Dozens of distributions are stepping into the US ring. But only two heavyweights -- Red Hat and Caldera -- pack serious business punch. Which one will be the champ?
We have seen the future of Linux, and its names are Caldera and Red Hat.
You got a problem with that? Then grab a ringside seat and separate the contenders from the pretenders.
More than 100 Linux distributions litter the worldwide landscape. Publicly, most US hardware and software providers have vowed to support four major versions: Caldera, Red Hat, SuSE and TurboLinux . Not to be left out, Debian is a favourite of Slashdotters, and upstart Mandrake is wildly popular in retail.
Still, on the eve of the LinuxWorld Conference & Expo in San Jose, which begins Tuesday, experts say Linux market consolidation is imminent because there is too little differentiation among many versions. What's more, many distributions generate little revenue or ship for free with trade magazines. Choose the wrong Linux distribution, and you could wind up with a bankrupt open-source partner.
Champions in waiting
What's a solutions provider like you to do? Place your bets on Caldera or Red Hat. That's what most US-based hardware and software companies are doing.
"We're picking Red Hat to win and Caldera to show (in the United States)," says a software expert at IBM. The source requests anonymity because he does not want to alienate SuSE and TurboLinux, which have a very strong following in Germany and Asia, respectively. IBM has partnerships with both firms.
"There are a lot of different (Linux) distributions out there," adds Michael Danzinger, director of strategic business alliances at Computer Associates International. "But IT managers will only hang their hats on those that are properly supported. We're going to let customers decide who the winners are. It's really a regional story. In the United States, Red Hat and Caldera are the Linux distributions we hear about most."
Dansinger notes that CA also has tight relationships with SuSE and TurboLinux.
On the move
Linux used to be the operating system of rebels, innovators and IT outsiders. But things have changed. Today, IBM, CA and other enterprise players want to push Linux directly into Fortune 500 data centers. After shipping 1.3 million server licenses last year, Linux has overtaken NetWare and Unix to become the world's No. 2 server operating system, trailing only Windows NT, according to International Data.
Caldera and Red Hat are riding the Linux tidal wave and generating record sales. But their success has less to do with technology and more to do with strategic business planning. Caldera and Red Hat both have seasoned management teams, firm financial backing and solid partner programs that include high-tech giants like Oracle.
Still, neither Caldera nor Red Hat can afford to pull any punches. While Linux shipments continue to skyrocket, both companies face several tall challenges, including mounting financial losses, deflated stock prices, potential staff defections, some skeptical Fortune 500 customers, and fierce competition from Microsoft and Sun Microsystems.
Just ask Lante. The Web integrator runs Solaris, Windows NT/2000 and Red Hat Linux in its development and testing labs, but has yet to perform a corporate Linux installation. "Our customers run mission-critical apps on Solaris and NT," says David Trowbridge, director of technology at Lante. "We don't see (Linux) enjoying acceptance in our customer settings at this time."
Caldera and Red Hat intend to change that. Backed by charismatic leadership, both companies made early commitments to develop Linux for low-end business servers and Internet servers. They also invested heavily in the reseller channel, vowing to offer a single point of contact for education, certification and support.
Top-ranked managers
Caldera CEO Ransom Love is a Novell veteran who was a very early champion of Linux for business.
While at Novell in 1994, he suggested that Linux might serve as the foundation for future NetWare or UnixWare releases. When his idea fell on deaf ears, Love and Brian Sparks (now CEO of Caldera's sister embedded-Linux company, Lineo) ran for the door and launched Caldera.
Not far behind them, Red Hat entrepreneurs Bob Young and Mark Ewing also spotted Linux's business potential early. Today, Red Hat is the biggest pure Linux software company, in terms of annual revenue. Company Chairman Young, with his trademark red hat, arguably is the Linux industry's most recognised personality. (Memo to Linus Torvalds: No offence.) Meanwhile, Red Hat President and CEO Matthew J. Szulik is making a name for himself cutting worldwide business deals with the likes of Dell Computer.
Fighting for profits
Neither Caldera nor Red Hat is profitable, but both companies expect to push into the black in the next 12 to 24 months. Still, the road to profitability won't be easy. In Red Hat's July 17 10-Q filing with the SEC, the company concedes that no firm "has built a successful open-source business."
The filing says Red Hat "expects to incur significant losses for the foreseeable future." Likewise, Caldera is very cautious in its latest SEC filing, stating that the company does not expect to be profitable until at least fiscal 2002. Caldera has lost US$42.1 million since opening its doors in 1994. Red Hat lost nearly that much money in fiscal 2000 alone.
Despite all the red ink, however, both companies can flex plenty of financial muscle. Caldera and Red Hat have US$91 million and US$300 million, respectively, in the bank. Most of the funds were raised through IPOs and equity investments from major high-tech players. For instance, The Canopy Group, run by former Novell Chairman and CEO Ray Noorda, has a stake in Caldera.
Both Red Hat and Caldera have used their funding to make strategic acquisitions. Red Hat has snapped up nine companies in recent months and is making a bold move into the embedded Linux market. "The server is critical to us, but we're also pushing into new areas," says Red Hat CEO Szulik. "We're going to leapfrog the desktop and move to embedded portable devices." Szulik doesn't think competing with Microsoft for the traditional PC desktop is a wise use of Red Hat's resources.
In this corner, Caldera ...
Meanwhile, Caldera recently plunked down roughly US$110 million in cash and stock to acquire SCO's (Santa Cruz Operation's) Server and Professional Services Divisions.
The Caldera-SCO combination positions Caldera as the world's largest Unix license vendor. It also delivers lucrative partnerships with Compaq Computer and IBM, which resell SCO's UnixWare. Perhaps most importantly, Caldera gains SCO's massive reseller channel, notes SCO CEO Doug Michaels.
David Gloria, an SCO Premier Reseller and president of Ixorg, an SCO reseller organisation, echoes Michaels' point. "The real value that Caldera will get from the deal is not the Unix name, not the (SCO) customer base, not even the technologies," Gloria said. "It is the reseller channel."
Caldera also stands to gain SCO's high-end technology. While most Linux companies must wait for the upcoming 2.4 kernel release before pushing into the enterprise, Caldera can leapfrog its rivals by migrating the best of SCO's high-end UnixWare technologies to OpenLinux.
SCO already offers high-level clustering, scalable symmetric multiprocessing, Access Control List-based granular security and auditing, and excellent Logical Volume Management. As a result, Caldera could meet high-end customer needs before most Linux rivals develop similar alternatives.
Linux inventor Linus Torvalds puts it a bit more diplomatically. "The most likely scenario would be (UnixWare and Linux) complementing each other especially in 'non-core' technologies," he said. "There are pieces of UnixWare that are interesting to Linux, so migrating things over is not all that unlikely."
In classic open-source fashion, Caldera isn't going to keep SCO's goodies all to itself. Said Caldera CEO Love, "While we're having to look carefully at the licensing, we're going to open up the (UnixWare) source as much as possible, and at least some of it will be under the GNU Public License."
Still, critics say the 120-person Caldera could have trouble digesting SCO and its 900 staffers. And UnixWare has suffered from inconsistent ownership. The product's roots stretch back to a joint effort between Novell and AT&T. When Novell's plan to make UnixWare a de facto standard failed, the company sold the product to SCO. But low-cost Linux has destroyed SCO's revenue base, forcing a business combo with Caldera. Insiders say a successful combo will require top-notch management by Walter D. Hammond, SCO's vice president of operations and information systems; and David McCrabb, current president of the SCO Server Software Division.
Who's the new world champ?
... And in this corner, Red Hat
If the Caldera-SCO merger doesn't proceed smoothly, the combined company may never gain ground on Red Hat. Even Caldera admits as much. In a recent SEC filing, Caldera concedes that Red Hat has a more established customer base and a considerably stronger brand name than Caldera.
Market research reinforces Caldera's view of the industry. Red Hat commanded nearly 70 percent of the US Linux server market in 1999, according to IDC. Still sceptical? Netcraft's recent Web Server Survey found that Red Hat runs 72 percent of Linux-based Web sites.
Red Hat got its customer base the old-fashioned way. It earned it.
Technically, Red Hat was the first company to release a cohesive Linux distribution by shipping it in an easy-to-understand format, known as the Red Hat Package Manager (RPM). Before this, Linux distributions were complicated hard-disk snapshots; multiple parts of the operating system often were crudely linked together over diskettes. With RPM, Red Hat made Linux accessible to business users as well as to Linux lovers.
Partners pack punch
Red Hat used its early momentum to attract big-name partners, including CA, Dell and IBM. Those partners, in turn, have helped Red Hat to attract major customers.
Two prime examples: eToys uses Red Hat Linux and CA's Unicenter TNG to support and manage its e-commerce site, said JP Corriveau, senior vice president of research and development at CA. Similarly, Weather.com is replacing its Sun Solaris servers with IBM NetFinity systems running Red Hat, noted Scott Handy, director of Linux solutions marketing at IBM. (Handy, however, takes the high road and declines to discuss potential consolidation in the Linux market.)
Despite Red Hat's momentum, many commercial customers remain wary of Linux. Just ask Web integrator Immersant. The company has installed Red Hat Linux at several not-for-profit sites, but Immersant's core Wall Street customers have yet to deploy the operating system. "To a large extent, Linux is still taboo with our financial customers," said Glenn Archer, a technical architect at Immersant. "But Red Hat is developing a commercial presence. It's the market leader. They have key partners in place."
Even Dell is on board. The PC giant recently inked a One Source Alliance with Red Hat. The deal makes Red Hat Linux Dell's third global, strategic operating system (the others are Windows NT/2000 and NetWare). It is the biggest deal ever between an OEM and a Linux vendor. Dell has a similar, but much less extensive, agreement with TurboLinux in Asia.
A new world champ?
Red Hat hopes to become a global power, but it faces stiff competition. After all, TurboLinux dominates Asia, and SuSE owns the German market. And in recent months, SuSE and TurboLinux have made aggressive and somewhat successful moves into the US market.
Still, there's no denying Red Hat's momentum. Just ask Dan Kusnetzky, vice president for system software research at IDC. Recently, Kusnetzky was in Brazil talking about server operating systems. During the presentation, he used Red Hat as a symbol for the Linux market. Audience members understood the symbolism -- even though Red Hat is not distributed in Brazil.
Red Hat's brand is backed by plenty of brains. Chief Technology Officer Michael Tiemann and Director of Engineering Erik Troan give the company a powerful technical punch.
Experts say only VA Linux, the first Linux hardware vendor, and Transmeta, with Torvalds, are in the same ring.
It's not all wine and roses for Red Hat, though. Chief Financial Officer Hal Covert recently resigned to join SGI. His departure came only three days after Red Hat CEO Szulik told Sm@rt Partner that the company needs to retain its top managers. According to a source close to Red Hat, SGI made Covert a financial offer he couldn't refuse.
The real winner
Thanks to savvy management, Red Hat and Caldera are often mentioned in the same breath as Microsoft and Sun in the server market. And despite their corporate focus, neither Red Hat nor Caldera is about to abandon the wild and woolly world of open source -- which is the real winner in the current operating-system wars.
What does the future hold for Linux? The simple answer is massive market consolidation. Said Ken Rother, chief technology officer of Immersant: "There isn't enough differentiation between all the distributions. Not everyone will survive."
CA's Corriveau compares the current Linux market to the Unix industry, where niche players like NCR and Sequent ultimately raised the white flag and embraced Unix offerings from high-profile partners.
Which Linux contenders will be left standing in the US business market? The smart money is on Red Hat and Caldera.
