Software Shift

Linux. For years it was an obscuren word, known mostly to idealistic

programmers who contributed chunks of software to help develop a free,

open-source alternative to operating systems from Microsoft Corp. and others.

With its friendly penguin mascot, it seemed more like a feel-good social

movement than a serious threat. But in the past four years, Linux has torn into

the once fat-and-happy operating-systems biz, raising its share of the server

market to 23%—second only to Microsoft.

Now, the open-source crowd is setting its sights well beyond Linux, to huge

new swaths of the software industry. Upstarts such as MySQL AB and JBoss Inc.

are coming out with second generation open-source software: everything from

databases and search engines to programming tools and desktop PC software. If

this stuff follows the trajectory of Linux, it could cut into the sales and

profits of incumbents, altering the financial landscape of the $200 billion

business.

None of this would be possible without the Web. The Net lets thousands of

people worldwide contribute code, fixes, and ideas to the small tribes that put

open-source programs together. At data-management developer Sleepycat Software

Inc., its 20 programmers are aided by a small army of volunteers. "Hundreds

of people have added small pieces," says Chief Technology Officer Margo

Seltzer.

Playing the Linux Card



The new players are gaining traction. Sweden’s MySQL has signed up 5,000

customers for its $495 database program. A March Forrester Research Inc. (FORR )

survey of 140 large North American companies showed that 60% are either using

open-source software or plan to. "We’re starting to see a big

change," says Andy Miller, vice-president for technical architecture at

Corporate Express Inc., a Broomfield office-products distributor.

There’s no mystery to open source’s appeal: The price is unbeatable.

Corporate Express has saved up to $6.1 million over three years with open-source

programs, says Miller. Many corporations simply download open-source packages

from the Net for free. Others get the software from such companies as Red Hat

Inc. as part of a package that includes services. Even when businesses pay for

the software, it often costs a fraction of what traditional software makers

charge. MySQL’s $495 program, while not as capable as Oracle Corp.’s $4,995

database, is being used as an alternative for certain applications. "Open

source shifts the balance of power to tech buyers," says Forrester analyst

Ted Schadler.

Software incumbents are retooling their strategies. IBM and Novell Inc. are

embracing open source and selling customers a package of software and services.

Microsoft at times discounts Windows to compete. "The word you hear from

customers is that playing the Linux card is worth a 25% to 30% discount,"

says Scott Lundstrom of AMR Research Inc.

Many corporate buyers still want the security and predictability of a

proprietary package that is sold and serviced by a proven supplier. Microsoft

tries to persuade customers that Linux costs more over time to maintain and

update. "Linux used to be this weird, mystical phenomenon," says CEO

Steven A. Ballmer, but now that it’s a commercial product, Microsoft knows how

to compete with it. Maybe so. But as open source moves beyond Linux, this

shape-shifting phenomenon is shaking up the software biz.

By Steve Hamm in BusinessWeek. Copyright 2004 by The McGraw-Hill Companies, Inc