Only the strong survive in Linux landscape

Two years ago, numerous companies thought it would be a snap to parlay the popularity of the open-source operating system into profitability. Now Linux companies are consolidating, overhauling their business plans, laying off staff, scaling back expansion plans and pushing back profitability schedules.

Linux executives and analysts predict this new environment could spawn several new trends: Linux companies cooperating more, consolidating more or ceding some influence to giant corporations such as IBM. And they expect the tougher business climate to widen the gap between the leading distributor of Linux, Red Hat, and its competitors.

"It would seem there are too many distributions for the market to bear," said Gartner analyst Tom Henkel. "Red Hat is the most popular. The other distributions don't have a lot of visibility."

But the fates of Linux companies are as intertwined today as they were during more optimistic days, and losing competitors is an outcome Red Hat itself doesn't want. "You certainly don't want to be a category leader in a category of one," Red Hat Chief Executive Matthew Szulik said in an interview.

Few doubt there is a future for Linux itself: It is the second-most popular server operating system, won the heart of IBM, and was identified as Microsoft's "threat No. 1" by Chief Executive Steve Ballmer in a January speech. And the cooperative programming effort that creates Linux shows no signs of slacking off.

But much of the entrepreneurial momentum behind the operating system is gone.

The rise and fall of Linux businesses
Linux began as a programming project in 1991 by Finnish computer science student Linus Torvalds, who wanted a clone of the venerable Unix operating system to use on his Intel computer. Over the years, students and enthusiasts spread Linux across the multitudes of Intel computers, then to computers using other processors as well.

Next came the businesses. Of the first generation of Linux companies, Red Hat, Caldera Systems, SuSE and Turbolinux sold software, while Linuxcare offered support services and VA Linux Systems sold computers.

A second generation of Linux companies included Lineo, MontaVista Software, TimeSys and LynuxWorks, all focusing on Linux for "embedded" computing devices such as network routers, handheld computers or set-top boxes. Steeleye and Mission Critical Linux emphasize high-end servers that protect customers against crashes. Indrema is working on a Linux video game console, and Loki Software is working on the games themselves.

Penguin Computing tried to take on VA by selling servers, while Linux Networx and Atipa specialized in connecting numerous computers together to make cheap supercomputers.

Now, Linux companies are sharing the financial hurt inflicted on Internet companies and the technology sector overall.

• Red Hat laid off 20 workers in December.

• Lineo withdrew its initial public offering in January.

• SuSE laid off 30 people, most of its U.S. employees, in February.

• Caldera Systems delayed the acquisition of Santa Cruz Operations' Unix software by a quarter.

• Turbolinux and Linuxcare laid off dozens in February. Turbolinux Chief Executive Paul Thomas said he's searching for someone to take his place, while Linuxcare co-founders Dave Sifry and Dave LaDuke are among those departing now the deal is done.

• VA Linux Systems cut 114 people in February and delayed its expected profitability by nine months.

Now further consolidation is a possibility.

"I don't think it's any secret that all the companies in this space have talked," Turbolinux's Thomas said in an interview.

But Red Hat, the most powerful and best-funded Linux company, isn't buying--at least not the standard Linux sellers. "Over the last three years, we've had discussions where we could have done that, and we have chosen not to," Szulik said. The company is more interested in moving into new software areas, he said.

"Any of these distributions are great targets for Red Hat, but they don't have to buy these guys," said WR Hambrecht analyst Prakesh Patel. Red Hat has enough cash and revenue, combined with tight expense control, that it can afford to play a waiting game, he said: "It's the one company that's financially going to be there in the next couple years."

More cooperation?
The top Linux executives at Caldera and Turbolinux foresee increased cooperation between Linux companies, but Red Hat's comparative market strength means it can afford to set its own standards.

"I think we'll see some opportunities emerge for collaboration in areas where frankly we should have been collaborating before," Caldera Chief Executive Ransom Love said in an interview. For example, other Linux sellers could put their weight behind a unified management software effort such as Caldera's Volution program. He also hopes the long-nascent Linux Standard Base will gain traction.

Turbolinux's Thomas also predicts that versions of Linux will converge. "There will be a generic or standard Linux distribution," he said. "People are moving toward neutrality."

Fat chance, observers say. "There's no reason for Red Hat to cooperate with Caldera or Turbolinux or SuSE," Patel said, adding that Red Hat has about 70 percent of the market, while none of the others accounts for more than 10 percent.

Indeed, Szulik derides the standardization hopes of Turbolinux and Caldera. "I don't think that coming out with a standard is going to be a great panacea," he said.

Respite coming?
Despite the troubles, there are some positive signs on the horizon. Little-known Ebiz Enterprises, through its acquisitions of Linuxmall.com and Jones Business Systems, expects to have positive cash flow by June 30.

Turbolinux, now with Linuxcare aboard, expects profitability by the end of 2001 if it can maintain its current revenue level, Thomas said.

Red Hat is in good shape and could break even or perhaps see a profit in its next quarter, Patel said. "Red Hat has zeroed in on several winning business models," he said. "Riding the Linux hype, they did their secondary offering at a very high price. They haven't missed any quarters. They've grown gross margins."

For his part, Szulik is trying to make sure Red Hat isn't tarred with the same brush of disdain that afflicts failing Internet companies. "It's very easy to put Red Hat in the same category as eToys," he said. "We're from that same era. But we're two very different businesses."

Caldera's Love, despite his company's difficulty digesting higher-end Unix software from Santa Cruz Operation, has no regrets. "It's the maturation of Linux," he said. "Maturation is often awkward and painful to go through, but its result is far better."

Even as Linux businesses are struggling, though, the idealistic motives that underlie much of the Linux movement still are intact.

Eric S. Raymond is author of open-source manifesto " The Cathedral and the Bazaar" and is one of the most vocal open-source advocates. But his position on VA's board of directors put him in the awkward position of having to vote for layoffs, he said in a recent letter posted on Linux discussion site NewsForge.

"I went along with the 25 percent cuts because I understood the possible alternative: no company," Raymond wrote. "It was a weird, wrenching feeling to wander around VA headquarters that afternoon, talking with good friends of mine, knowing in a few cases that they were likely to be canned through no special fault of their own."

But Raymond also has a deeper optimism, even though his previous paper worth of $41 million has dwindled. "I wasn't in it for the bucks then, and I'm not now," he said. "If the slump does nothing else but take our eyes off those dollar signs and put them firmly back on the work, maybe it will have been the best thing for us after all."