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 emphasise 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 specialised 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."
