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Strategies & Market Trends : Sharck Soup -- Ignore unavailable to you. Want to Upgrade?

To: Sharck who wrote (131)	8/28/2000 11:10:12 PM
From: puborectalis	Respond to of 37746

Software: How to, and How Not to, Make Money Off Linux, Part 1 Toronto, ONT, August 29 /SHfn/ -- VA Linux [LNUX], Red Hat [RHAT] and Corel [CORL] [T.COR] are trying to make money off Linux in different ways. VA Linux is likely to show the best short-term profitability, Red Hat could pull ahead in the long-run, and Corel appears headed nowhere. Linux fever is off its peak, as are shares in all three companies. The 52-week trading highs for VA Linux, Red Hat and Corel are US$320, $151-5/16 and $44-1/2--all attained at the height of the Linux craze late last year. The stocks now trade in the $40, $20 and $3 ranges. VA Linux is taking a hardware-based approach to making money off Linux. But it's a hardware-based approach with a twist. The company does not sell its Linux servers as a stand-alone hardware product. Instead it sells them combined with its version of the Linux operating system and service/support--all as part and parcel of one take-it-or-leave-it package. This is proving popular. The all-in-one server, operating system, service/support sales package gives corporate IT departments a "one-stop Linux shop." Everything is in one package, with the solution already pieced together. Just sign the contract and Linux heaven is in reach. Year-over-year sales growth of 547% in VA Linux' fiscal fourth quarter ended July 28 shows the sales pitch is working. Good results are likely to continue over the next year and boost VA Linux' share price. In a very short time-span, Linux has taken a 25% share of server operating system shipments, according to market research data from International Data Corp. Only Microsoft Windows NT ships in higher numbers. But many market researchers expect Linux to surpass Windows NT server operating system shipments in 2001. Put in perspective, Linux ships more than server market leaders Sun Microsystems' [SUNW], Hewlett-Packard's [HWP] and IBM's [IBM] versions of the Unix server operating system combined. The problem for Linux companies is that the stunning market-share growth is in large part due to the open source nature of Linux. Open source code is freely available code. If code is freely available, how is it possible to make money from it? VA Linux' approach is based on the fact Linux needs servers to run on. No matter whether the source code is free or not, the hardware is always going to cost money. Although much larger, established server vendors such as Compaq [CPQ], Hewlett-Packard and IBM have moved into the Linux server market, VA Linux' overall product package remains competitive. While the company's hardware may not have any advantages over product from its larger competitors, its overall Linux knowledge is relatively higher. By bundling together hardware, software, service and support as one product, VA Linux is creating a product advantage where its hardware alone might have none. VA Linux is counting on fast-growing hardware sales to produce profits, despite having a lower gross-margin business model than Red Hat or Corel to profitability. The latest financial results indicate VA Linux may be right. It produced a loss of $6.5 million on $50.6 million revenues, with a 22% gross margin. Red Hat lost $7.9 million on $16.0 million revenues with a 54% gross margin. Corel lost $20.8 million on $36.6 million revenues with a 69% gross margin. (All losses exclude special charges and acquisition expenses.) Though its hardware is posting tremendous growth, VA Linux will become just another server vendor-with no special advantages or prospects--as Compaq, Hewlett-Packard, IBM and others gain Linux expertise. In the long run, all server vendors are dependent upon their hardware and operating efficiency. If the hardware or operational efficiency lags, the vendor gets in trouble. In the short run though, VA Linux appears to be doing enough to maintain and probably strengthen its market position. The company has great product initiatives like "build-to-order" Linux, a software tool that lets corporate IT departments configure their server/software orders before shipping. As well, a co-development pact with Intel [INTC] that some competitors say gives VA Linux an edge in product development (Linux runs on Intel-based servers) is another example of things that will maintain the company's short-term progress and probably boost its share price, too.