"We basically made a cost decision," said Ray Villeneuve, MonoSphere’s president and chief executive officer (CEO).

Open source software also helps Fonality Inc. undercut larger competitors in telecommunications, said Chris Lyman, co-founder and CEO. In January Azure invested $5 million in Fonality, a provider of IP-PBX (Internet Protocol-private branch exchange) telephone systems for small and medium-size businesses.

Lyman got the idea for the business when he first launched Fonality. The company was originally intended to be a residential VOIP (voice over Internet Protocol) service provider. He balked at receiving a quote for $15,000 for a mere 5-phone office IP-PBX from Avaya Inc.

"I said, 'That's our new business,'" said Lyman, and changed Fonality's business model to selling IP-PBX systems.

Fonality's IP-PBX offering is based on the Asterisk open source program for telephony management. Developing proprietary call management products on top of Asterisk enables Fonality to offer IP-PBX systems for smaller companies at about a quarter of the cost for systems from companies like Cisco Systems Inc. and Avaya.

Asked whether he's worried that they will also develop open source products, Lyman responded, "They better hurry because open source is about to eat their lunch."

Red Hat sees the open source trend as not simply moving up the software stack, but growing in all directions, said Scott Crenshaw, general manager of Enterprise Linux at Red Hat.

Crenshaw sees a second wave of open source innovation in 2007 as virtualization and service-oriented architecture, which enable operation of an IT infrastructure dynamically, become open sourced.

"The goal isn’t just to move up the stack," he said. "The real goal is to fundamentally change the economics of IT once again."