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THE CUTTING EDGE: FOCUS ON TECHNOLOGY

Linux Firms Still Searching for Success

As the Open Source OS Continues to Build on Its Challenge to Windows, a Quartet of Pioneers Struggle to Ride the Wave

October 02, 2000|JOSEPH MENN | TIMES STAFF WRITER

FREMONT, Calif. — The scattered boxes and extension cords snaking through the spacious new VA Linux Systems offices show that the company is riding a wild growth curve.

Last week, VA Linux moved into buildings four times bigger than its old offices, giving the past year's 400 new hires a place to stretch their legs. "We've been very pleased with the way it's gone," said Chief Executive Larry Augustin of sales that have tripled in the last three quarters.

VA Linux is on the upswing, selling thousands of specialized computers handling data storage, World Wide Web pages and other functions, all running the free operating system known as Linux.

Only a year ago many analysts expected there would be dozens of similar companies, all closing in on sizable profits by providing Linux products or services. Instead, VA Linux is one of only four Linux companies that had initial public stock offerings before the technology slump this spring, and all four are trading at fractions of their giddy highs.

Although VA Linux is nearing break-even, none of those four firms make any money yet. And for all Linux firms, public or private, tougher times may lie ahead as IBM, Compaq and other major computer makers embrace Linux and step up the level of competition.

The enthusiasm hasn't helped Linux companies live up to the promise of their early stock prices. "People thought that Linux was going to overthrow Microsoft, and that was misplaced," said analyst Prakesh Patel of WR Hambrecht & Co. in San Francisco.

Created in 1991 by Finnish student Linus Torvalds, Linux is an operating system like Microsoft's Windows, a major piece of software that runs an entire computer. Smaller programs, such as e-mail, Web browsing and word processing, work within this operating system. But Linux is an "open source" system, one with the blueprints available to all, so that Linux is not under the control of a single corporate owner.

Although the basic Linux system can be downloaded for free, it isn't easy to use. Investors believed that many companies would prosper by writing Linux software applications, helping customers integrate Linux with their other systems, and selling Linux pre-installed on computer equipment.

Linux has generated wide support among programmers, and that enthusiasm spread to Wall Street last year. VA Linux's initial public offering in December set a record for first-day performance when the stock soared from $30 to as high as $320. On Friday, VA Linux closed at $46.25.

Yet corporate demand for Linux systems keeps rising. Last year Linux accounted for 24% of new operating systems shipped for computer servers (which run tasks such as e-mail or printing), second only to Windows NT's 38%, according to International Data Corp. By the end of this year, IDC projects that paid Linux installations will top 3 million. And the proportion of Fortune 500 companies using Linux has surged from 14% to 22% in six months, according to Salomon Smith Barney.

For these customers, the attraction is that Linux is free, or nearly free, and can be adapted to various network systems and handle a wide range of heavy-duty functions without crashing.

All told, more than a hundred companies now sell various Linux products. And although the business of Linux is still in the chaotic early stages, industry experts say some lessons are emerging.

First, selling material that can be downloaded for free isn't much of a long-term strategy.

Red Hat Inc. sells packages of Linux on compact discs, together with technical documentation and a promise of technical support, for as little as $30. The first out of the Linux IPO gate last year, Red Hat's stock soared from its IPO price of $14 and rose as high as $151.31 before skidding.

That slide has accelerated since Sept. 15, when the Durham, N.C., company reported that its sales rose a less-than-spectacular 15% from the previous quarter. Red Hat is now trying to sell more technical help for corporate customers that have already installed the Linux system. But in the most recent quarter, Red Hat's loss widened to $16 million on just $18.5 million in sales, and the stock closed Friday at $17.06.

"People don't understand how Red Hat is going to make money," Patel said.

One basic problem is that packaging Linux software for sale isn't worth much. "There's no barrier to entry," said IDC analyst Dan Kusnetzky. "A college student could configure Linux software and buy a CD burner and sell it on campus. At best, you can charge enough for the production, packaging and advertising."

Caldera Systems, another Linux distributor, based in Orem, Utah, has seen its stock plunge from $33 after its March IPO to $4.09 on Friday. Caldera sells Linux packages and also develops Linux-oriented training material.

Another rival is TurboLinux based in Brisbane, Calif., and sells most of its Linux sets in Asia. On the verge of filing for an IPO, the company is now shifting toward creating software applications for big businesses already using Linux.

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