Open Source on Small

Business: A Case Study Mike Hendrickson Roger Magoulas Tim O'Reilly

  Published by O’Reilly Media Beijing ⋅ Cambridge ⋅ Farnham ⋅ Köln ⋅ Sebastopol ⋅ Tokyo

Preface

  This report was inspired by a conversation between Tim O’Reilly and Hari Ravichandran of Endurance International Group (EIG). Hari remarked that his web hosting business had been

enabled by open source software, and that he wished he could find more ways to give back to the

communities that have made his success possible. Tim suggested that a novel way to give back

would be to work together on a study making clear just how much of a role open source software

plays in the hosting industry, and by extension, in enabling the web presence of millions of small

businesses.

Hari graciously agreed to provide data collected by EIG’s Bluehost division as the basis for this

study. What we have tried to do here is to help broaden the discussion of open source software’s impact beyond "the usual suspects" like Red Hat, MySQL, and other pure-play open source

companies, and instead to focus on how open source has been a direct enabler not only of Internet

companies, but of any business that enjoys an Internet presence.

One of our sayings at O’Reilly is "Create More Value Than You Capture." Open source software

is one of the great examples of that principle. Rather than measuring the value captured by

companies that provide open source software or services based on that software, this report tries

to hint at how value is instead captured downstream by users of that software.

  Open source developers are unsung heroes of our economy. It is not always the business titans, who have managed to extract a significant fraction of the value they have created, whom we should celebrate as the wellspring of economic growth. Those who have put their work into the commons, enriching the soil from which other businesses can grow, have an untold economic impact.

This study is an attempt to initiate a deeper conversation about hidden sources of value creation

in our society. In a time when traditional ways of doing business have resulted in economic chaos,

as financial companies focused more on extracting value from the economy rather than on creating it, it is worthwhile to reflect on what open source software can teach us about how to build a world in which, as Eric Liu and Nick Hanauer say in their book Gardens of Democracy, "We all do better when we all do better."

Chapter 1. Executive Summary

  Because the Internet’s infrastructure is largely dependent on open source software and open protocols, it’s fair to say that open source has played a significant role in the economic impact of the Internet. This impact is both direct—in the revenues of Internet companies themselves—and indirect, in the increased revenues attributable to businesses because of increased visibility, efficiencies, or commerce on the Internet. But because open source software is not monetized directly by most of those benefiting from its use, it tends to disappear from economic analysis.

  Web hosting shows how open source software impacts the economy: web hosting companies rely on open source software to provide the infrastructure required to generate monthly subscription fees, small and medium sized businesses (SMBs) get low cost access to the Web and the open source tools to build a web presence—extending access to customers and transactions for existing companies, and creating a new breed of company that could not exist without the Web. In this report, we use a unique data set, as well as survey data, provided by the Bluehost division of Endurance International Group, a web hosting company that provides hosting services to over 2 million customers, most of them small and medium sized businesses. There are areas where we believe Bluehost’s data provides a reasonable proxy for the SMB hosting market. The Bluehost data is used to analyze the actual software used by their customers, estimating the cost savings provided by open source software. We project the total economic impact of open source software as an enabler of the web hosting market as well as the economic impact on the SMBs who make up its customers.

  Bluehost offer customers a web infrastructure and programming tools rich with open source components like PowerDNS, Linux, Apache, and MySQL, and open source programming languages like PHP, JavaScript, Perl, Python, and Ruby. Bluehost also offers open source tools like Content Management Systems (CMSs), dominated by WordPress, and e-commerce tools like osCommerce, Magento, and PrestaShop.

  While offering open source software via web hosting and domain name registration is a multi-billion dollar business, we show how open source generates even greater economic impact by creating a platform fostering the increased success of the small and medium sized businesses that make up the majority of web hosting customers.

  Here is some of what we learned from the Bluehost data and follow-on research: 60% of web hosting usage is by SMBs, 71% if you include non-profits. Only 22% of hosted sites are for personal use.

  75% of customers build their own site using simple site-builder tools. Another 6% have it built by a family member. Only 13% use professional web developers. The majority of the websites are informational; only 14% have an online store (including non- profits that take donations online). Nonetheless, nearly 20% of businesses in the survey say they derive more than 50% of their revenue from their website. The majority of hosted businesses are very small. Only 15% have revenues in excess of $50,000/year, yet collectively, we believe these businesses represent a trillion dollars of economic output.

  2:1. WordPress is a far more important open source product than most people give it credit for. In the SMB hosting market, it is as widely used as MySQL and PHP, far ahead of Joomla and Drupal, the other leading CMSs.

  Languages commonly used by high-tech startups, such as Ruby and Python, have little usage in the SMB hosting market, which is dominated by PHP for server-side scripting and JavaScript for client-side scripting.

  Open source hosting alternatives have at least a 2:1 cost advantage relative to proprietary solutions.

Chapter 2. Introduction

  By most traditional measures, pure-play open source companies appear to have had a relatively modest economic impact. Red Hat, the largest open source software company, had revenues of $1.13 billion for the fiscal year ending February 29, 2012, and a market capitalization of $10.8 billion as of June 2012. MySQL was sold for $1 billion to Sun Microsystems in 2008. After the sale of Sun to Oracle, MySQL has estimated revenues in the range of $171 million, and MySQL ecosystem revenue is expected to grow at a CAGR of 40% to reach $664 million by 2015 . There are many smaller companies that directly monetize open source software programs, but none have achieved the scale of either of these market leaders.

  Yet there is no question that open source software has had a profound economic impact that belies these numbers. Companies like Google, Amazon, Facebook, and Twitter are built on open source platforms. All of them run on Linux, make heavy use of open source databases and languages, and contribute to the open source communities they rely on. They have built a proprietary layer on top of the open source stack, analogous to the way Microsoft builds applications on top of Windows, or Apple creates operating systems and applications for its various devices from a common platform. Even Apple bases many of its platforms and products on open source software and offers many Open Source languages, databases and other tools for developers.

  And the economic impact is clear: Google had 2011 revenues of $37.9 billion and market capitalization of $189 billion. Facebook had 2011 revenues of $3.8 billion and market cap of $82 billion, and Amazon had 2011 revenues of $51 billion and a market cap of $103 billion. It is difficult, however, to apportion the value of the Open Source databases, programming languages, tools and Web software infrastructure in creating the success of companies like Google, Amazon and Facebook, as they all mix Open Source components with proprietary software. Fortunately, we know another market where we can more directly tie value to Open Source software: the Internet Service Providers (ISPs), domain name registrars and web hosting companies that rely heavily on Open Source components to provide access to web services for their customers. According to IBIS Research, the total size of the Internet service provider market in 2011 was $79 billion.

  ISPs typically provide both a data pipe and a set of basic Internet services, including email and web access. They may also provide web hosting, and with it, domain name registration services. It is difficult to allocate the value provided to customers of an ISP between "the dumb pipe", or access to free (but not open source) services such as Google, Facebook, YouTube, Twitter, and millions of websites, versus use of open source email and web tools, but there’s no question that without the existence of the free and open source software of the Internet, this huge and profitable market would not exist. In the case of the domain registry market, the allocation of value to open source software is simple. Domain name registration is essentially a service business based on the open source Berkeley Internet Name Daemon, or BIND, which (along with a few related programs, like PowerDNS) provides the Internet’s Domain Naming System, or DNS. It is fairly reasonable to ascribe the entire size of this market to open source software. Many domain name registrars also offer web hosting services based on Linux, Apache, MySQL, and a variety of other open source tools. We estimate the domain reported revenue (before going private), and on estimated market share for the top providers, including GoDaddy, Endurance International Group (EI), Enom, Network Solutions and 1&1.

  These direct Internet businesses are just the tip of the iceberg. According to a recent McKinsey study, Internet-related businesses now represent approximately 3.4% of GDP in 13 countries they studied (including the US), and 21% of GDP growth over the past five years in mature economies. The report also notes that 75% of the Internet’s economic impact comes from tradtional business; that SMBs get a 10% productivity boost from internet usage; and, that SMB’s with heavy investment in web technologies grow twice as fast as those with little or no web presence.

  Because the Internet’s infrastructure is largely dependent on open source software and open protocols, it’s fair to say that open source has played a significant role in this economic boom. But because open source software is not always tied directly to revenue, it tends to disappear from economic analysis.

  In 1975, environmentalist Steve Baer described in his book Sunspots (Zomeworks) this kind of indirect economic impact by way of an analogy he referred to as the "Clothesline Paradox": If you take down your clothesline and buy an electric clothes dryer, the electric consumption of the nation rises slightly. If you go in the other direction and remove the electric clothes dryer and install a clothesline, the consumption of electricity drops slightly, but there is no credit given anywhere on the charts and graphs to solar energy, which is now drying the clothes.

  So too it is for the Web and for open source software. Tim Berners-Lee put the Web into the public domain, the most open of all open source licenses; as a result, like the ecosystem services provided by the sun, the open source software that makes the web possible disappears from our accounting. (In an interesting example of the Clothesline Paradox, it’s worth noting that while Internet users are often accused of enjoying free content, and being unwilling to pay for what they receive, they in fact typically pay substantial sums to their ISPs as a monthly subscription for access to these "free" services. Simply by comparing the economics for the Cable companies and other ISPs for consumers who use Internet services to those who watch television, you can see that it is the ISP, not the consumer, who is getting the free ride. On the television side, the Cable company must pay for content; on the Internet side, the Cable company gets content for free, with much of it created by the very customers who are paying them for access.) Web hosting shows how open source software software impacts the economy: web hosting companies rely on open source software to provide the infrastructure required to generate monhtly subscription fees, small and medium sized businesses (SMBs) get low cost access to the web and the open source tools to build a web presence - extending access to customers and transactions for existing companies, and creating a new breed of company that could not exist without the web. Web hosting firms (including the web hosting component of Internet Service Providers) effectively provide access not only to a web server but also to domain name registration, programming languages, content management systems, e-commerce apps and other software components for which there are both proprietary and open source alternatives. However, they overwhelmingly provide open source software as their first alternative. According to Netcraft, 85% of all websites are hosted on open source web servers, including Apache, nginx, and Google Web Server.

  Fortunately, we have access to a unique data set provided by Bluehost, a subsidiary of web hosting largest hosting company in the world. They provide hosting services for over 2 million accounts and 7 million domains, most of them SMBs. This data contains statistics and usage data from both Bluehost and other affiliated EIG companies. Due to the size and the diversity of this data set, we believe that Bluehost’s data provides a reasonable proxy for the hosting market as a whole.

  In this report, we use the Bluehost data to analyze the actual software used by their customers, estimating the cost savings provided by open source software. We project the total economic impact of open source software as an enabler of the web hosting market as well as the economic impact on the SMBs who make up its primary customer base.

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Chapter 3. Bluehost Customer Analysis

  Web hosting firms typically provide a variety of services to their customers: one or more named domains, data storage and file transfer, email, and software for building a site. They may also offer ancillary services such as web design. Prices start as low as $4.95 a month. EIG and its Bluehost subsidiary host over 7 million domains for more than 2 million customer accounts, most of them SMBs. For our analysis, Bluehost provided us with anonymized data from more than 1 million accounts, plus the results from a survey of approximately 4,000 customers. Based on our Bluehost domain analysis, we see an average of about 2.5 domains per customer. Domains have been active for roughly 35 months at an average rate of $7.49 per month. Of the domains created, roughly 73% point to the registered name, 12% are redirected to a separate site, and 15% are parked. More than 77% of the hosting plans have a relational database system installed (almost entirely MySQL), averaging roughly 3.8 databases (i.e., schemas) per system. Multiple databases on a system show companies engaging in, and capturing some form of customer interaction, whether a guest book, product list, product information, transactions or some other dynamically served/captured content. About 32% of users have email addresses hosted, with an average of 7 mailboxes per user. As far as web applications go, WordPress dominates in the Content Management category with a 55% share; the next closest is Joomla at 9%.

  The average hosting fee has decreased more than $1 on average in the previous two years. This is a function of economies of scale that Bluehost has achieved, but may also represent increasing competition in the SMB hosting market in the face of tough economic times. This pricing decrease may also be contributing to the growth of new users in the last couple of years.

  The average number of domains that each user obtains increased steadily each year up to 2008 and has steadily decreased since then. While customers may be creating fewer domains, Bluehost continues to add new customers. Having fewer domains per customer may simply be a sign of the down economy, and may indicate less of a sense that multiple domains are necessary to protect a brand. Despite ICANN’s introduction of new top-level domains, the era of domain name speculation may be slowly starting to wane as well.

Customer Sophistication

  In a survey of nearly 4,000 Bluehost customers, 31% described themselves as Beginners, 40% as having Intermediate skills in developing a website, 15% as Advanced, and another 14% as a Professional Web Developer or Designer.

  Bluehost’s simple site builder tools allows 75% of users to build their own website, including 50% of those respondents who called themselves "Beginners" and more than 80% of respondents self- identified as "Intermediate" - clearly, building a web site on Bluehost does not require a high level of technical sophistication.

  Roughly 25% had someone else build their site, 6% had it built by a friend or relative, 6% had someone in their organization build it, and 13% paid a third party to design and create the website.

Reason for Having a Website

  Some customers have a website for purely personal reasons. Long before the advent of social networking sites like Facebook, a blog or simple website was the easiest way to do social sharing on the Internet. However, many customers who wanted only this kind of personal Internet sharing were likely hosted directly on a blogging platform like wordpress.com or blogger.com. Today, most businesses realize they need a strong web presence in addition to any social media efforts they make on Facebook or Twitter. Bluehost’s customer base is dominated by small and medium sized businesses. Even those too small to have their own IT department find that they need a web presence to support their business.

  The typical customer, representing roughly 48% of survey respondents, use hosted services for their business without a shopping cart. This is a site to provide information to customers rather than commerce. The next most frequent purpose is a site for personal use, representing about 22% of the user base. The third most frequent purpose is a business with an online store, i.e., supporting online transactions, payments and e-commerce, about 12% of respondents. Eleven percent are informational sites for non-profits. An additional 2% are non-profits with online donations or e-commerce. Counting non-profits as SMBs, roughly 73% of the sites are for business use.

  The chart below shows the survey results to the question "What role does your website play in your business or organization?" The number one response, roughly 23% of the respondents, to provide more information to their prospective or existing customers. Roughly 20% built a website to help build their brand and add to their credibility as a business. The third most common reason to have a website was to generate leads for new members or customers.

  The question Is your website related to a full-time or part-time business? returned these responses.

  Slightly more than a third of the customers use their website for a full-time business. About a third have a part-time business. Slightly less than a third declined to answer, most likely indicating they do not use their site for business purposes.

  Company Size of Survey Respondents The annual revenue of the Bluehost customers who filled out the survey is shown in the chart below.

  Only 4% of the respondents indicate that they have annual revenues of more than $1 million USD, suggesting that the businesses represented in this study tend to lie on the smaller end of the spectrum.

  Percentage of Revenue Derived Online

  It is quite revealing how many of the respondents are reliant on having an online presence for their

  business (i.e., the percentage of revenue derived from your website)? Select the figure that’s closest to the actual percentage; guesstimates are fine. The question elicited the following

  responses:

  

Percent of Business from Online Number of Respondents

05% 256 10% 166 15%

  67 20% 82 25% 75 30% 66 35% 25 40% 31 45% 12 50% 111

  55%

  5 60% 23 65% 12 70% 31 75% 42 80% 47 85% 16 90% 63 95% 40 100% 204

  Don’t know/Prefer not to say 269 I derive no revenue 1,566

  Slightly less than half the respondents didn’t get any revenue from their website; nearly 20% got more than half their revenue from their website, and almost 10% got 90% or more of their revenue from their website. Note, even businesses that don’t derive direct revenue from their website get economic benefits from a web presence. No one buys meals or drycleaning from a website, but they do use the web to find the

  Just how reliant SMBs are on their website is evident from the answers to the question If my website

  

went offline tomorrow … We see that roughly 28% (19% significant + 9% lose their business) of the

  respondents would be significantly impacted by losing their web presence.

Payment Methods

  The following chart shows methods for collecting payment. Fifty-three percent of survey respondents accept PayPal, 26% accept a credit card via an online form, 12% accept payment by check or money order, and 9% accept credit cards over the phone.

  The relatively low penetration of e-commerce capabilities may seem surprising until you consider the wide range of SMBs. Many are local businesses whose website is the equivalent of a yellow pages kinds of products they offer, location, contact information, and opening hours. Restaurants might also offer menus, and, if they offer reservation services, it is more likely to be through external services like OpenTable than through an online form.

  We also note that even when SMBs offer products for sale on their website, they may not be using a full-function e-commerce tool. For example, SMBs with a limited number of products and don’t need a sophisticated commerce platform. When thinking about commerce and SMBs, keep in mind that companies like Etsy, eBay and Amazon make it easy to use a hosted site for displaying information and then move the transactions to these other platforms for purchase. This federated approach to e-commerce contributes to growth of SMBs and what Etsy refers to as rebuilding human-scale economies around the world. Etsy reports that there are more than 15 million buyers and creative businesses in their vibrant community. The UN _{[ ]} Global Compact Report, eBay Inc. Communication of Progress indicates that more than 25 million entrepreneurs and small business owners are doing business on eBay.com. eBay’s purchase of the company behind the Magento eCommerce platform may help accelerate SMB usage of eBay as a sales platform. Amazon has 17 different categories in which individuals and small businesses can market their own items through the Amazon store, and a web services platform designed to make it easy for third parties to sell Amazon items through their own sites and have the orders fulfilled by Amazon. In addition, many small business websites make money from Google AdWords, Facebook ads, and other mechanisms that generates revenue. Later in this report, we will look more closely at the role Google Adwords may have on SMBs as a proxy for estimating the overall economic impact of having a website.

Browsers and Operating Systems

  Seventy-seven percent of the our survey respondents use a typical desktop browser, and 23% used a mobile browser. Firefox and Chrome are the two top browsers - survey respondants are actively installing these altenative browsers and not passively using Internet Explorer on Windows or Safari on Mac.

  Browser and client operating system information were captured when users completed the survey. The following chart is a bit surprising in that it is heavily dominated by Firefox. The dominant combination of Operating System and Browser was Windows running Firefox, followed by Windows running Chrome.

  Equally interesting is how many iOS users there are. In the Browser chart above, you’ll notice that Mobile Safari has the third largest browser share. The chart below indicates the client platform being used by the respondents to the survey.

  Mac and iOS users show up surprisingly often for these predominantly SMB respondents, e.g., 24% of respondents were on Macs compared to Apple’s 12% retail platform market share . Open source may be part of the hidden economy, however, nearly two-third of respondents responded yes when asked Are you familiar with the term "open source"?

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Customers

  Bluehost offers one-click installation for more than 70 different software packages and services that users can select from when signing up for a hosting plan. There are 26 categories of software and services, including Backups, Blogs, Business Tools, Classifieds, Client Management, Content Management, eCommerce, Education, Forms and Surveys, Forums, Guestbooks, Help Center, Live Chat, Mailing Lists, Photo Galleries, Product Sourcing, Project Management, RSS, Security, Social Networking, Statistics, Utilities, Webmail, Website Builders, Website Design, and Wiki. In addition, customers are able to upload software to their account on their own.

  Far and away the most common applications selected by customers are Content Management Systems such as WordPress, Drupal, and Joomla. We also took a close look at e-commerce systems such as Magento, osCommerce, and Prestashop.

The Open Source Software Stack

  These applications in turn typically run on an open source software stack consisting of Linux, Apache, and MySQL. (Bluehost also offers PostgresQL, but few users choose it, as MySQL is the default database installed with most of the applications that rely on databases.) Domain name services are managed by PowerDNS.

  Bluehost does have a small number of users running on Windows and SQL Server, but they are legacy customers from an acquisition, and did not feature in our analysis. Bluehost is thus slightly more skewed to open source than the overall Internet population. According _{[ ]} to Netcraft’s July 2012 web surver survey , 61.45% of known websites are hosted on Apache, 14.62% on Microsoft servers, 11.09% on nginx, and 3.44% on Google Web Server. The Web thus runs on approximately 85% open source web servers, while almost all of Bluehost’s customers are on Linux and Apache. Returning to the Bluehost data, we first looked at all users in the dataset and selected only those users who have a tool installed. By tool we mean access to a software package or application that lets you add functionality or features to your website. Of the million users, 504,831 had a tool installed. We are using this as a proxy for someone who is doing something more than just owning a domain name and running pure HTML on their site. Of the 504,000 users, let’s now look at the most-used open source tools beyond the operating system and web server: 301,401, or approximately 60%, of the tool users in the sample have MySQL installed; 389,542, or 77%, use PHP; and 336,125, or 67%, use JavaScript.

  The choice of database and language is often driven by the choice of a higher level website management tool such as WordPress. WordPress was built as a big instance of PHP and MySQL, so users tend to use those same tools: PHP on the back end, and JavaScript on the front end. At the time this paper was being readied for press, Bluehost was the top provider listed on hosting tab of the WordPress.org web site. The chart below shows the number of sites that had just one instance of MySQL running, those with more than one, and those with more than ten. The ones with more than ten represent a fairly sophisticated user. Users who understand that they need more database instances, and not just more

  tables in their database, have some interesting dynamics going on with their website. Those with

  two or more instances, roughly 55% of all MySQL users, may be using more instances for business, or experimenting, or truly need more than one database as they scale. They may also simply have installed multiple apps, each of which carried along with it its own MySQL instance. At the SMB level, though, we think it is fair to say that those with more than ten databases are heavy users, which is 7% of all Bluehost MySQL users.

CMS and E-commerce Tools

  Bluehost users are offered an array of software packages to use with their hosted platform. The most common choices are a CMS such as WordPress, Joomla, or Drupal. A small percentage of users host their own e-commerce capabilities. A small percentage do their own programming in various open source languages.

  The following tables represent the number of SMBs who use a particular tool. The total population of accounts that have tools installed rather than a pure HTML site is roughly 504,831 users out of the 1+ million users in the Bluehost data.

  

CMS Number of users % Share of All Tool Installs

WordPress 189,913 38% Joomla 53,324 11% Drupal 18,510 4%

  Now let’s look at the same data for e-commerce. You can see that osCommerce is by far the largest installed tool for doing e-commerce on a Bluehost account. However, it is still a tiny proportion overall. Note, however, that the CMS platforms themselves have e-commerce plugins. For example, the Cashie plugin for WordPress makes it simple to turn WordPress into an e-commerce platform, and the Ubercart and Drupal Commerce modules do the same for Drupal. Our measurements don’t include these e-commerce platforms.

  

E-commerce Number of users % Share of All Tool Installs

Magento 6,032 1% osCommerce 10,627 2% Prestashop 1,857 0%

Analysis of the CMS Tools

  The big three CMSs are WordPress, Joomla, and Drupal. Whether you look at job postings, Google Trends, or Bluehost user data, WordPress is the leading CMS tool. For many SMBs, WordPress is all they need to engage their customers, and even do some rudimentary sales by putting a phone number on the website to call/order and taking a credit card directly via the phone. This was not measured in any of our data sets other than the customer survey, but it is quite common in practice. The Water&Stone 2011 Open Source CMS Market Share Report surveyed more than 2,500 respondents. Twenty percent were single-person businesses, and 33% had between two and ten employees.

  Total installs reported by Water&Stone for WordPress are about 4.3 million compared to 1.7 million for Joomla. But in Weekly Downloads, WordPress is now about a factor of eight times that of Joomla, the next closest competitor in the small business market. This study corroborates the dominance of WordPress that we find in the Bluehost data.

  TECHi has an excellent write up and infographic titled Open source wars: Wordpress vs Drupal vs summary of cost components that may make the platforms more palatable for a SMB.

  What WordPress Joomla Drupal

Cost to set up $250-$15,000 $5,000 - $50,000 $2,000 - $20,000

Avg Monthly Maintenance $250 $1,500 $500 Number of Plugins 14,629 8,039 7,609 _] Number of Themes 1,392 885 54-100 _{[ ]} Monthly Visits to Main Site 50,000,000 55,700 59,600

  

Programming Languages

  The chart below shows the programming languages used by Bluehost customers. PHP and JavaScript combined account for roughly 80% of the language activity on Bluehost. The only other language with a double-digit representation is Perl.

  The chart below shows a logarithmic view of the programming languages and their growth among Bluehost customers for the years between January 2001 and June 2012. The most notable spike was in 2004 when Python and Ruby both suddenly burst up the scale. Python grew by a magnitude of 10 during the first few months and Javascript kept doubling its size every couple of months. Perl, Ruby, ASP, and Python seem to have hit a wall around 2007 and has been flat or on a slight trend down since. Note, however, that this chart does not truly reflect underlying language trends in the broader market, as it is significantly affected by changes in EIG support for various languages.

  In the Appendix, we provide data on job posting trends for open source programming language jobs from O’Reilly Media’s historical job data mart. The key conclusion is that the hosting market is not end scripting and JavaScript for front-end scripting.

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  for SMBs

  Constant downward cost pressures during the last 15 years from open source projects has made having a web presence affordable, and the business opportunities that a web presence provides are now more reachable for more if not all SMBs, including the growing home-based business (HBB) segment.

  For SMBs, a web/online presence pays off immensely. According to a 2011 McKinsey study, SMBs that invest most heavily in web technologies were shown to grow fastest, more than twice as fast as _{[ ]} companies who make the lowest level of investments. McKinsey found that the increased productivity of the SMB market in mature economies had a significant impact on overall GNP growth in those countries.

  In this section, we’ll look at some of the factors leading to this pay off. We’ll estimate the total revenues of the businesses hosted on Bluehost, and by extension, by the entire hosting market. We’ll also show a methodology for determining the cost savings to business from the open source platform, and will explore one way that having a web presence makes such a significant difference to small businesses.

Economic Activity Attributable to Hosting Industry Customers

  According to the customer survey described in Chapter 2, 71% of customers are using their site for business purposes, including non-profits. Customers reported that their businesses ranged in size from under $10,000 in annual revenue (clearly a home-based or supplementary income business) to $5 million or more.

  If we make the assumption that survey respondents are representative of the Bluehost customer base as a whole, we can apply these percentages to project the overall economic activity represented by the SMBs in the Bluehost customer base, as shown in the following table. We first assume that the total SMB population is 71% of the 1 million customers in the data set, or 710,000. (22% of surveyed customers reported that their website was for personal use; another 3% reported that it was for a group or association; and 4% reported "Other.") Then we apply the percentages for each revenue size segment to derive an approximate number of customers in that segment, and multiply by the median from that revenue range to derive an aggregate revenue value. (In the case of the top range, $5 million or more, we used $5 million for our calculations.) These calculations may underweight the size of the businesses in the sample, because those with revenues over $5 million could be considerably larger. Using these very rough assumptions, we see that the Bluehost customer base has aggregate revenue of about $124 billion, as shown in the table below.

  

Reported Revenue % of Respondents No of Firms in Segment Segment Revenue

More than $5 million 0.94% 6674 $33 billion

  $500,000-$999,000 2.83% 20093 $15 billion $250,000-$499,000 3.81% 27051 $10 billion $100,000-$249,000 8.22% 58362 $10 billion $50,000-$99,000 9.16% 65036 $4.8 billion $10,000-49,000 16.31% 115801 $2.9 billion Less than $10,000 31.93% 226703 $1.1 billion Prefer not to answer/don’t know 24.18% 171678 NA Total

  709929 $124 billion

  We estimate that Bluehost represents about 10% of the hosting market. By extension, then, assuming that the size distribution of companies in Bluehost’s customer base is representative of the industry as a whole, we can estimate that businesses who rely on hosting/domain name providers for their web presence represent a trillion dollar market. While these businesses are on the low end of the SMB market, their collective economic impact is huge. These numbers are an extremely rough estimate, but they give a sense of the order-of-magnitude benefit that we can attribute to having a web presence, and by extension, because that web presence is made possible by open source software, the hidden contribution of open source software to small business in the US economy.

Open Source Cost Differential

  The price for a web presence has been driven down for more than a decade by a number of factors, including resource sharing, enabled by virtualization, Moore’s Law lowering the cost and increasing the power of computer resources, data center economies of scale, and, as we cover below, the availability and adoption of no-cost/low-cost open source projects as key web presence components. These lower costs have made a web presence, and all the benefits that a web presence provides, available to a wide swath of SMBs, including the growing HBB segment.

  Open source projects and vendors provide low-cost/no-cost options for business consumers, and, often, help keep the price of competing commercial products in check. For some of the tools that are relevant to SMBs, for example ecommerce and CMS, open source projects and vendors dominate the market.

  For tech savvy SMBs, open source offers other benefits in addition to low cost: access to the source code, including the ability to make changes specific to your business, and access to community-based support. There are many stories of open source tool users posting a problem to an online forum and having the developer who wrote the code respond with a fix.

  Keep in mind that beyond creating their own web presence, SMBs and HBBs have access to number of commerce platforms and marketing/promotion platforms that are built on open source architectures (for example: eBay, Amazon, Etsy, Google, Facebook, Twitter, and Paypal). Even those SMBs that build their own web presence may include storefronts on eBay, Amazon, or Etsy, and may augment their marketing via Facebook and Twitter. We focus on the cost differential between open source and or via a hosting or cloud vendor. Later in this report, we talk about the impact of the large selling platforms and their potential impact on SMBs.

Open Source Cost Differential Model

  We set out to build a model to help quantify the open source savings differential for infrastructure software like operating systems and databases—the type of infrastructure that undergirds most applications. To access a proxy of prices for roughly comparable open source and commercial components, we turn to Amazon’s EC2 hosted platform pricing, with its open source (Linux, MySQL) and commercial (Microsoft Windows and SQL Server) options running on the same hardware platforms in the same data centers with the same tiered pricing options. We use an analysis of Bluehost’s business customers' tool usage to help us determine the share of SMB users likely to need a large database—an extra cost item on the proprietary side but not on the open source side—based on their use of SMB applications like e-commerce and CMSs. Our model shows that for a proxy of the SMB market, the price differential for hardware/software platforms running commercial software is about 2, i.e., SMBs would pay about double for the hardware/software infrastructure they need to operate online to run on commercial platforms. For smaller SMBs, who either don’t need a database or can use free commercial options, like SQL Server Express, the differential is about 1.5. For the software component of the server platform alone, the price differential is likely higher. In any case, the savings created by open source options likely make a web presence, from a simple information website to full-blown e-stores, accessible to more SMBs.

  Here’s the high-level view of the model:

  Share of SMB customers with full access db * full access db price differential + share of SMB customers with web access db * web access db price differential + share of SMB customers with no db * no db price differential

  At a high level, the model looks at the share of SMBs that need the various levels of database support available for Windows platforms on EC2 and multiplies that by the price differential between Windows and Linux pricing for the types of EC2 instances appropriate for the SMB’s web presence. You can find more detail about the methodology and the assumptions used to develop the model in the Appendix.

  We focus on the infrastructure components of operating systems and databases as they are commonly required for a web presence, managing content, and online stores, and they require similar administration and operating expense loads. For more complex applications, researchers have found more of a mixed picture regarding savings from open source applications. Tellingly, for the types of applications most SMBs need for a web presence (CMSs and ecommerce apps), open source options dominate the low-end of the market—all the leading applications operate on both Linux and Windows, and most of the leading CMSs run on both MySQL and SQL Server. For additional context on SMB tool usage, we compare tool usage for Bluehost business customers _] with data compiled by W3Techs from Alexa and Google Analytics . The chart below shows that Bluehost SMB customers are more likely to use WordPress, phpBB, and osCommerce than the large cohort of companies that W3Techs samples. We also see more Joomla share and less Drupal among users tilting towards WordPress and the other apps shows that SMBs prefer simpler apps and Bluehost’s easy installation process due to less access to technically sophisticated resources.

Benefits of a Web Presence

  There are many benefits for SMBs with a web presence: ready and mobile access to information about your business, online advertising, print advertising, email marketing, ecommerce stores, social network marketing and commerce, and others. It’s worth emphasizing that having a web presence helps expand an SMB’s potential customer base to cover the entire world. Twenty years ago, an average SMB would be hard-pressed to get customers outside of their own geographic region, let alone their own town. A web presence today breaks down those geographical boundaries. In any event, we know that SMBs are a growing part of the Internet economy, and, from the McKinsey study, that those SMBs most heavily invested in web technology grow the fastest.

  It is difficult to quantify every aspect of this benefit. However, following the lead of Google’s report _] on the economic benefit of Google Adwords , it is possible to use Google Adwords online advertising as a kind of proxy for economic impact. It’s a safe assumption that SMBs uses Google AdWords to help boost their revenue. We know that spending on Google AdWords works best if users go to a landing page with a clear call to action. In addition, having a website allows SMB owners to conduct simple A/B tests to increase conversion rates. Assuming that the average SMB owner who controls their own landing pages is able to meet Google’s conservative estimate ( 8 * (what you spend on AdWords) ). So what does this mean when you aggregate all SMBs that have a web presence, or more importantly, those that do not have a presence are losing potential huge revenue gains. So let’s look at a formula that could help us get more insight into the revenue gains or losses due to a web presence. Note that we are not covering the 70% of SMB online ad spend not used for Google Adwords—clearly, SMBs get some value for these investments that increase the economic impact beyond the calculations we show below.

  (Total online ad spending by SMBs) $5.4 billion * (share of ad spending on Google AdWords) ⇒

37% (online search) * 80% (Google share) * 8 (this is the Google multiplier: $1 of ad spending ⇒

$8 revenue) = Economic impact of Google AdWords = $12.8 billion

  Next we create a blunt estimate of the dollars that could have gone to SMBs that don’t have a _] website. We use the US census count of SMBs , and an amalgam of estimates of how many SMBs _[ have no web presence : US SMBs (2010): 5,300,000 est SMBs offline: 30%

  (# of SMBs without a website ) 1,590,000 * ( EconImp_Goog_SMB / # of SMBs with a website ) ( $12.8 billion / 3,710,000) = (AdWords economic impact left on the table) = $5.5 billion

  This is an estimate, because we are assuming that EconImp_Goog_SMB came solely from SMBs with websites. (You still can use AdWords even if you don’t have a website, but you probably need to be able to optimize your landing pages to maximize conversion and get to the 8 multiple from Google.) We know that SMBs have access to niche and specialized promotional platforms. From the CocoKnits case study, we see an SMB that uses the web ecosystem and social network around the knitting community to promote her business. Jule Weisenberger, the CocoKnits founder, says that

  (centered around knitting sites and forums like ravelry.com), and that she doesn’t need paid search ads to reach new customers - an example of the hidden economy at work, no money changing hands and great value from a web presence, sitting on an Open Source platform, and a niche online community. For folks running SMBs who lack technical knowledge, creating an Open Source online presence operates like a Higgs field, an invisible force that they can leverage even if they don’t complete understand what it is.

In Conclusion

  The SMBs who rely on hosting services for their web presence collectively represent more than a trillion dollars of economic output. Given McKinsey’s assertion that companies with a web presence outperform those without, the contribution of the open source software offered by web hosting companies has an economic impact far more significant than direct monetization of that software.