The Rise of Linux in the Marketplace

 
During the past year, Linux has risen to the forefront among the relatively unknown products that can substitute for the Windows operating system.”[1]
 
Linux has become a major competitor to Microsoft’s operating system in a short period of time. Red Hat Software, the leading Linux distributor[2], defined Linux as:

An operating system that can be downloaded free and belongs to an entire community of developers, not one corporate entity [(e.g. Microsoft, etc.)]. In other words, anyone from professional software developers to hobbyist computer hackers can access and make changes to the Linux kernal – all the information about Linux is open and available to everyone…This freedom also allows companies to sell and distribute Linux on CD-ROM or by other means, although those companies must keep their code open to the public.
[3]
 
Linux has become a major player in the computer operating system market because Linux is affordable, reliable, and is being backed by a large number of respectable companies such as Red Hat Software[4] and Corel.
 
Linux has slowly risen over the years to become a major competitor to Microsoft. In fact, Microsoft is so concerned about the competition from Linux that the company deployed a team of engineers and marketers in order to “convince potential corporate users that Linux was not ready for prime time”.[5] Microsoft’s claim of Linux not being ready for the big businesses is not true considering the large number of well-known companies that are currently using Linux to complete their day-to-day operations. Linux based operating systems are currently being utilized at companies including: IBM, Netscape, Oracle, Sony Electronics, Mercedes-Benz,[6] Canadian National Railways (CNR), and Re/Max.[7]
 
Linux has become the leading competition to Microsoft because, compared to Microsoft, Linux has lower transaction costs,[8] higher economies of scale,[9] and high market growth potential.[10] Linux is able to outperform Microsoft in these key areas because of the three pronged business model that the Linux companies are based on. The three-pronged business model consists of the ‘open source concept’, the Linux development community, and the ability to provide superior customer support. In order to fully understand why Linux has become so competitive the three aspects of the Linux business model must be fully investigated.
 
The first prong of the Linux business model is in the concept of ‘open source code’. ‘Open source code’, as defined by Red Hat Software, “is a concept that keeps software open and accessible to the public”.[11] Adopting the concept of open source code is important in the competition that Linux is in against Microsoft. As David Trowbridge – a senior analyst at Survey.com – notes, the concept of Linux is troubling to Microsoft because “in the past [Bill] Gates has responded to his toughest competitors by buying them…but that’s not possible with Linux; being open-source, there’s nothing to buy”.[12] Trowbridge’s argument is true when we consider that Linux is not created in one central location, but is created by, as Red Hat Software’s co-founder Robert Young writes in his book Under the Radar, a group of “engineers working for large and small organizations as well as independent programmers”.[13] Therefore, since Linux is free and available to anyone who wants it, one company cannot attempt to monopolize the Linux kernal.
 
The fact that the Linux kernal is free is an advantage to Linux distribution companies. The advantage to a Linux company who adheres to the ‘open source code’ concept compared to a proprietary company[14], is that the Linux company can have the support of the “independent programmers [because they are] continually looking to participate in the enhancement of the product”.[15] The Linux company, therefore, doesn’t have to retain a large number of programmers compared to a proprietary company. Robert Young explains why Linux companies are able to outperform their proprietary counterparts. Young explains, “if one Linux supplier adopts an innovation that becomes popular in the market, the other Linux vendors will immediately adopt that innovation”.[16] However, a proprietary company must employ a large number of programmers who are responsible for creating and updating products. The proprietary company must make the costly investments in production because the company possesses ownership through its copyright over its product and must, therefore, privately invent new technologies and enhance their own existing technologies. Therefore, a Linux company is able to have lower transaction costs compared to their proprietary counterparts because they are able to draw upon a larger supply of programmers at a lower cost than the proprietary companies are able to.
 
The Linux community is the second prong of the Linux business model. Red Hat defines the Linux community as “an entire community of talented developers [who] can devote their efforts to fixing problems and adding new innovations”.[17] The Linux community is heavily reliant on the Internet to exchange their ideas. The Internet allows programmers around the world working for different companies share information on how to enhance the existing product and new functions that Linux can be part of. Bernie Mills, Vice-President of Marketing at Collabnet agrees with the concept of the Linux community. Mills says that the Linux community provides “an element of spontaneous innovation that [only] happens when you have developers share code and advance that using open-source principles”.[18] This spontaneous innovation occurs when a group of developers exchange their drafts of new Linux source code over the Internet in order that the cod can be adequately edited and tested before release. The process of exchanging code allows the Linux community to adequately test the new technologies to ensure its stability and effectiveness before the Linux code is released into the marketplace.
 
There is a large supply of interested parties who have been willing to engage the Linux community for their business advantage in order to develop new computer hardware technologies. These companies include Intel, Dell, Compaq, and IBM. The computer hardware companies were tired of having to wait for Microsoft to develop the software required to operate their new technologies. The Linux community intrigues the hardware companies because they realize that the control that Microsoft possesses over them could be broken. For example, without Linux, Intel would have to wait for Microsoft to develop the software that was required to run Intel’s new computer chips before Intel could begin manufacturing them. Intel realizes that, according to Robert Young, “if Microsoft would not support [their] technologies, Intel could do the work for Linux itself…[or] Intel could also have companies like Red Hat…do the actual work”[19] on their behalf. Therefore, Linux allows companies to cease their reliance on Microsoft to supply the software for the companies’ new hardware.
 
The main advantage of Linux is that it places the control in the users possession and not with the developer. For example, according to Red Hat Software, “Burlington Coat Factory runs Red Hat Linux on 1,250 customized Dell OptiPlex PCs over Oracle databases in its 264 stores nationwide”.[20] Burlington Coat Factory has customized Linux so that “the PCs administer Burlington’s Baby Registry and facilitate back office functions, such as shipping and receiving”.[21] Therefore, Linux has allowed the Burlington Coat Factory to personalize the software for the company’s day-to-day operations from everything from the point of production to the cash register all within one simple customized databases.
 
If Burlington Coat Factory had chosen a Microsoft product, the company would have had to request that Microsoft develop a customized technology for their business. The customized technology would have cost Burlington Coat Factory money in the purchasing of the product due to: the configuration and consultation required to customize the product and the installation of the operating system; and the further consulting fees for regular maintenance and upkeep of the customized operating system. Also, Burlington Coat Factory would have had to purchase operating licenses for each of the company’s 264 stores in order to abide by Microsoft’s copyrights. However, with Linux, the Burlington Coat Factory had contracted Dell computers to pre-install Linux and the Oracle databases and is able to call upon Red Hat Software for support at any time without having to worry about the possibility of copyright infringement. Also, as Red Hat points out, the company can upgrade their operating system for free at any time.[22] Also, since the source code of the Linux is open, bugs can be quickly developed and fixed[23] because the company can either simply fix the bugs in house or contract a company similar to Red Hat Software to fix the bugs for them. Burlington Coat Factory doesn’t have to worry about copyright infringement with Linux because anyone or any one single company does not own the operating system.
 
Angelfire.com is another company that has taken control of their Web servers’ operating systems through the use of Linux. Angelfire.com provides “web hosting services to thousands of customers who generate millions of page views a day”.[24] The page views and the increasing number websites that Angelfire.com hosts, has lead the company to “become the fastest growing Web site on the Internet, according to Media Metrix”.[25] Angelfire.com also provides a web page creation tool that simplifies the website building process. Therefore, Angelfire.com runs Linux because the operating system provides the stability and the versatility the company requires. Also, Linux enables Angelfire.com to customize the operating system to allow the company to provide and operate computer programs via the Internet. As an added incentive, Red Hat Software notes, “Linux can run for months, even years, without having to be rebooted”.[26] The fact that Linux can operate for long periods of time is important to Angelfire.com because the company serves a worldwide community, and therefore, must be available to the company’s customers twenty-four hours a day and seven days a week.
 
Customer service is the third prong of the Linux business model. Customer service is the major revenue source for Linux companies like Corel and Red Hat Software because of the fact that, unlike Microsoft, their product is available on the Internet for free. Therefore, the Linux companies must provide “access to premium services”[27] in order to produce revenue. Red Hat Software, for example, provides training and certification programs for developing and operating Linux software; installation support for private, commercial and developers; and customization services for commercial and industrial users.[28] These services allow customers to install, personalize, and operate their Linux operating systems as well as allow companies to contract out their computer training courses.
 
Linux companies have recognized the fact that having to talk to each customer individually would be too expensive and time consuming. Red Hat Software solved this issue by automating the interactions with its customers through the Internet.[29] This allows, according to Red Hat Software’s Chairman Robert Young, customers to “login and get access to the special services that they need from among the wide range of services offered”.[30] This method is perhaps the best use of a Linux company’s time and money because it allows the company to answer frequently asked questions once instead of having to explain the same question over and over again. Therefore, once a company or individual has purchased a Linux company’s product or purchased a service package from the Linux company they are then able to access the Linux company’s resources and consultation services.
 
The ‘premium services’ that Linux companies must offer to service are what their corporate customers want and demand. Andy Butler, an analyst with Garner Group agrees saying, “what [companies] want to see is the service and support around Linux that makes them feel comfortable”.[31] Butler goes onto explain that the role of Linux organizations, like Red Hat Software, Compaq and IBM is to provide the necessary support for the Linux based operating systems and their programs.[32] IBM, for example, has completed this task by teaming up with Red Hat Software. The partnership, as described by a press release from Red Hat Software, will see the companies:
 
Work collaboratively to optimize IBM personal system hardware for running Red Hat Linux, providing customers with powerful and reliable enterprise and e-business solutions on the Red Hat Linux platform. Both companies will work together to provide enterprise-level technical support and will conduct joint marketing to enterprise customers….Under the agreement, a development lab will be established to maximize performance, reliability, and security for Red Hat Linux on IBM server and client systems, including Netfinity servers, PC 300 Commercial Desktops, IntelliStations, and ThinkPads.[33]
 
The partnership between IBM and Red Hat Software adds credibility to the Linux operating system. IBM is considered to be, as Robert Young notes, “a leader in powerful, reliable computing solutions”.[34] Therefore, the companies that Andy Butler is talking about, would feel comfortable in dealing in Red Hat Linux because they know that IBM and Red Hat Software are willing to give them the support premium services and are also willing to stake their company’s credibility on the Linux operating system.
 
The belief in the Linux operating system is re-enforced by the establishment of the Red Hat Center for Open Source. The Red Hat Center for Open Source is, according to a Red Hat Software press release, designed to sponsor, support, promote and engage in a wide range of scientific and educational projects intended to advance the social principles of open source for the greater good of the general public”.[35] The centre is designed to research further uses for the Linux operating system in the personal and business world. In order to ensure that this research is done properly the centre has created a Board of Directors made up of Robert Young, Red Hat Software’s Chief Technology Officer Mark Ewing, Chief Scientist of Xerox Corporation John Seely Brown, Entrepreneur and Co-founder of Cygnus Solutions John Gilmore, Berkman Professor of Law at Harvard Law School Lawrence Lessig, and Associate Professor at the Fuqua School of Business at Duke University Sim B. Sitkin. The members of the Board of Directors are all considered to be top intellectuals in their respective fields of study. The board members believe that Linux can be used and manipulated for companies around the world for various tasks from the development and hosting of web pages at Angelfire.com to the inventory of stock at the Burlington Coat Factory. The board members believe that the Linux can further evolve to become the basis of other new technologies. The creation of the Red Hat Center for Open Source shows that Red Hat Software is committed to the development of the Linux operating system because they have invested over eight million dollars[36] into the centre for the research and development of new Linux technologies.
 
Linux has successfully taken on Microsoft where every other operating system has failed before. Linux is troubling to Microsoft because the company knows that the Linux operating system is not owned by one single company and therefore, cannot simply be controlled by buying out a single competitor. Also Microsoft is competing with an operating system that has faster economies of speed, lower technology costs, and high market growth potential. Linux has faster economies of speed because of the fact that the one single operating system that can be updated and enhanced by a group of developers the Linux company does not have to employ. Microsoft, in comparison, must employ a large team of computer programmers who must perform the similar task Linux has lower transaction costs because the Linux Companies do not have to pay high labour costs in the development of the operating system and the costs of production and distribution processes are similar to Microsoft’s. Linux has a high market growth potential because of the fact that the operating system is easy to update, maintain, and enhance by companies when compared to Microsoft Windows. Also, the partnerships between Linux companies including Dell and IBM allow private corporations to know that there is adequate support for both the software and the hardware components of the computer system. Therefore, Linux’s three pronged business model consisting of the ‘open source concept, the Linux development community, and the ability to provide superior customer service allow Linux companies to maintain partnerships with other corporate partners and have an advantage over Microsoft in the cost of production and transaction costs.
 
It is no wonder that Linux has become a major player in the computer operating system market. The three-pronged business model has allowed companies like Red Hat Software and Corel to become major competitors to Microsoft in the computer operating system marketplace. Microsoft is so concerned about the invasion of Linux that the company had started a smear campaign against the operating system in order to try and slow the growth of the Linux operating system. However, the partnerships between Linux companies and other corporations involved in the technology sector should gradually end the fears raised by the Microsoft smear campaign and show the business world that Linux is ready for the big time. Therefore, it is no wonder that Linux was able to change the software business to its advantage and take Microsoft by surprise.[37]
 
 
Bibliography
 
Primary Sources
 
“IBM and Red Hat Announce Alliance For Enterprise Solutions on Linux.” Red Hat Software, Inc. Press Release. 18 February 1999: 1-3.
 
Red Hat, Inc. Establishes Red Hat Center For Open Source.” Red Hat Software, Inc. 1 November1999. Press Release. On-line. Internet. 18 November 2000. Available: http://www.redhat.com/about/1999/press_rhcos.html
 
Secondary Sources
 
Brown, Jennifer. “Corel’s fate lies in ‘focused strategy’: reputation, software and Linux are interim CEO’s top priorities.” Computing Canada. 1 September 2000: 1, 4..
 
Brown, Jennifer. “Open source makes big business inroads: advocate warns against over-selling attributes of always evolving platform.” Computing Canada. 4 August 2000: 1, 4.
 
Careless, James. “’Stable as a rock’: open source ready for business.” Computing Canada. 4 February 2000:14-15.
 
Chase, Steven. “Linux system finds a friend in China.” The Globe and Mail. 16 November 2000: B1.
 
Edwards, Cliff. “Open source called great equalizer.” Calgary Herald. 17 August 2000: E12.
 
Edwards, Cliff. “Open-source movement lauded at Linux gathering.” Vancouver Sun. 17 August 2000: Page E7.
 
Evans, Mark. “Founder tips his Red Hat to liberal arts studies.” The Globe and Mail. 5 November 1999: M1.
 
Francis, Dianne. “War brewing over technology: Ownership and control of new advances is a complex issue, indeed.” Vancouver Sun. 16 July 2000: A10.
 
“IBM to offer Red Hat Linux on servers, PCs.” Computing Canada. 26 February 1999: 6.
 
“Introduction to Linux.” Red Hat Software, Inc. 2000. On-line. Internet. 18 November 2000. Available: http://www.it.redhat.com/support/docs/linux_intro.html.
 
Mendoza, Martha, “Microsoft challenger gets financial backing from big high-tech names,” The Detroit News 30 September 1998. Online. Internet. 8 October 2000. Available: http://detnews.com/1998/technology/9809/30/0930022.htm.
 
“Red Hat in the Real World.” Red Hat Software, Inc. Press Release. 1999: 1-3.
 
Solomon, Howard. “IBM’s favour heralds arrival of Linux: all servers will comply to help drive upstart OS.” Computing Canada. 21 January 2000: 1, 4.
 
“The Best Reputations in High Tech: For Once, the Dot-Coms Trail Older Technology Firms – Microsoft, Intel and Sony.” The Wall Street Journal. 18 November 1999.
 
Young, Robert and Wendy Goldman Rohm, Under the Radar. Scottsdale: The Coriolis Group, 1999.
 

 

[1]Mendoza, Martha. “Microsoft challenger gets financial backing from big high-tech names.” The Detroit News. 30 September 1998. Online. Internet. 8 October 2000. Available: http://detnews.com/1998/technology/9809/30/0930022.htm.

 

[2]According to the International Data Corporation, “Red Hat Linux accounted for 55 percent of all Linux-based operating systems in 1999”. Young, Robert and Wendy Goldman Rohm. Under the Radar. (Scottsdale: The Coriolis Group 1999), 164.

[3]“Introduction to Linux.” Red Hat, Inc.  2000. On-Line. Internet. 18 November 2000. Available: www.it.redhat.com/support/docs/linux_intro.html.

[4]Red Hat placed in 17th place in a Wall Street Journal questionnaire of online computer users.  “The Best Reputations in High Tech: For Once, the Dot-Coms Trail Older Technology Firms—Microsoft, Intel and Sony.” The Wall Street Journal.  18 November 1999.

[5]Young, Robert and Wendy Goldman Rohm. Under the Radar.  (Scottsdale: The Coriolis Group, 1999), 41.

[6]“Introduction to Linux.” Red Hat, Inc.  2000. On-Line. Internet. 18 November 2000. Available: www.it.redhat.com/support/docs/linux_intro.html.

 

[7]Careless James. “’Stable as a rock’: open source ready for business.” Computing Canada. 4 February 2000: 14.

 

 

[8]Transaction costs are the costs associated when the product is transferred between stages of procurement, production and distribution.

 

[9]The production processes of one company have a cost advantage compared to their competitor (i.e. have a lower price per unit than their competitor).

 

[10]There is a larger market for Linux than for Microsoft’s Windows operating system.

[11]“Introduction to Linux.” Red Hat, Inc.  2000. On-Line. Internet. 18 November 2000. Available: www.it.redhat.com/support/docs/linux_intro.html.

 

 

[12] Careless  15.

 

[13]Young and Goldman Rohm 38.

 

[14]A private company that copyrights its operating system and does not release the operating system’s source code (e.g. Microsoft’s Windows, etc.).

 

[15]Young and Goldman Rohm 38.

 

[16]Young and Goldman Rohm 126.

 

 

[17] “Introduction to Linux.” Red Hat, Inc.  2000. On-Line. Internet. 18 November 2000. Available: www.it.redhat.com/support/docs/linux_intro.html

 

[18]Edwards, Cliff . “Open source called great equalizer.” Calgary Herald. 17 August 2000: E12.

 

 

[19] Young and Goldman Rohm 24.

 

[20] “Red Hat in the Real World.” Red Hat Software, Inc. Press Release.  1999: 1.

 

[21] Ibid. 1.

 

[22] “Introduction to Linux.” Red Hat Software, Inc. 2000. On-line. Internet. 18 November 2000. Available: www.it.redhat.com/support/docs/linux_intro.html.

 

 

[23]Ibid.

 

[24]“Red Hat in the Real World.” Red Hat Software Inc. Press Release 1999: 1.

 

 

[25]Ibid., 1.

 

 

[26]“Introduction to Linux.” Red Hat, Inc. 2000. On-line. Internet. 18 November 2000. Available: www.it.redhat.com/support/docs/linux_intro.html.

 

 

[27]Young and Goldman Rohm 159.

 

[28]“Introduction to Linux.” Red Hat, Inc. 2000. On-line. Internet. 18 November 2000. Available: www.it.redhat.com/support/docs/linux_intro.html.

 

 

[29]Young and Goldman Rohm 159-160.

 

 

[30]Ibid. 160.

 

[31] Brown, Jennifer. “Open source makes big business inroads: advocate warns against over-selling attributes of always evolving platform.”  Computing Canada. 4 August 2000: 1.

 

[32]Ibid., 1.

 

 

[33] “IBM and Red Hat Announce Alliance For Enterprise Solutions on Linux.” Red Hat Software, Inc. Press Release. 18 February 1999: 1.

 

 

[34] “IBM and Red Hat Announce Alliance For Enterprise Solutions on Linux.” Red Hat Software, Inc. Press Release. 18 February 1999: 1.

 

 

[35] “Red Hat, Inc. Establishes Red Hat Center For Open Source.”  Red Hat Software, Inc. 1 November1999. Press Release. On-line. Internet. 18 November 2000. Available: www.redhat.com/about/1999/press_rhcos.html.

 

 

[36] “Red Hat, Inc. Establishes Red Hat Center For Open Source.”  Red Hat Software, Inc. 1 November1999. Press Release. On-line. Internet. 18 November 2000. Available: www.redhat.com/about/1999/press_rhcos.html.

 

[37] Young and Goldman Rohm front cover.

 

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