Meet Nicholas
Walker, digital nomad. Like blues musicians who once wandered the
South singing for their supper, this 18-year-old high school dropout
lives out of a suitcase--sometimes trading his software programming
skills for a place to crash or some spending money. His travels have
taken him far and wide, from a programmers' confab in Istanbul to
Massachusetts Institute of Technology's famed Artificial
Intelligence Laboratory. Walker's fresh, earnest face tells all:
He's an idealist. He believes in sharing his software innovations
with others. "I'm not comfortable with selling the things I do and
making money from them," Walker says during a stopover at his
parents' home in New Hampshire.
Three hundred miles to the south, on the 12th floor of a
Manhattan office tower, Walker has an unlikely soul mate. Jeffrey M.
Birnbaum, 37, is managing director for computing at brokerage giant
Morgan Stanley's Institutional Securities Div. He's so buttoned-down
that he wears a suit on Casual Friday. You would think this cog in
the capitalist machine would have nothing in common with young
Walker. But Birnbaum is betting Morgan Stanley's (MWD ) technology
future on the kinds of software projects, called "open source," that
Walker participates in.
Birnbaum has fallen hard for Linux, a
penny-pinching open-source alternative to computer operating systems
such as Microsoft Corp.'s (MSFT ) Windows
and Sun Microsystems Inc.'s (SUNW ) Solaris.
He's busy replacing 4,000 high-powered servers running traditional
software with much cheaper machines running Linux. Projected
five-year savings: up to $100 million. Does it bother him that
counterculture kids like Walker have a hand in Linux? Not a bit. "We
see their work, and it's good," he says.
Just when it seemed
the technology world had lost its fizz, a powerful movement is on
the rise. A ragtag band of open-source programming volunteers
scattered around the globe--and hooked up via the Internet--is
revolutionizing the way software is made. At the heart of what they
do is Linux, an operating system flexible enough to run everything
from an IBM supercomputer to a Motorola (MOT ) cell phone.
Because it's open source, Linux can be downloaded off the Web for
free--though it's typically bought by corporations as part of a
package that includes service.
The computer realm may never
be the same. Imagine the havoc in the energy business if some
newcomer started giving away gasoline. Linux is bringing on a
convulsion of that magnitude in tech. Practically every tech company
is being forced to figure out how to take advantage of Linux--or to
avoid being swept aside by it. And don't be fooled by Linux'
harmless-looking penguin mascot, Tux: This stuff is shaking up the
balance of power in the computer industry. It poses the biggest
threat to Microsoft's hegemony since the Netscape browser in
1995.
Backed by technology titans such as Intel (INTC ), IBM (IBM ),
Hewlett-Packard (HPQ ), and Dell
(DELL ), Linux
is just now going mainstream. From DaimlerChrysler (DCX ) to Tommy
Hilfiger (TOM
)--not to mention just about every major brokerage on Wall
Street--Linux is gaining ground. Coming from near zero three years
ago, it has grabbed 13.7% of the $50.9 billion market for server
computers. That figure is expected to jump to 25.2% in 2006, putting
Linux in the No. 2 position, according to market researcher IDC. And
get this: Starting this year, No. 1 Microsoft's 59.9% share in the
server market will reverse its long climb and slowly slide
backwards, predicts IDC. Meanwhile, Linux is finding its way into
countless consumer-electronics gizmos, including Sony PlayStation
video-game consoles and TiVo TV-program recorders (TIVO ). "Has
Linux come of age? The answer is absolutely, positively,
unequivocally yes," says Steven A. Mills, group executive for IBM
Software.
No one could have seen this one coming, not even
Linus Torvalds, the young Finnish programmer who wrote Linux as a
cut-down version of Unix for the PC in 1991. Torvalds figured it
would be a free plaything for computer hobbyists who weren't
satisfied by what big tech companies like Microsoft and IBM
produced. "If someone had told me 12 years ago what would happen,
I'd have been flabbergasted," says Torvalds.
How did Linux
make the jump into the mainstream? A trio of powerful forces
converged. First, credit the rotten economy. Corporations under
intense pressure to reduce their computing bills began casting about
for low-cost alternatives. Second, Intel Corp., the dominant maker
of processors for PCs, loosened its tight links with Microsoft and
started optimizing for Linux in addition to Windows. This made it
possible for corporations to get all the computing power they wanted
at a fraction of the price. The third ingredient was widespread
resentment of Microsoft and fear that the company was on the verge
of gaining a stranglehold on corporate customers. "I always want to
have the right competitive dynamics. That's why we focus on Linux.
Riding that wave will give us choices going forward," says John A.
McKinley Jr., executive vice-president for global technology and
services at Merrill Lynch & Co., which runs some key securities
trading applications on Linux.
Microsoft takes the threat
seriously. While it is holding on to its monopoly in desktop
systems, Linux' march into servers threatens a key growth area--one
that controls much of the Internet. Microsoft Chairman William H.
Gates III and CEO Steven A. Ballmer decline to answer questions on
the subject. But James Allchin, the group vice-president who runs
the Windows business, calls Linux "the No. 1 competitor for this
company," ahead of even IBM and Sun. Because it's free, Linux is
undercutting Microsoft much the way Microsoft has gutted its rivals
with lower prices for the past two decades. But Microsoft insists
that Windows is more capable than Linux and argues that
innovations--such as its Tablet PC technology--will keep coming from
commercial software outfits.
Frustrations, though, run high.
One Microsoft executive, chief strategist Craig Mundie, even calls
Linux unhealthy for the technology industry. "It ultimately is a
question about whether societies are going to value intellectual
property or not," he says.
He has a point. The computer
industry has been built on a simple premise: Companies invest to
create software, sell it, and pour a good part of the proceeds into
building more. Now, with the open-source philosophy, that stream of
revenue is threatened. And it's not just because the Linux operating
system is free. Before using open-source software, tech companies
must sign a license in which they promise to give away innovations
they build on top of it. "The business doesn't go away," says Eric
von Hippel, a professor at MIT's Sloan School of Management. "But it
changes forms. Instead of making money from the operating system,
you are going to have to make it elsewhere."
For tech
companies to thrive in this new world, they'll have to operate
differently. This could mean building businesses around selling
services, as IBM does, or creating software that runs on top of
Linux, like Oracle Corp.'s database (ORCL ). Dell
Computer Corp. benefits from Linux and sidesteps its dangers by
staying out of the software business altogether.
Longer term,
the open-source movement threatens vast sectors of the software
industry. True, since the volunteer programmers often lack
specialized knowledge, complex business applications are probably
beyond their range. But basic open-source databases and e-mail are
already available. What happens if corporate customers begin
gobbling them up? While no one knows how far open source will go, it
could deflate profits.
Like all big shifts, the Linux
phenomenon will produce winners and losers. Likely winners include
IBM, which specializes in high-performance computing and is selling
twice as many Linux servers as any other computer company. Processor
maker Intel is riding Linux' coattails into the world of
high-powered computing. And Dell is pumping out low-priced Linux
servers and selling them directly to companies via the
Net.
While Microsoft stands to lose from Linux, the movement
is inflicting far greater damage on Sun. Some of Sun's customers are
migrating to Linux machines, which perform similar tasks at a
fraction of the price. Online stock trading site E*Trade Group Inc.
(ET ), for
example, replaced 60 $250,000 computers that run on Sun's Sparc chip
with 80 Intel-based Linux machines costing just $4,000 a
pop.
What could derail Linux? The biggest risks are
intellectual-property issues. SCO Group, holder of the original
patents for Unix software upon which Linux is based, has announced
plans to form a licensing division and hire superlawyer David Boies
to press its claims against sellers of Linux. Another potential
problem: There are a handful of commercial versions of Linux. If
they evolve into substantially different programs, software
companies that sell applications might have to create a separate
version for each type of Linux.
None of this, though, looks
likely to halt Linux' advance any time soon. So far, the threat of
patent claims is not deterring customers. And sellers of Linux vow
to keep their versions compatible with one another. A recent survey
by Goldman, Sachs & Co. shows that 39% of large corporations now
use Linux. While many companies haven't tried it yet, analysts
expect an improved version coming out this year to tempt a new wave
of corporate tech buyers.
The Linux phenomenon spreads like
water--finding its way into all sorts of surprising nooks and
crannies. And that's by design. When Torvalds started writing the
operating system on a $3,500 computer while a graduate student in
Finland, he made it both compact and flexible, so it could be used
in a host of ways. He also decided to share the technology freely
with others. The idea: Take it, build something, share what you
make. Within weeks of the now-auspicious Aug. 25, 1991, date, when
Torvalds first posted the bare bones of his little program on the
Internet, dozens, then hundreds, of people from Japan to New Zealand
to the U.S. were responding with encouraging words, fixes, and new
features. He had tapped into a vibrant underground community--true
believers in the principles of open-source software--that would help
him build Linux into a global phenomenon.
Torvalds, now 33,
still orchestrates this digital quilting bee. He has final say on
everything that goes into the updates of his operating system--and
doesn't mind being called the "benevolent dictator" of Linuxland.
These days, Torvalds' day job is programming for startup chipmaker
Transmeta Corp. in Santa Clara, Calif. He speaks at Linux
conferences from time to time. But for the most part he prefers to
stay in the background, writing code, exchanging e-mails with his
comrades-in-arms, and spending his free time with his wife, Tove,
the six-time women's karate champion of Finland, and their two
daughters.
Torvalds appears unspoiled by success. While he
makes no money directly from Linux, he cashed in on the boom
modestly by selling some stock he was given before the 1999 initial
public offering of Linux seller Red Hat Inc. After that, he traded
in his old Pontiac for a sporty BMW Z3. Mainly, he says, he just
wants to have fun, which he considers a prerequisite for good
programming. "People need to be able to goof off," he
says.
The open-source movement's roots are decidedly more
radical than Torvalds'. In this software revolution, Richard
Stallman, a former programmer at MIT's Artificial Intelligence Lab,
plays the role of Karl Marx. The 49-year-old Stallman, with his
flower-child hair, has long believed in free software, uncontrolled
by copyrights. Back in 1984, when he set out to build such a system,
it seemed downright utopian. But Stallman persevered. With a small
group of programmers, he started building free software programs.
Stallman also created the licensing system on which Torvalds would
eventually base Linux.
Open-source software programmers say
they're different from Stallman in one major way: They don't have a
problem with people making money off their work--or making money
themselves. Miguel de Icaza, the Mexican programmer who created
GNOME, software that makes Linux easier to use, in 1999 co-founded
Ximian Inc., a private Boston company that sells software for making
Linux easier to install and update. Still, de Icaza says it's
passion for the work and not the prospect of riches that drives him.
"I can't tell if I have worked all my life or if I have never worked
a single day of my life," he says.
But if Linux' surge
continues, it will be due in large part to the Goliaths of the tech
industry. Companies including IBM, Intel, Oracle, and Dell have
thrown their weight behind it--and have given the technology
credibility with corporate tech buyers. Intel, for instance,
interested in expanding its role in the corporate server market,
convened a meeting of Wall Street heavy hitters to consider Linux on
Dec. 6, 2001, at the Michelangelo Hotel in midtown Manhattan.
Gradually, Intel and the Wall Streeters persuaded software makers
such as storage specialist VERITAS Software (VRTS ) and
financial-information suppliers such as Reuters Group (RTRSY ) to up
their commitment to Linux. "Intel's muscle on this was incredible,"
says Bridget E. O'Connnor, chief technology officer at Lehman
Brothers Inc. (LEH )
As it
happens, Linux fits comfortably with the strategic imperatives of
many of the industry's behemoths. Take IBM. For a change, it's on
the cutting edge of a technology shift. That's because in late 1999,
Samuel J. Palmisano, then head of IBM's server group and now the
company's CEO, asked his staff what the next big trend would be in
servers. Their answer: Linux. Within a matter of weeks, intensifying
during what became known as the "Christmas meetings," IBM decided to
make Linux a pillar of its strategy. During the next year, it
earmarked $1 billion to retool its software and computers to run on
Linux and devoted 250 engineers to working with the open-source
community. With Linux, IBM was able to put tremendous resources
behind the trend toward lower-cost Intel chips without becoming ever
more dependent on Microsoft, its archrival in corporate
computing.
Today, Linux and IBM are as inseparable as Las
Vegas animal tamers Siegfried and Roy. Big Blue has more than 4,600
Linux customers. About 15% of the IBM mainframe capacity shipped in
the first half of 2002 ran Linux. And in the fourth quarter, IBM
sold $160 million worth of Linux servers, equal to the combined
tally of its nearest competitors, Hewlett-Packard and Dell,
according to market researcher Gartner Inc.
Get caught on the
wrong side of Linux, though, and you take a pounding. Scott G.
McNealy's Sun Microsystems, for example, is losing contracts to
rivals who embraced Linux first. "Clearly, Linux poses the greatest
threat, at least in the short term, to Sun," says Thomas P.
Berquist, of Goldman Sachs.
McNealy is using a two-track
strategy to grapple with Linux. For the top of the market, Sun is
racing to keep its own Solaris software a step ahead of Linux. At
the same time, it's selling basic machines running Linux for simple
tasks such as serving up Web pages. "We have a very deliberate plan
here. We're going to stay focused. We're not going to do what IBM or
HP are doing--abandoning a 20-year investment in mission-critical
Unix operating systems. They're marooning customers," he
says.
While McNealy donned a penguin suit during an analyst's
conference on Feb. 6, 2002, to show his love for the operating
system, the penguin has yet to return the love. Sun just started
selling Linux servers last fall. In the fourth quarter it racked up
just $1.3 million in Linux server sales in the U.S., compared with
$675 million in sales of its Unix-based servers, according to
Gartner.
Contrary to just about every other tech company and
sage, Sun insists that the biggest impact from Linux will come on
the desktop. It's tooling up to begin selling desktop computers
loaded with Linux and its own Linux-based StarOffice suite of word
processor, spreadsheet, and database programs. Yet analysts say
Microsoft's Office software, with better than a 95% share of the
market, is so entrenched that it will be hard to supplant. Faced
with the costly prospect of converting vast terabytes of Word and
Excel documents, desktop users will likely stick with Microsoft,
predicts analyst Al Gillen of IDC. "Microsoft won the desktop battle
a long time ago," he says.
Still, large companies are jumping
on the Linux bandwagon for servers. And with so many bruisers
aboard, there's scant room for startups. Among them, only Red Hat is
a bona fide success. Like a half dozen other upstarts, it sells
packages including Linux software for desktop computers and servers.
But because of the ban on selling Linux itself, Red Hat is
essentially selling related software, ongoing technical support, and
maintenance for corporations. Three years after going public, the
company made its first-ever profit in its third quarter ended Nov.
30--a scant $305,000, on $24.3 million in revenues. It seems to have
staying power, though, thanks to distribution deals with the likes
of IBM, HP, and Dell. And it got certification on Feb. 11 to sell to
the Defense Dept.
While a host of Linux-oriented startups
were launched in the late 1990s, most of them were geared to selling
to dot-coms--many of which have since gone out of business. A dozen
Linux companies failed in the past two years, including Loki, a
gaming company, and Eazel, which was making Linux easier to use. VA
Software Corp. (LNUX ), formerly
VA Linux Systems, a maker of Linux-based computers, is just hanging
on as a seller of software-development tools--this only three years
after it broke all IPO records with a share price that soared 698%
on the first day of trading.
A handful of industry giants can
make the market grow faster than an army of startups ever could.
That's especially true internationally, where the big companies can
afford to operate sales forces in all the major countries and many
minor ones. IBM, for instance, sold Linux computers to China's
postal service for 3,200 post offices in a single province. Last
June, Germany's Interior Ministry and IBM signed a contract to
enable the public sector in Germany to buy Linux.
It's no
surprise that industry giants such as IBM, Intel, HP, and Dell
dominated the LinuxWorld conference at New York's Jacob K. Javits
Convention Center in January. Their huge booths crowded out the more
modest digs of Red Hat and Ximian on the show floor. During a ride
down the escalator on the way out of the building, three Gen Y guys
dressed in black and sporting multiple facial piercings seemed to
represent a passing era. One of them, talking on a cell phone to a
friend, called the gathering "boring." Down-escalator, a young woman
dressed in a camouflage shirt and pants and a pink babushka heartily
agreed. "It's all Big Business now. Linux has been taken over by the
suits," she sneered.
Her name was oh-so avant-garde: Scirocco
Six. Yet it turned out she was working for none other than
Microsoft.
These days, even the titans of industry are
hurrying to act like rebels. But as the Linux movement continues to
push its freeware into the world, a delicate balance is forming. Its
success hinges on keeping the peace between two extremes: the
volunteer programmers like Nick Walker, who pull all-nighters
writing code to change the world, and the commercial types like
Morgan Stanley's Jeffrey Birnbaum, who use the software to save
money. It's a weird twist on capitalism. But it just might work.
By Jim Kerstetter in San Mateo,
Calif., with Steve Hamm and Spencer E. Ante in New York and Jay
Greene in Seattle
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