Software Shift

Linux. For years it was an obscure 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. (MSFT) 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 (Colo.) 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 (ORCL) $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. (NOVL) 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

The Good Business Issue
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