Netflix, Inc. (NFLX) & Citrix Systems, Inc. (CTXS): Two Open Source Strategies

There are two strategic reasons why a company would want to sponsor its software as open source. One is good for investors, the other is not good.

The good reason is to create a standard. A de-facto standard, which anyone can use royalty-free, based on open source software can be a powerful catalyst for a company’s growth. The best example in the recent past is Rackspace, which has now hit hard times but which absolutely took off after it began sponsoring Open Stack, an open source cloud infrastructure, rising from just over $5 per share to a peak of $80 early this year.

The bad reason to sponsor your software as open source is because you need new customers. An example of this is webOS, which HP made open source in 2012 after acquiring it as part of Palm. No one was fooled. The announcement created no lift. HP sold the software, and its development team, to LG of Korea, early this year for an undisclosed (and likely very embarrassing) price.

Here are how two companies are using these two business models, and what you should do about it.

NetFlix: OpenConnect a Standard

Netflix, Inc. (NASDAQ:NFLX) launched OpenConnect as an effort to create an open source standard in web caching. The company is sharing both its hardware design and its software, hoping that a widely-adopted system for making data redundant in many different geographies will give it options over hosting at Amazon.com, Inc. (NASDAQ:AMZN).

Netflix, Inc. (NASDAQ:NFLX) delivered OpenConnect last June, and it has since won high praise from the open source community. More important, it has also given the stock a huge lift. The shares have tripled in value since last June, and now are priced at $216. This has happened despite the fact that quarterly sales have grown only 10% over that time, and that net income has actually gone down, from $6.16 per share in the June quarter of last year to $2.69 per share in the March quarter of this year.

What investors are seeing with Netflix, Inc. (NASDAQ:NFLX) is what Stephen J. Vaughan-Nichols of ZDNet calls “the biggest cloud app of all.” The company bases its system on Amazon.com, Inc. (NASDAQ:AMZN), still the cheapest public cloud out there, but now has the redundancy to keep running even if an Amazon.com, Inc. (NASDAQ:AMZN) data center goes down, delivering over 1 billion video files each month. That’s because servers running OpenConnect can now be linked at many different ISP locations around the world, meaning there is no single point of failure.