Small Player Scores Big Open-Source Win

1&1 Internet plans vast expansion of services using open-source software from a tiny newcomer. Can it really compete with Microsoft's Exchange?

In the scrappy open-source software world—where software is developed in the open, rather than within the confines of corporate patents—successes are hard-won and often come in small chunks. Typically it's a few thousand government employees in Munich, Brasilia, or Amsterdam who begin using the Linux operating system or the Open Office suite of business programs, shunning comparable offerings from the likes of Microsoft (MSFT).

But a deal announced Feb. 26 was on an entirely different scale. 1&1 Internet, the world's largest Web hosting company, said it will roll out 1 million e-mail accounts this year running on Open-Xchange's open-source software.

Important Step for Open Source

The deal shines a light on Open-Xchange, a tiny Tarrytown (N.Y.) company that's never listed among open-source bigwigs like Red Hat (RHAT), Novell (NOVL), or MySQL. Open-Xchange has just 54 employees, most based in Germany. "This is the largest deal ever for us and, in the application space, it's the largest deal ever for an open-source company," says Open-Xchange Chairman Rafael Laguna.

1&1 Internet plans to use Open-Xchange first in its home market of Germany and eventually to expand to its businesses in Britain, the U.S., and France. It has 2.7 million Web-hosting customers, half of them consumers and the other half small businesses. Eventually, most of the 5 million e-mail accounts it manages could shift to the open-source package. "This is a big step forward," says 1&1 Internet Chief Executive Andreas Gauger. "We're offering big-company-style e-mail services for small companies at a very good price."

Analysts briefed on the announcement say it's noteworthy, if not earth-shattering. "This is good news for open-source software," says Sara Radicati, chief executive of messaging software market researcher Radicati Group.

Making a Dent in Exchange

The world of e-mail server software has long been dominated by Microsoft's Exchange and IBM's (IBM) Domino packages. Before this announcement, 1&1 Internet had two e-mail offerings—Microsoft Exchange and one of its own design. Gauger said that because of the high cost of Exchange, he has to charge small businesses $10 to $15 per user per month. With Open-Xchange, he'll charge $5 a month for individuals and as little as $2 per month for purchasers with 100 e-mail accounts or more.

The 1&1 Internet deal by no means signals a big threat to Microsoft's Exchange franchise. Today, 20 million hosted Exchange mail boxes are provided by more than 500 Web-hosting companies. "A few of the reasons we're seeing such partner and customer success is due to the fact that our products are engineered to be familiar, easy to use, support a broad choice of applications, with an emphasis on security, reliability, and consistent interoperability—all at a lower total cost of ownership," says Kim Akers, general manager for product marketing at Microsoft's Unified Communications Group.

Some purchasers of Web-hosting services would beg to differ. And as long as the cost-of-ownership claim is open to debate, open-source applications like Open-Xchange will continue to catch on and be deployed in ever-larger numbers. And that's nothing but bad news for the world's largest software company.

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