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Why Linux companies go broke?

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CIOL Bureau
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If I can make one fairly certain prediction for 2001, it is that by this time

next year, there are likely to be fewer Linux companies around. For two years,

at trade shows and on other occasions, I have been asking people from TurboLinux,

Red Hat, and other Open Source supporters how they expect to make money, any

kind of money. The answer usually is something like this, "We will sell

support contracts."

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The Open Source business model may make for an interesting college thesis. In

the real world, many of these ambitious Linux companies are simply writing a

story that will end in Chapter 11. And that appears the course many Linux

companies are on. The poor financial results of one Linux company after another

goes to show that the Open Source model is a disaster in progress.

Case in point? TurboLinux. The Silicon Valley company has a great solution to

run everything from a single Linux workstation to clusters of powerful Linux

servers running large enterprises. The company is among the top three or four

Linux distributors. It is the leading Linux distributor in Japan and the rest of

Asia. And the company has been pulling out all the stops these past two years

promoting itself in heavy advertising campaigns and large booths at trade shows.

Last week, TurboLinux reported a loss of $29 million on sales of just $3

million. After so much marketing effort, that clearly underscores the fiasco of

the Open Source business model. Having burned through tens of millions of

venture capital dollars from Intel and others, TurboLinux is now asking

investors to open their wallets as it tries to raise $60 million in new capital

by going public.

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Wall Street, of course, needs another Linux IPO like it needs a hike in

interest rates. Most Linux stocks have plunged from a year ago, leaving

investors holding billions of real and paper losses. VA Linux shares have lost

93 per cent from where they stood at the end of the first day of trading. The

problem with Linux and other Open Source solutions is that consumers and most

businesses don't want to pay for support. The market expects that if you throw

out a solution, it is supposed to work with little or no expert help. Support is

a last resort when something unexpectedly goes wrong or your own IT people can't

figure something out. And, of course, most companies offer tech support for free

as a strategic selling tool.

By making support the center of the Open Source fiscal universe, the industry

is sending the message that Linux needs a lot of support and that it is probably

too complex for the average IT staffer to figure out. And for most people

willing to try out Linux, that is exactly what it is. Worse, to be valuable, the

actual support that is delivered must be instant and of such high quality that

almost any problem is resolved in one call. But with scarce resources these

days, Linux distributors cannot afford to hire and maintain a large staff of

highly qualified technicians who need to be experts in both the Linux OS,

applications, and networking. People that good really shouldn't be doing tech

support if they have any sense of self-worth. They can snap up jobs paying two

or three times as much.

While Linux distributors may be going the way of the dotcom industry, it does

not mean the Linux OS won't become a long-term force in the industry. On the

contrary, the Linux OS will likely grow in popularity in running networks,

Internet appliances and other devices that can benefit from a highly reliable,

secure, scalable and free OS. But chances are Linux will migrate from a group of

idealistic start-ups to being absorbed by giants like IBM, Dell, and Compaq who

see Linux as a vehicle to better position themselves against Sun Microsystems

and Microsoft.

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