VA Linux's Portal Dreams
By Danny Hakim
LARRY AUGUSTIN WAS a graduate student at Stanford along with Yahoo! (YHOO) co-founders Jerry
Yang and David Filo. While his buddies spent their free time building an Internet portal, Augustin started
building servers that ran the free Linux operating system, and by 1993, he was selling the servers out of
his makeshift apartment workshop. You know how Yang and Filo became zillionaires, but what about
Augustin? Don't cry for him: In December, his company, VA Linux Systems (LNUX), went public with the
biggest one-day pop in the history of the IPO market, a gain of nearly 700%.
Two months later, the 37-year-old CEO is reinventing his company — which gets most of its revenue from
building high-end computer equipment that runs Linux — and making a play to be the open-source
movement's King of Content. Thursday morning, VA Linux announced the acquisition of the open-source
portal Andover.Net (ANDN) in a stock and cash deal valued at around $913 million. The
Massachusetts-based Andover is the open-source community's premier media company — sort of a very
miniaturized, specialized, Time Warner (TWX) of the Linux movement. As a result, Augustin's company
begins to look less like a computer-hardware company and more like, well, a Linux superportal.
"What we're building is a Yahoo for developers," explained Augustin Thursday afternoon. "People think of
us as a hardware company, but we've always considered ourselves part of the Linux and open-source
community, not just a box-deliverer. We'll be able to pull the pieces together to create a great developer
community and resource online."
The idea behind open-source traces its roots back to the early days of the Internet a couple decades ago,
when programmers regularly traded and collaborated on free software projects. Only recently has the
movement shifted over into the business world, focusing on the Linux operating system that was created,
and distributed for free, by a Finnish student named Linus Torvalds. The for-profit companies that are
distributing Linux software and hardware and providing services are seen as challengers to Microsoft
(MSFT) and its proprietary software, which is created in a traditional, "closed" environment.
How does open-source software creation work?
VA Linux has created a software development hub called SourceForge. Basically, it's an online swap
meet where software developers come together to work on all manner of projects, most of which provide
no direct revenue for VA Linux. For instance, one of the most popular projects on the SourceForge site is
an open-source version of the original "Quake" video game. In the past week alone, 1,688 copies of the
QuakeForge software have been downloaded free.
Why does VA bother to host such projects? Simple. If you have all these developers moving through your
hub, you have a free army of programmers at the ready for projects that do make money. Last week, VA
announced that Hewlett-Packard (HWP) had tapped the company to create software to run its laser
printing system, and the software will be developed on SourceForge. VA developers will participate, but
they will almost certainly be far outnumbered by a well of contributors from all over the place, who will
work for free.
Since SourceForge's launch in January, there are already over 1,600 projects running on the site and over
9,500 software developers have signed up to use the site and its free tools. And that's what Linux is really
about: more than any particular operating system, it's the evangelical group of developers that surrounds
it. "It's not just all about technology," Linus Torvalds said in his speech Wednesday at the LinuxWorld
expo in New York. "Equally important is the community you build around it."
With its acquisition of Andover.Net, VA Linux is attempting to lock up that community. Andover operates
a network of ad-supported Web sites, the most popular of which is Slashdot.org. If Andover is the media
baron of open-source, Slashdot would have to be the movement's USA Today. (Or it would be if USA
Today illustrated each of its articles about Microsoft with an image of Bill Gates dressed as one of Star
Trek's villainous Borgs.) The site is something of a journalistic adaptation of open-source programming, in
that most of the site's "stories" are really just a paragraph or so, starting points for endless discussions
by Slashdot's sizable community of readers. Other Andover sites include Freshmeat.net, a repository of
Linux software; Andover News, a tech-news site, and the newer Server 51, a SourceForge competitor.
The combined entity would control "nearly two-thirds of the total traffic of major open-source sites,"
according to the companies' press release. Is that accurate?
"That's probably fairly close. Andover's the big puppy in terms of content," says Forrester Research
analyst Simon Yates. "The most important factor is that it grabs [VA Linux] a 2 million visitor-a-day
community. Andover is a great aggregator of content and VA is viewed as a server manufacturer. It brings
together the people, the hardware and the software in one company."
One thing the deal won't likely do is help justify VA's value on Wall Street, which has had trouble figuring
out why any Linux company is worth a multibillion dollar valuation. VA, which is expected to lose $1.23 a
share in its current fiscal year, has a $5.4 billion market capitalization. Andover.Net, which has a $540
million market cap, is expected to lose 89 cents a share this year. Together, they had less than $35
million in revenue last year. Under terms of the deal, Andover shareholders will receive 0.425 shares of VA
Linux for each Andover share. Shares of the two companies have moved in opposite directions since the
announcement, with VA dropping over 6% and Andover gaining over 25%.
Clearly, any bet on the new company will require a leap of faith about the viability of Linux itself. If you
believe in Linux, then VA, with its hold over the open-source community, becomes a compelling choice,
though Linux software distributor Red Hat (RHAT) is still the "golden child" of the industry, according to
Yates. Augustin argued Thursday that the open-source model was far more efficient than Microsoft's
proprietary software model because an open-source team works faster, does a more thorough job of
checking errors and avoids the redundancies that arise when companies work separately to solve the
same problems.
"Open-source is inevitable," says Augustin. "We're leading a movement in software development where
thousands of programmers working cooperatively across the Internet are better than a handful of
programmers working within a closed company."
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