BusinessWeek

MAY 16, 2002
SPECIAL REPORT: LINUX GOES MAINSTREAM

Giant Steps for a Software Upstart

Linux is gaining momentum in nearly all corners of computing, and more and better programs now run on it. Now, it just needs a business model

Shoppers at Sherwin-Williams (SHW ) paint stores in the Cleveland area haven't realized it, but during the month of May, 2002, they've been key participants in an experiment by the Ohio-based paintmaker. In pilot tests, Sherwin-Williams replaced proprietary Unix software on computers that help customers match paint colors -- and that run its stores' retail sales systems -- with cheaper and more versatile Linux software. By May 23, Sherwin-Williams had seen enough: It announced that it will install the Linux operating system in its 2,500 stores in the U.S., Canada, and Puerto Rico.

Sherwin-Williams expects to save millions of dollars per year: No longer will it have to pay a licensing, or subscription, fee for each computer the OS is installed on. And by adding on Linux-based e-mail and Web-browsing software -- both of which are essentially free -- it can avoid paying for Microsoft's Windows operating system.

Beyond that, is the flexibility of using open-source software -- whose core code Sherwin-Williams is welcome to customize to its needs. "The switch to Linux gives us access to better technology in the point-of-sale arena and ultimately provides better service to our customers," says Bill Thompson, director of information technology.

GROWING PAINS. The Sherwin-Williams installation is one of the biggest Linux retail roll-outs to date, according to systems integrator IBM, whose Global Services unit will manage the project. It's also an indicator of the extent to which open-source software, formerly a fringe product, is working its way into Corporate America.

A lot has changed for Linux in the past two years. True, the basic tenets of the rebellious open-source software-development movement popularized by coder Linus Torvalds remain largely intact. Loosely organized collectives, often from competing companies, collaborate to build software products that no one owns, with source code that anyone can view and alter. Any changes in the code are held by the community at large.

While such idealism worked fine in academia and among uber-geeks, it wasn't immune to market economics as the movement matured. A slew of Linux startups have disappeared in the past two years during the crushing information-technology spending crunch. They were either bought out by bigger Linux companies or shuttered when venture capitalists lost interest in open-source and customers failed to appear quickly enough in sufficient numbers.

What's emerging now is an operating system -- the software that runs a computer's basic functions -- that's more reliable, consistent, and businesslike, approaching older and more robust forms of Unix in scalability and stability. Steady improvements to the code have come as big tech players such as IBM and Hewlett-Packard have thrown signficant research dollars at improving open-source software. In short, the Linux movement is not only growing up but it's also going mainstream.

DEMAND SPEAKS. The willingness of major companies to support and maintain Linux systems has also helped convince customers that they aren't taking a big risk by choosing open-source. And customer demand for Linux has convinced big hardware makers, including IBM, Dell, and HP, to ship boxes preloaded with it. More recently, software companies such as SAP, Veritas, and BEA have been promoting versions of their products that run on Linux.

That's not to say big questions don't remain for both Linux and open-source. No one has come up with a business model that's consistently profitable. Despite casting a large shadow over the software industry -- Microsoft CEO Steve Ballmer has gone so far as to call Linux a "cancer" -- total revenues from sales of Linux products and services remain a tiny fraction of the software market. Linux and open-source also remain particularly weak in desktop software. For the vast majority of computer users, Linux is nothing more than a buzzword and a penguin icon named Tux.

Certainly, however, Linux now occupies a significant role in corporate computing. Look at the percentages of servers shipped by Dell that are preloaded with Linux. In 2001, they represented 8% to 10% of Dell's total server shipments, according to Randy Grove, vice-president for enterprise computing at Dell. That number should climb to 10% to 12% in 2002.

For hardware giant Compaq (consistently either No. 1 or No. 2 in servers shipped before its merger with HP), Linux is also playing a larger role. According to Peter Blackmore, executive vice-president of HP's enterprise systems group and former executive vice-president of sales at Compaq, 12% of customers purchasing Compaq Proliant servers now request Linux software. He thinks that number will move into the high teens through 2002 and 2003. "I think the market reality is it's here, and people have to absolutely embrace it," Blackmore says.

SUDDENLY, LAST SUMMER. In some cases, make that a bear hug. In industry after industry, big companies are turning to Linux. Boeing's Phantom Works used customized Linux software to link a series of servers to perform tasks previously done on a supercomputer. At film studio Dreamworks, clustered Linux machines performed complicated graphics for the hit film Shrek. According to Dell's Grove, the shift started in this area of the Linux universe started last summer. "We began to see companies replace their supercomputers with clusters of Dell servers doing everything from drug modeling to geophysical analysis," he says.

Perhaps most important, Linux has started making inroads on Wall Street, a huge market. In April, 2002, CS First Boston converted its worldwide trading system to Linux. Merrill Lynch is likewise in the midst of a massive effort to replace Solaris servers with Linux.

A big part of Linux' success is what it can run these days. With so many big guns backing it, many large software companies have created versions of their products that work well on Linux. That means customers buying a Linux server can now choose between Oracle, IBM, and Sybase databases, and can pick between Apache or iPlanet Web servers. Sun's still-popular Solaris operating system has the edge in terms of total number of software titles designed for it. But Linux appears to be catching up fast.

FAST GROWTH. More promising for the penguin-heads is the degree of involvement some of the big software shops are taking in open-source. Oracle worked closely with Red Hat to ensure that Red Hat's latest Linux product, Advanced Server, had specific capabilities that would please Oracle customers. Add up all these factors, and it's no surprise that IDC says Linux should be the fastest-growing server-operating system over the next several years. Its market share is expected to grow at a compounded annual clip of nearly 30%.

That doesn't include other business areas where Linux is showing significant promise. In embedded software, it's gaining ground among makers of everything from set-top cable-TV boxes to cell phones. They like the "slim profile" of Linux vs. other embedded systems, particularly for uses where computing resources are limited, such as in the circuit boards of next-generation cell phones.

In the server-appliance business, mostly targeted at small-business and home-office users who want to easily network a few machines, Linux is quickly becoming the de facto operating system due to its low price -- $0 per copy. According to Sun Microsystems, unit sales of its Linux-powered Cobalt server are growing in excess of 25% per year.

Yet even after such stellar growth, Linux will pull in only $291 million in revenues for server-operating systems by 2006, IDC estimates. That's a paltry, single-digit percentage of revenues in a global market that was worth $10.6 billion in 2001.

"A PARING DOWN." As IDC analyst Al Gillen points out, the market clearly isn't large enough to support the various players, which include five major companies specializing in building Linux operating systems and untold numbers of newcomers distributing their own versions of Linux. "You'll see a combining of the players and a paring down," predicts Ransome Love, CEO of Caldera International, one of the five.

The other possibility is a stiff hike in prices, which is already starting to happen. In the past, versions of Linux conveniently packaged for easy installation (intrepid souls could piece together free but messy-to-install downloads) sold to businesses for $200 or less. German Linux-maker SuSE, another of the big five, now sells enterprise-software packages that offer far more capabilities than older, cheaper Linux ware for $1,000 and up.

Red Hat, the leading Linux vendor with approximately 20% market share, is selling a one-year license to use its Advanced Server at $800 a pop. Include service and support, and the tag goes up to $1,500 or $2,500 for round-the-clock assistance. "Ultimately, high-end open-source systems will cost as much as typical Unix systems," says Love.

These high prices have already started to rankle the developers community that's the lifeblood of open-source. Particularly galling is when companies such as Red Hat refuse to release the integrated code of the products they sell and instead hand out the individual pieces, leaving it to savvy developers to build their own Linux system.

"NO ECONOMIC VALUE." Thus far, however, such conflicts have been minimal. And the issue could go away as the entire software marketplace coalesces around subscription models that take upgrade burdens off corporate info-tech staffs -- albeit at a stiff price. "The concept of freely distributing binary code -- there's no economic value to that," opines Love. "It will be a subscription-based model that Linux will end up with."

That sounds much like the subscription model Sherwin-Williams moved away from with its shift to Linux. But the paintmaker remains unfazed. Why? because the flexibility of Linux means that Thompson can pick and choose his subscriptions as needed and build his own software configurations if he wants. That's particularly useful for Sherwin-Williams, which has a strong tech staff that feels comfortable tinkering with software.

The one area for Linux and open-source that has thus far been nearly a total flop is the desktop, including productivity software. Despite a flurry of activity, Linux has only recently appeared on the desktop radar, according to IDC. Some analysts think that will harm its ultimate adoption curve as big corporations opt for Microsoft's soup-to-nuts offerings. And the rough edges that Linux products still have -- limited support of peripherals, for example -- remain a turnoff for many buyers.

NOT PREVALENT YET. In fact, most hardware companies see Windows products also growing at the expense of higher-priced flavors of Unix. But top-end Unix still has a stronghold for some of the most resource-intensive computing practices, such as databases that run retail systems or record-keeping. (These are different than custom applications written for supercomputers, which is a growth market for Linux.) "What we're seeing in the market is that Windows is accelerating and Linux is accelerating," says HP's Blackmore. "In the very high end, you aren't seeing Linux as prevalent yet."

That doesn't much bother the proprietary Unix makers, as they're happy to continue raking in big bucks, while Linux does the dirty work of competing with Microsoft for the lower end of the market. And advances in Linux usability easily translates to Unix, which arose from basically the same source code and methodology. "It allows us to compete much more effectively with the Microsoft Windows proprietary environment than anybody else," says Vivek Mehra, vice-president of Sun's Cobalt division.

The performance gap between Linux and Unix should close in the next few years. The sheer speed of the upstart's advances, resulting from the collective-development approach, will overwhelm proprietary Unix efforts. Even HP's Blackmore admits that eventually Linux will show up everywhere. The next release is scheduled to double or triple its ability to cluster multiple servers so that they act like a single, more powerful machine.

LOTS OF GNOMES. And Linux desktop zealots maintain their day is coming soon. Ximian, a company that specializes in Linux desktop software such as word processing and e-mail clients, has just rolled out a software tool that lets its users connect to Microsoft Exchange, the predominant corporate e-mail server system.

Interest in desktop development continues to mushroom. Two years ago, the annual meeting of GNOME developers (one of several Linux desktop environments) drew 150 people, according to Nat Friedman, vice-president for product development at Ximian. Last year the conference drew 300. This year 800 eager coders showed up.

By many accounts, the latest versions of Linux desktop software are finally within striking range of the more polished Windows offerings. "These applications have become commoditized. They're not that complicated anymore," says Ximian CEO David Patrick. Does that mean we're headed for a Windowless world? Hardly. Linux systems will ultimately cost real money, and Microsoft will compete fiercely on price.

FREE PUPPY? The same will be true in the server market, with Unix prices coming down to match Linux and Microsoft continuing to play a strong game. IDC believes market share for Windows server operating systems will grow from the low 40s to nearly 50% during 2002, mostly at the expense of Unix. And now Redmond is also focusing on Linux and trying to sway customers from open-source. Linux is "like someone giving you a puppy," says Peter Houston, senior director of the Windows Server Group at Microsoft. "It may be free, but you have to pay more to feed it and take care of it."

Still, from strange cult to common standard in less than a decade is no small feat. Underestimate the penguin battalions at your own risk.

Editor's note: An earlier version of this article included information on Mindbridge, an intranet software company that uses Linux. On June 10, we deleted the references to Mindbridge after it declined to reconfirm details about it that were in the original story.

By Alex Salkever, Technology editor for BusinessWeek Online

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