Servers With a Smile
fortune.com
It will never beat Windows on the desktop, but the Linux operating system has an undeniable charm in the world of corporate computing: It's free.
FORTUNE
Monday, September 30, 2002
By Fred Vogelstein
Microsoft's Bill Gates may be richer, but when it comes to unvarnished business aggression, no one in the high-tech world can top Larry Ellison, the 58-year-old founder and CEO of Oracle. This is a man cocky enough to fly his own fighter jet, competitive enough to have his minions pilfer Gates' trash, and mean enough to verbally flog his executives in public. He's worth $14 billion, making him the fourth-wealthiest American at last count, and unlike his peers who demur on the subject of money, Ellison isn't afraid to admit that he loves being rich.
So explain this contradiction: Last month Ellison spent an hour in front of 1,000 programmers in San Francisco talking about the merits of free software. That's right. A man who became as rich as Croesus by selling software for thousands of dollars per user told this standing-room-only audience that their practice of sharing code on the Internet for an operating system called Linux and charging nothing for it was a good thing. Indeed, it's such
a good thing, he said, that Oracle had just taken 3,800 lines of its own proprietary code, developed over more than a decade, and posted it on the Internet for all the world to see. "We're trying to be a good member of the community," he said.
A charity? A breakdown? No. Ellison was sucking up to this group for a simple reason.
Developers of free software, in particular the hundreds of thousands of Linux programmers, are hot commodities these days. Ellison, ever the master salesman, was simply adding his celebrity to their annual gathering, Linux World, and giving them his best pitch.
For those not familiar with its genesis, Linux was brought to life 11 years ago by a Finnish college student named Linus Torvalds, who wanted to use his home PC to write programs that would also run on the university's Sun workstations. Linux was the software code he created to do the job.
Businesspeople have tended to associate Linux with the charlatans of the Internet bubble and the flakes who seem to dominate its over-granolaed, Berkeley commune culture. Why?
Because dozens of now-defunct Linux companies went public at the height of the bubble, each with its own plan for persuading customers to pay money for free software. Because the record for an IPO's opening-day gain belongs to VA Linux, which shot up 700%, to $239.25 a share, when it hit the market on Dec. 9, 1999, but now, renamed VA Software, trades for about $1. And because Linux adherents trumpeted the view that free Linux would replace costly Windows on every desktop. They earnestly claimed that a community of programmers who worked on the code free in their spare time, who weren't tied to any production schedule, and who willingly gave up all profit-making rights to their modifications in the name of promoting free software worldwide was going to topple Microsoft. It just seemed too preposterous for words.
It turns out that the Linux doubters were wrong. Today Linux has become the hottest thing in corporate America since e-mail and maybe even Windows itself. Yes, most of the Linux IPOs are out of business or on the verge of going bust. Yes, few really believe Linux will ever replace Windows on the desktop. But on the back end, on servers in data centers rather than PCs on desktops, companies like Boeing, Amazon.com, E*Trade Financial, DreamWorks, Google, and virtually every major Wall Street firm have either finished reconfiguring big chunks of their servers to run Linux or are in the process of doing so. General Motors says it is likely to do the same in a year or so. Even the Chinese and German governments, along with about two dozen other countries, are taking a look at how they can save money by using Linux in their infrastructures.
This conversion is already causing reverberations throughout the high-tech world. For the year ended June 30, the number of servers sold with Linux as the operating system grew 18%, while those sold with Windows grew only 3% and those sold with Unix fell 7%, according to research group IDC. IBM says that contracts for its Linux integration and support services now number around 800, compared with 95 only 15 months ago. And Dell and HP say they will sell 15% to 18% of their servers this year with Linux preinstalled, up from less than 10% last year.
It's still early in the conversion cycle. IDC says servers running Linux represent only 5% of the servers in operation, compared with 27% for Windows and 43% for Unix, the umbrella term for the proprietary operating systems largely in use by IBM, HP, and Sun. And there are still big business applications like Siebel's that don't yet support Linux. But IDC predicts that by 2006, Linux and Windows will have all but replaced Unix as the dominant server operating systems. It forecasts that 26% of servers in operation will be running Linux, 56% will be running Windows, and only 12% will be running Unix.
Indeed, Linux may bring about the greatest power shift in the computer industry since the birth of the PC, because it lets companies replace expensiveproprietary systems with cheap commodity servers. This is scariest for Sun, which makes almost all its money by selling proprietary hardware and software; many of those systems are being replaced by Intel machines running Linux. Microsoft must worry too, since Linux blunts its biggest selling point to corporate IT managers: price. Because its Windows software runs on Intel hardware, corporate systems built around Microsoft programs are typically cheaper than systems from HP, IBM, and Sun. But Linux runs on Intel hardware, too, and Linux is free. Microsoft most certainly is not.
Lovers of the underdog might wish that Linux caught fire in corporate America because the world simply underestimated the undisciplined and unorganized brainiacs of the Linux movement. In truth, the system has surged because while Linux was losing its luster on Wall Street over the past few years, IBM was adopting it. Indeed, Linux was the only thing customers wanted to talk about in 2000, said Sam Palmisano, then IBM's president and now CEO, in a speech last year. "They were testing, prototyping, fooling around with Linux," he said, and they wanted to know what IBM thought about it. Seeing both a new opportunity to sell services to its customers and a way to address one of their biggest complaints--incompatibility between the many different operating systems running IBM computer products--IBM announced it would spend $1 billion to help promote, develop, and support Linux for its own and its customers' use. The ultimate goal is to have Linux run on every computer IBM sells. While competitors made fun of IBM then, few dispute today that it legitimized Linux to IT executives and gave Linux the financial backing it never had before.
A Linux conversion is not for the faint-hearted. Companies must install new hardware and software on a large scale and prepare for bugs and hardware incompatibilities galore. When Amazon was considering the project early last year, says Jacob Levanon, Amazon's headsystems engineer, "we had a lot of skeptics." Their concern: The company had built its business by giving customers a great purchasing experience, and here was a project that could blow that up overnight.
But Amazon couldn't resist Linux's power as a money saver. "We didn't have a choice," Levanon says. "When we looked at our IT costs, we realized we couldn't sustain our growth with our existing infrastructure." Translation: If Amazon ever hoped to become profitable, it needed to convert. So in the space of 120 frenzied days last summer, with its team's daily schedule broken down into one-minute increments, Amazon replaced 92% of its servers--about 2,000 Sun machines--with about the same number of Intel-based serversrunning Linux. Levanon says the hardware and software savings are nice, but what has really made the conversion compelling is that his labor costs are down 10% to 20%. Linux has become the main operating system used in university computer science classes at places like Berkeley, Stanford, and Cornell. That means Linux programmers are more plentiful and cheaper to hire than ever. In all, technology costs at Amazon were down 16%, or $21.5 million, for the six months ended June 30. This year Amazon expects to take in more cash than it spends for the first time ever.
The remarkable thing about Linux for Ed Leonard of DreamWorks is not how much money it saves him but how much faster it is. That is a big deal for his crew. Among other things, Leonard is in charge of technology for DreamWorks' giant animation business, makers of Shrek. Animation is one of the most processor-intensive applications in the computer industry, requiring complex images to be redrawn over and over. For years it was the
province of workstation maker SGI. But, having converted to Linux about 18 months ago, Leonard says his systems are generating ten times the performance for a third of the cost. Converting to Linux has boosted productivity in another interesting way: "It allows animators to work at home," says Leonard. That wasn't possible when every machine cost $30,000. But anyone can afford a PC running Linux.
The displacement of expensive proprietary systemswith commodity hardware and software is not a new story in the computer business. But the big-muscle corporate market has largely resisted the cut-rate model. That's because the computers that run the back ends of corporate networks--the websites, the databases, the e-mail, accounting, human resources, and production systems--must be not only fast but also as reliable as a telephone and as secure as a bank. Until recently it seemed that the only way to get all that was with specially tuned systems consisting of proprietary hardware and software. Such systems cost more, but corporations willingly paid the price because they had no alternative. Intel-based servers weren't fast enough, and the only operating system written for them, Microsoft Windows, wasn't reliable.
Today Intel machines are often faster than the proprietary systems from the three big vendors, and with Linux, the systems are just as reliable. That means corporations have fewer reasons to pay proprietary-system prices. "It's a sea change," says Bridget O'Connor, a top technology executive at Lehman Brothers. "Now I can play all the vendors off against each other to get the price I want. I never had that negotiating power when all my machines
came from Sun."
For some companies, the gains from converting to Linux are so large that CIOs get giddy talking about it. Take E*Trade Financial. Three years ago it paid $12 million for 60 Sun machines to run its online trading website. CIO Josh Levine has just finished replacing those machines with 80 Intel-based servers running Linux for a mere $320,000. That has let E*Trade bring its tech budget down 30%, from $330 million in 2000 to $200 million this year--a big reason the company has stayed alive despite the carnage in its business. "It's remarkable," he says. "On top of all that, website response time has improved by 30%."
Such accolades explain why the entire panoply of tech leaders are either gleefully trumpeting their own Linux offerings (like IBM, HP, Dell, and Intel) or twisting themselves into pretzels to fight off the scourge (like Microsoft and Sun). A year ago Microsoft CEO Steve Ballmer called Linux a "cancer" that would cause the death of intellectual property as we know it. Microsofties were encouraged to make that saber-rattling pitch on their corporate sales calls. But that just made IT executives angry. Peter Houston, Microsoft's head of industry strategies, says, "It became clear that we were being seen as having a polarizing and myopic view."
These days Microsoft's sales pitch is more measured. Sure, the company still plays hardball: It is lobbying governments here and abroad to convince them that Linux's open-source roots make it a security threat. It is also telling people that the license under which a lot of Linux code is generated leaves them open to future patent litigation. But Microsoft account executives now educate rather than bash, trying to win business on the merits. Last month, for the first time, Microsoft paid for a booth at Linux World. It has even set up a program in which IT managers of companies with more than 1,500 Windows users can look at up to 98% of the Windows source code free. That's quite a turnaround. During the Microsoft trial in the late 1990s, Bill Gates said, in effect, that he'd sooner have a lobotomy than do something like that.
Sun's response to Linux isn't nearly as nuanced. In fact, you might say it's downright defiant.Yes, it is courting Linux programmers aggressively, despite having trashed them for years. CEO Scott McNealy spoke at Linux World for the first time this year, telling the audience that Sun planned to sell low-end servers with Intel processors and that Sun would include both Linux and its own Solaris operating system on the machines. At a gathering in New York
earlier this year, McNealy even came on stage wearing the Linux trademark penguin suit.
But ask Sun executives how Linux fits into the corporation's long-range strategy, and they make it sound as if it's a minor tweak to an otherwise unchanged business plan: Linux will help Sun sell more servers on the low end, a market in which Sun hadn't previously competed. Meanwhile, Sun will continue to dominate the middle and high end of the server market with its blend of proprietary hardware and software, the way it always has. "If you're suggesting that Linux will replace Solaris, well, I am totally dismissive of that," says Jonathan Schwartz, head of Sun's software business.
It is a gamble of immense proportions for Sun. It is betting, in effect, that while Linux may be making a dent at the edge of corporate networks, Sun will continue to dominate the network center, where databases and other vitally important systems run. This despite the fact that IBM wants Linux to run on everything it sells, from small servers to mainframes. This despite the fact that Oracle's biggest sales push right now, demonstrated by Ellison's Linux World appearance, is to persuade corporations to run their Oracle databases on Linux machines. And this despite the fact that one of the biggest topics in corporate computing today is clustering--that is, using many little computers to do the work of a big computer.
Sun certainly has a history of turning out to be right when the rest of the world thought it was wrong. In the early 1990s it bet big and correctly that servers would be the dominant piece of corporate computing hardware, even though it had never sold any and giants like Digital Equipment already dominated that business. The high-tech world will be watching closely to see if Sun can do it again.
Companies like Sun, HP, and IBM could derail Linux if they co-opt it--that is, modify it enough so that their versions run well only on their own hardware systems. That is exactly what Sun executives plan to do. They believe the profit motive will prove too strong for IBM, HP, or anyone else to resist making such a play either. "The reality is that profit-making companies like to get paid," Sun's Schwartz says.
There is a precedent here. The proprietary operating software that has run the big corporate computer systems for more than a decade was once free. Unix, as it's known, was invented in 1969 at AT&T's Bell Labs. Then a regulated monopoly, AT&T wasn't allowed into the computer business, so it licensed Unix free to the University of California at Berkeley, where Bill Joy, a graduate student who was to be one of Sun's founders, refined the
software and quickly found huge corporate demand for it. Joy's version of Unix worked easily with any computer of the day and made networking them simple. It is now the basis for operating systems at Sun, IBM, and HP.
But not every attempt at co-optation has worked. Lots of software players have tried to come up with their own gloss on TCP/IP protocol, the universal translator of Internet communications. Their aim is to improve the system so that information travels faster and so certain communications receive priority, which, not so incidentally, would let companies charge more to carry them. But they haven't succeeded, because the value of letting everyone on the Net communicate freely with everybody else is too great to mess with. In the same vein, CIOs have seen how much power they lose in a world of proprietary computer systems, and many computer companies are now too worried about losing customers to raise that specter. "Shame on us if we go down that path," says Peter Blackmore, HP's head of corporate computer systems.
CIOs have a powerful incentive to band together and take Linux to its logical extreme: a universal computer language that every one of their balky noncommunicative proprietary systems can understand. Systems integration accounts for 13% of IT budgets, according to IBM. Indeed, the complexity of corporate IT grew so much in the past decade that if it continued at its current pace, says one IBM executive, the industry would need 200 million
more people by 2010 to serve corporate America's IT needs.
As Ellison told his Linux World audience, anyone who longs for the days when Linux was the province of hackers and academics--in other words, the great intellectual unwashed--should forget about it. The suits have taken Linux over. Whatever happens next, they're here to stay.
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