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STREET WISE by Sam Jaffe	February 22, 1999

BUG-FREE, AND FREE. Still, don't expect to see the Linux penguin -- the software's logo -- appear on your PC screen anytime soon. Right now, the OS is used only on network servers. But that's its first point of attack against Microsoft, whose future ultimately may depend on its ability to make its NT operating system ubiquitous, both for servers and PCs. Linux' threat to NT lies in its reputation as relatively bug-free software that is much more scalable -- or better able to handle multiple-processor machines -- than is NT.

Further, Linux has one edge that Microsoft may never match: It's free. Companies such as IBM and Red Hat do charge for their implementation of Linux, but the software is also what, in industry jargon, is called open-source software. This means that unlike the situation with Microsoft's Windows, Sun's Java, or nearly any other piece of proprietary software, Linux' source code is freely available to anyone who wants to tinker with it. Once the code has been changed, you can't distribute the altered version. But you can submit your changes to Linux' original author and copyright holder, Linus Torvalds. If he likes your changes, they could be included in Linux' next official. Even so, you won't get paid for your trouble because the source code isn't for sale: It's free to anyone who wants it.

Linux has already enjoyed startling growth. Its first version was written by Torvalds in 1991, while he was still an engineering student in Finland. Since then it has been improved with a multitude of fixes and dozens of upgrades. Last year was a breakthrough for it: According to statistics from IDC, about 750,000 servers had Linux installed in 1998, an increase of 212% from the year before. Linux' share of the lower-end server market grew from 6.8% in 1997 to 17.2% last year. Microsoft's NT, meanwhile, saw its share of the market barely rise, from 35.8% in 1997 to 36% in 1998. The server market grew dramatically last year, so the number of NT installations rose 27%. Still, Linux has stolen Microsoft's thunder in servers, at least for the moment.

WIDESPREAD SUPPORT. The dramatic growth in Linux installations in part reflects the service and application agreements that major software and hardware manufacturers have signed. IBM aside, Hewlett-Packard (CA) that they will be publishing versions of their programs that can run on Linux servers. That's the real key to Linux' success: Application programs that will run on Linux.

"Companies don't buy operating systems for their own sake," says Kimball Brown, an analyst with Dataquest. "They start with problems needing to be solved, then choose the software applications that will solve those problems, and then choose the operating system that best fits those applications. The more applications that are written for Linux, the brighter its future."

Right now, Linux has a long way to go before it becomes a full-fledged Microsoft-slayer. Its most visible weakness is its lack of a graphical user interface that would make it easier to use. Even some of its plumbing is still a work-in-progress. For instance, there is no JFS, or journal file system, which allows a computer to reboot exactly where it left off in case of a freeze. But Linux is improving rapidly. Probably its greatest asset is the pool of programmers who use it. "Microsoft is limited to a few thousand programmers in Redmond," says Brown. "Linux has a potential workforce of millions."

Back at Microsoft's Washington headquarters, meanwhile, software's 800-pound gorilla looks like it is drowning in its own code. Microsoft's next big program, called Windows 2000, is slated to replace NT later this year, and then to replace Windows 98 sometime over the next two or three years. That means one operating system for all Microsoft-controlled computers -- desktops, servers, or information appliances such as Web-enabled electronic address books.

LATER AND SMALLER? Launching Windows 2000, which was originally supposed to be released more than a year ago with the name NT 5.0, is no easy task, however. Win2000 is already a behemoth, with more than 40 million lines of code. And its preview releases have been less than a smashing success, as companies that are experimenting with it have reported frequent shutdowns and freezes. Microsoft claims that Win2000 will be launched by the end of 1999, but doubts are surfacing that it can be finished in time. "I'm convinced that Windows 2000 won't ship this year," says Dataquest's Brown. "And the feature set that will eventually be released will have to be whittled down." In other words, the program won't be as expansive as Microsoft has promised.

A lot is riding, then, on how good Windows 2000 turns out to be. If it's a dud, it would be a catastrophe for Microsoft. Even its hold on the desktop market, where its gross profit margins approach 80%, could eventually be threatened. And the company's future growth, upon which is built its sky-high price-to-sales ratio of 20 (vs. 2.4 for the S&P 500 companies), ultimately will depend on the success of Windows 2000. Already, Linux as sent a quiver through Microsoft's stock price, which for the week ended Feb. 19 was down 10% before recovering slightly -- mainly because of the IBM agreement. If Windows 2000 turns out to be a disappointment, Linux could be one of several potential earthquakes that might knock down Microsoft's house.

Jaffe writes about the markets for Business Week Online

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