Money for Nothing, Clicks for Free

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ExactTarget (NYSE: ET), Workday (NYSE: WDAY), and Salesforce (NYSE: CRM) are poised to take advantage of a post-proprietary SaaS landscape. These firms have a healthy customer base and a keen eye for acquiring firms that specialize in using open source technologies to generate real profits.

In the software-as-a-service (SaaS) industry everyone is looking for something: scalability, flexibility, management, hardware utilization, even community. The SaaS industry has delivered strong earnings for the past few years—these stocks have been good to investors. Many of the expenses for SaaS firms are due to the proprietary software that powers the very products SaaS's provide. The proprietary vendors—the Microsofts, the IBMs, and the Oracles of the world—have worked wonders selling bloated undemocratic technology. Their customers—the SaaS Industry—have forked over cash and control so that they can provide products and services. The Microsofts, IBMs and Oracles of the world have done well, and will continue to "not disappoint" patient investors.

They will however, continue to disappoint the SaaS firms that must push these bloated, confining, proprietary technologies to exceed the expectation the markets place on the SaaS industry. The price and aggravation of proprietary software don’t allow for SaaS firms to exceed anything but their budgets. There are solutions, and the SaaS industry is actively seeking them out. Open source is the answer; it’s free for the taking—and can lead to more profits. Many have mistakenly believed open source technology just a nerdly plaything—all theory and no reality. This kind of thinking is a crucial miscalculation. The major players in the SaaS industry are flocking to open source technologies—high cost and a lack of control have created more than a keen interest in putting open source technologies to work.

Live Free

As .NET falls to Rails, and Oracle to Redis, the entire SaaS landscape is being re-imaged before our eyes. The newly mature open source tools and frameworks have more than matched their proprietary kin. The development community has known this for some time, but developers don't rely on the dependability of ones and zeros the way a corporate balance sheet must—but things have changed. Most now agree that secure web applications can be built and maintained using open source frameworks. The SaaS industry is on the verge of a post-proprietary future. Free to build flexible multi-tenant platforms—for free. It's akin to the emancipated marching across the Roman countryside, butchering former masters and screaming with conviction and power, "I-AM-SPARTACUS!"

Even if, some SaaS companies are firmly (for now) entrenched in a proprietary software solution, the industry is a smallish pool, ever shrinking—caused by mergers and buyouts. This environment creates alliances like the Salesforce-Workday partnership. This type of relationship is ripe for the cross-pollination of ideas and strategies—open source technologies will no doubt be discussed, compared and implemented in the years ahead as this partnership evolves. ExactTarget, Salesforce, and Workday are no longer just nascent threats, they are players. And these players use open source technology. ExactTarget’s acquisitions of Pardot and iGoDigital are just another example of the power of open source software and frameworks (Ruby on Rails) being a key ingredient of innovation. The paradigm has shifted—let freedom's cash register ring.

Open Source at Work

ExactTarget's recent selection of Cloudera to manage its data warehouse points to the acceptance of using open source technology vendors. ExactTarget's use of Twitter's Bootstrap is a perfect example of leveraging open source technology for profit. ExactTarget's Fuel UX is currently being used to build new products and upgrade existing email marketing applications and is yet another example of a SaaS firm smartly using not only open source software and standards, but becoming part of the open source community. SaaS companies like ExactTarget are not only leaders, but they are also following the lead of the development community while empowering the open source community with a strong ally.

Workday is built on a powerful open source technology stack that is, partly the reason a company with only 1,700 workers can generate a 10 billion in market cap—with paying customers. Workday's open source "stack" provides real value. This open source power is why Oracle, SAP and others are afraid—very afraid. As more and more of the corporate world becomes yet another SaaS account, the very notion of not building with open source becomes a liability. SaaS firms that expect to compete must embrace and implement open source. The firms that do will add value to their customers, and investors, while those who don't will churn out Franken-soft concoctions that torment users and investors alike.

Salesforce purchased Heroku—THE cloud platform for the reigning open source framework, Ruby on Rails. Salesforce also snapped up BuddyMedia to take full advantage of Facebook's nation-state population of 1 billion users. ExactTarget, Workday, and Salesforce have been busy, and all of this activity points to an open source future—a very profitable future.

The Payoff

Looking at the sector leaders in the SaaS landscape is essential to capitalize on the open source trend. Will Salesforce need to acquire an email marketing and lead generation partner to keep up with SAP and Oracle? Who might ExactTarget team up with or acquire in the future? Open source integration and innovation will be vital in the decision-making that reshapes the SaaS landscape. While surveying this landscape always remember, the most powerful feature of open source technology is that it allows those who understand and use it to deliver a better experience to their customers. Is not that the goal of a good SaaS? As SaaS firms begin to embrace and implement open source technologies—through innovation or acquisition—profits will rise, and expenses will fall. This cycle has just started to turn, the question is will you be along for the ride—or will you be staring at yet another soaring stock that passed you by?

John Moore has no position in any stocks mentioned. The Motley Fool recommends Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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