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Are the Linux Backers Right?


by Hal Plotkin
Silicon Valley Correspondent


“I believe open source software will have an impact on the category of Internet infrastructure software. It already has. Part of it’s because businesses don’t have to pay the extra licensing fees.”
— Steve McClure, an analyst at International Data Corporation

As companies such as Red Hat Inc. {RHAT} and VA Linux Systems {LNUX} continue to prosper, dozens of well-established software firms could face a daunting set of challenges from the same phenomena that gave rise to Linux: the open-source software movement.

Open-source products are software programs that are developed in unison by individuals and companies who freely share programming code and documentation over the Internet and in person.

Companies that are affected by the open-source movement include Computer Associates {CA}, Candle, BMC, The Santa Cruz Operation {SCOC}, Oracle {ORCL}, Peoplesoft {PSFT}, Vignette {VIGN}, SAP {SAP} and many others.

To date, most stories about open-source software have focused on how Microsoft Corp. {MSFT}, the dominant maker of computer operating systems, might be affected by Linux.

But if Linux and the open-source business model it represents does succeed, Microsoft won’t be the only software firm with a potentially outdated business model.

“From an investor’s perspective it’s valid to identify which specific software companies have an open source strategy,” says Stacey Quandt, an analyst at the Giga Information Group, based in Santa Clara, California.

If a software firm doesn’t have a viable open-source strategy, or plans to quickly develop one, Quandt says, “there could be monetary implications to the success of that company.”

At present, most major high-tech companies have made only tepid moves in the open-source marketplace.

IBM {IBM} and Oracle, for example, have ported, or made compatible, some of their products with Linux. Both firms, however, continue to focus most of their efforts in the more traditional proprietary arena.

Like other analysts, Quandt says competitive software companies will need to be more aggressive about formulating an open-source strategy. It’s similar, she says, to the way successful high-tech companies developed an Internet-strategy over the last few years.

RHAT’s post-IPO chart


MSFT’s 6-month chart

Firms that grasped the importance of the Internet early on and developed clear and focused online strategies, such as Dell Computer Corp. {DELL}, have prospered, while others that were slower to understand the impact of the Internet, such as Compaq Computer Corp. {CPQ} and AST Research, floundered.

“The same thing is happening again,” says Quandt. “It’s not in the immediate time frame, but it’s definitely emerging. Some companies will adapt more quickly than others.”

Steve McClure, an analyst at International Data Corporation, based in Cambridge, Mass., says business software infrastructure companies, particularly Internet infrastructure firms, are at most risk should the open-source software movement continue to gain steam.

“It’s particularly important for companies that are close to the operating system,” he says. “You’re talking about companies like Computer Associates, BMC, and Candle.”

“I believe open source software will have an impact on the category of Internet infrastructure software,” McClure says. “It already has. Part of it’s because businesses don’t have to pay the extra licensing fees.”

Unlike proprietary software products sold by companies such as Microsoft, Oracle, SAP, and others, the vendors of open-source software products such as Linux make the source code of their products freely available.

Armed with the source code, programmers can modify or improve software without needing the help or permission of the original manufacturer.

“Everyone who uses open source software can benefit whenever the software is improved,” says Quandt of Giga Information Group.

Rather than make money selling software or software-user licenses, open source companies generate revenue by selling documentation and related professional services that help businesses maintain and improve their operations.

Tim O’Reilly, the founder of O’Reilly and Associates, a leading publisher of Internet and open source-related technical journals based in Sebastopol, Calif., says the software industry is already in the throes of a major transformation. “Quite a few successful companies have already been created based on open source software,” he says.

Although people outside the industry may not fully realize it yet, O’Reilly says the advent of Internet Service Providers, such as AOL {AOL}, and other companies, such as Herndon, Va.-based Network Solutions, Inc. {NSI}, which sells and registers Internet domain names, can be traced directly to the widespread use of the open source software that enabled the Internet.

“The idea that open source software creates new business opportunities is not speculation,” he says. “It’s a proven case.”

In the future, O’Reilly, says, increasing numbers of business customers will likely conclude they would be better served by open-source vendors.

“Take customers of a company like Vignette,” he says. “A lot of what Vignette is selling is a whole lot of professional services. The software is only a small part of it.”

O’Reilly says information technology buyers will increasingly flock to competitive open source products as they become available for very practical business reasons.

“If you’re going to be spending a lot of money on professional services with a firm like Vignette, you might as well spend it with an open source company that gives you more freedom.”

Vendors of proprietary software solutions may, in the future, find it hard to compete with open source suppliers who offer their customers such freedom, O’Reilly says.

That is, as long as the products themselves are comparable on a feature-by-feature basis.

“You’re taking away the power of a supplier to restrict a market,” he says.

Customers buying from a vendor selling a proprietary software product, for example, are usually forced to turn to that one vendor for service, support, and upgrades. Open source customers, on the other hand, are free to leave one vendor and go to any another, much the way a car owner can get service from any qualified mechanic.

“It’s puts more power in the customer’s hands,” says Quandt, of the Giga Information Group. “There’s real value created by the open-source approach.”

Experts are divided, however, on the potential, overall long-term impact of open source practices on the software industry.

Some, like Quandt and O’Reilly, see it as an already dominant reality, which is, or should be, forcing software companies to immediately rethink their strategies.

Others, such as McClure of IDC, say they still need to be convinced the open source business model has legs.

McClure doesn’t quibble with the idea that open source software, such as Linux, is playing an important role. Instead, he says the jury is still out on whether open source companies can show the kind of profitability and revenue growth needed to sustain their businesses.

“The principle of increasing returns has to kick in somewhere,” he says. “There is a lot of experimentation going on in the software industry right now, with new business models. This is part of that. But the truth is, just how sustainable any organization can be with open source products as a primary business strategy isn’t known yet.”

Analysts say prospects for the open source business model could get a boost from two Linux-like open source software development projects now gaining steam: Icecast, a streaming media open source software project that competes with Seattle, Washington-based Real Networks, Inc., among others, and Zope, a high-performance web site application program, both of which are available free of charge over the Internet.

“If Icecast catches on, it can potentially have an impact on Real Networks in the same way that Linux is having an impact on Windows NT or Sun’s Solaris,” says O’Reilly. “It’s creating an open source alternative.”

At a minimum, O’Reilly says technology investors, particularly those holding stocks of companies in the business-to-business infrastructure space, should pay careful attention to whether those companies have integrated an open source strategy into their business plans.

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This work is licensed under a Creative Commons Attribution 4.0 International License.

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