Thread:
Good article with many FM terms used by the Motley Fool gang:
Microsoft vs. Linux
By Rob Landley (TMF Oak)
boards.fool.com
GAITHERSBURG, MD (Nov. 24, 1999) -- On Friday, I reviewed The
Innovator's Dilemma, a book about disruptive technologies that
encourage start-up companies to replace large established firms.
On Monday, I talked about "use value," which is discussed in
greater detail in Eric Raymond's book The Cathederal and the
Bazaar (which I'll be talking about some more today). Yesterday,
I explained how network effects can create natural monopolies,
and discussed the first way I know of to compete with this type
of monopoly: participating within the existing network to share
the market.
fool.com
A disruptive technology can also crack a monopoly, by replacing
the existing network with a new and larger one. A larger network
will consume a smaller network operating in the same space,
because the value of the network increases exponentially with
the size of the network. But a disruptive technology doesn't
(initially) operate in the same space; it starts by finding a
new market with wants and needs that the old technology cannot
meet.
Because a disruptive technology can't initially compete directly
against the existing technology for the original uses even
without taking the network effects into consideration, the only
successful way to market one is to carve out a new "roaches
under the floorboards" niche taking advantage of the new
technology's distinctive advantages. This new niche is a market
the existing technology can't fit into, and is usually too small
and low margin for the existing companies to care about anyway.
But it gives the disruptive technology a protected base within
which to develop, and which can finance an upscale attack into
the existing value network. Since the disruptive technology can
eventually be made to serve the same purposes as the old
technology, and it has its protected base to draw from as well,
it forms a larger network than the old technology.
The disruptive technology currently attacking Microsoft (Nasdaq:
MSFT) is the Open Source development model. Eric Raymond's
classic paper "The Cathedral and the Bazaar" has recently been
published by O'Reilly as part of a book by the same name. It
explains how software can be developed not by a team of highly
trained professionals, but by a loose association of hobbyists
organized through the Internet as a kind of fan club. It also
discusses why this software development model often beats the
pants off of the old way of writing software.
While traditional software development is motivated by the sale
value of that software, Open Source development is motivated by
the software's use value. People who use the Apache Web server
naturally want it to be the best Web server it can be. So, if
they are capable of improving it, many of them will -- in their
spare time or when they encounter a problem they need to fix.
All that time spent on hold to tech support for proprietary
software companies is spent actually finding and fixing the bugs
and limitations of Open Source software. The availability of the
source code to Apache gives the technically inclined individuals
and organizations using Apache the ability to do whatever they
like with it.
Sharing the improvements through the fan club doesn't cost
Apache's users anything, since they didn't plan on selling those
improvements anyway. They just want a good Web server. The fact
that it's a free download is merely a bonus. What they really
get is control over the tools they use to run their business --
high quality tools created by people motivated by how well they
work and not how well they sell.
Apache is the server behind the majority of the websites on the
Internet. In that niche, Open Source is the dominant paradigm.
To examine Open Source as a disruptive technology, we need to
look at a clean room clone of Unix that started as the Free
Software Foundation's GNU project and was completed (well, first
made independently usable; Open Source development and
improvement never ends) by a graduate student at the University
of Helsinki in Finland named "Linus Torvads." You may have heard
of it; it's called Linux.
Linux started out in a "roaches under the floorboards" niche.
People who couldn't afford what AT&T and others charged for Unix
but wanted to use it anyway reverse engineered the thing and
made it run on PC hardware. Then, Linux became popular to turn
old, discarded, underpowered PCs into file servers and print
servers. As the Internet (created by and full of Unix machines)
became popular, this reverse engineered Unix clone was a cheap
way to use a PC as a Web server, gateway, or firewall to hook up
to the Internet.
Microsoft's high end is the desktop, and that's the last market
Linux will take over. From the low-end machines that other
operating systems were too inefficient or expensive to use on,
Linux jumped straight to high-end multi-processor machines. As
the Web became important and expensive hardware was thrown at
it, Linux was moved over to that expensive hardware where the
lean and mean efficiency required to run at all on the cheap
junk was just as valuable to squeeze every drop of performance
out of the expensive stuff.
Again, this was fringe territory as far as Microsoft was
concerned. Although they have tried to push Windows NT on the
high-end for almost ten years, it has never shipped in volumes
even approaching that of its desktop home ground. Microsoft may
have been unwilling to yield any niche, but Linux definitely
attacked where it was weakest.
Linux has also had success with embedded systems, and has
virtually driven Windows CE from the field. Microsoft may have
unlimited funds with which to develop their products, but Open
Source products simply cannot be starved for cash. Their
development is funded with their users' time and effort, not
with revenues from any sale. Use value again, not sale value.
If you remember FUD from yesterday, Linux is un-FUDable. As long
as the users have the source code, development will continue.
And how can it go out of business if it never made any money?
Companies make money off of Linux, of course. Red Hat's (Nasdaq:
RHAT) IPO shot to a multi-billion dollar market capitalization,
and hundreds of established companies like IBM and SGI are
betting heavily on its success. But like dating services, they
seek to cash in on an existing phenomena. They dip their mill
wheel in a river that's already there, and could go on without
them just fine.
Like all companies performing an upward retreat (however
grudgingly) in the face of a disruptive technology, Microsoft's
profits will probably continue to increase right up until the
end as it tightens its focus on the areas that make it the most
money. The desktop is Microsoft's home ground, its strongest
niche, and where it makes the most money. It will be the last
niche Linux penetrates, and the one Microsoft will fight hardest
to keep.
According to the Gartner Group's estimate, Linux passed the 10
million user mark during 1998 and was growing at 212% annually
at the time. Assuming it slows to 100% annual growth (which it
has maintained since its introduction in 1990), it will surpass
the Windows installed base in about three years. At that point,
the network effects will favor Linux and hinder Windows.
Strangely enough, many of us in the software industry view the
trial as an interesting supplement to the main action. Microsoft
IS an abusive monopoly, and unrestrained perhaps it could force
the entire computer industry into stagnation. But we're busy
working on its replacement. |
