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An observer of the software industry once remarked that Linux is free, as long as your time has no value. Although this might be a harsh assessment of the open source world, it contains a grain of truth.

The traditional model for Linux software involved enthusiasts making the code available, free of charge, to the wider community. But turning that code into part of a working computer system involved skill, and often a considerable amount of time. For this reason, some of the most promising early work on open source took place in universities: places with an abundance of skilled, and often cheap, labour.

Commercial operations, however, do not have the time to “roll their own” open source technologies. Nor do they want to do deals with hobbyists and enthusiasts, however great the technology. Large companies tend to prefer to deal with other large companies.

For their part, many of the coders and developers who were involved in the early stages of open source are looking for ways to earn a living out of the technology. Some have joined large technology companies that make extensive use of Linux, such as IBM and Oracle. But others are looking for more direct ways to monetise “free” software.

“You have 18 to 25 year old supporters of Linux, with low overheads, who can be philanthropic,” says Clive Longbottom of industry analysts Quocirca. “But they come to the point where they can’t write code for free, and need to make money.”

For those who have stayed with open source, this is usually goal achieved around integration and maintenance services. Most open source software is distributed under a general public licence (GPL), which does not allow companies to sell licences to software and stay within the boundaries of open source. But there is nothing to stop companies selling services such as support or maintenance around an open source operating system or application.

This is the business model followed by most Linux distributors, most notably Red Hat and SuSe Linux (the latter is now owned by Novell). It has also been followed by software companies such as MySQL, and Sun Microsystems with its version of OpenOffice, StarOffice.

Other businesses have opted to use open source technologies as part of a wider suite of products, or have exported their existing, paid-for software to run on open source. Apple Computer incorporates a wide range of open source technologies in the server version of its OSX operating system, including e-mail (Postfix) and web server software (Apache).

Oracle and SAP, the great rivals in enterprise software, have both ported their products to work with open source operating systems. Even Microsoft has embraced some elements of open source: it recently released a software installer tool under an open source licence. “With an open source licence, the software community can modify and redistribute the installer,” says Bill Hilf, who heads Microsoft’s Linux and open source software technology group. “There is a community of developers that really wants to be able to do that.”

Microsoft does not make money from the installer; potentially the company could even lose out on revenues from selling the tool kit commercially. But the software giant finds open source to be a useful way of distributing specialist tools to developers. The company also benefits indirectly from being seen as a contributor to open source.

For other large software companies, moving their applications to open source is a way of increasing their overall share of a customer’s IT spend. Both Oracle and SAP have used Linux as a way to grow their share of computing projects.

Working with a cheaper operating system, running on increasingly commoditised hardware, frees CIOs to spend more money on software licences. But it also makes it easier for the large independent software vendors to gain sales for their middleware and other utilities. “Oracle doesn’t need a big operating system such as Solaris or AIX,” explains Phil Dawson, an enterprise IT analyst at Gartner. “There is more and more in their system that used to be in the OS. Oracle benefits from Linux because it reduces the overall cost of the system, but the Oracle proportion becomes bigger.”

Vendors of complex, vertically-integrated software systems can turn a small and light operating system to their advantage, because it avoids the need to cede control of functions to the operating system vendor. It can also make it easier to add technologies such as grid processing.

Controlling the operating system is also important in some vertical markets, such as banking, finance and retailing. Here, IBM has found Linux to be a profitable option, because it allows the company to develop systems for markets where less, not more functionality is an advantage.

IBM’s retail platform is based around Linux, with a Linux system for point of sale applications. IBM has used similar technology to build applications for banking and e-government, says Scott Handy, the company’s vice president of worldwide Linux. He also sees potential for Linux on the desktop, but expects to see thin client applications rather than the wholesale replacement of existing systems. “Just rolling out Linux will not bring down your total cost of ownership,” he cautions. “Thin clients are a big part of that.”

IBM, of course, has a key advantage over pure play Linux companies: it can use Linux to drive hardware sales. Thin clients need to connect to powerful servers, and there is money to be made in services to make sure it all runs well.

For software companies, and the Linux distributors in particular, profits will grow by developing distributions for specialist markets, and by growing the total take up of Linux. This will bring scale economies to support and services operations. But commercial customers need to understand that commercial grade support is not free.

“If someone wants free software, they can download Fedora,” says Red Hat chief finance officer, Charlie Peters. “But if a CIO wants to run a data centre, he will want a greater level of confidence [in the software]. “We offer the comfort that a build of Linux will work with 2,100 applications, and that the CIO will receive updates every quarter.”

Copyright The Financial Times Limited 2017. All rights reserved.
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