LINUX: Fad or Future? by Barry Jaruzelski, Vice President Gerald Horkan, Principal Randy Lake, Associate Separating Hype from Reality 1 The Linux operating system has taken the computing world by storm. Every major technology publication has feature articles promoting Linux and its potential to undermine the dominance of Windows. Hardware and software vendors announce Linux products and services daily, and new companies focused exclusively on Linux have started to emerge. Linus Torvalds, the creator of the Linux kernel, is revered in the technology community as the David to Bill Gates Goliath. The stock market has taken notice as well. Linux vendors Red Hat, Cobalt Networks, Andover.net, and VA Linux Systems have all reached sky-high valuations upon their IPOs, while existing software vendors such as Corel and Applix have seen their stock prices surge at the announcement of Linux products. Additionally, a consolidation wave is already striking the Linux market as key players such as Red Hat, VA Linux, and Corel buy up other firms to broaden their Linux capabilities. Over the past year, the rate of Linux adoption has been tremendous, and the trend should continue. In 1998, Linux was the fastest growing operating system with 190% yearon-year growth, capturing 16% of the new server market. Total shipments of Linux for clients and servers is projected to grow at greater than 25% annually from 1999 through 2003. According to a recent survey, over a third of enterprises are using or plan to use Linux within the next year. We estimate that Linux has close to 20 million users today and project that the total Linux server market will exceed $5 billion by 2003. Despite this initial success and media attention, Linux penetration has been limited to low-end servers and sectors of the technical computing market, and its long-term success beyond these markets is far from certain. Amidst all the hype, technology providers and users alike are unsure about the level of commitment they should make to Linux. At the strategic level, there are three major questions that need to be addressed to separate the hype from reality. Will Linux like Unix fragment into multiple flavors? In which segments will Linux become a competitive alternative to Solaris or Windows NT? How can technology providers make money in an opensource model? In this paper, we present Booz Allen & Hamilton s views on these questions and make recommendations on how companies can best embrace the Linux revolution. Will Linux Fragment? A significant threat to the success of Linux is the possibility of fragmentation. The Unix operating system began as a single operating system in 1969, but was splintered by hardware vendors in the late 1980s, ultimately forming six major competing operating systems: Sun Solaris, HP-UX, IBM AIX, SGI Irix, Digital UNIX, and SCO UnixWare. This fragmentation increased supplier and customer costs for development, application porting and system maintenance, and slowed the adoption of Unix in a number of segments. Many fear that Linux is fated to repeat this course. Today, more than 22 companies sell the Linux operating system (Exhibit 1 illustrates the top Linux distributors and their current market focus). In order to differentiate their offerings, many vendors have added software tools to
Exhibit 1: Market Positions of Linux Distributors Segment Focus Server Desktop Embedded Primary Geographic Market* N. America Europe Asia Caldera Corel Blue Cat Debian Red Hat Lineo SuSE TurboLinux * While the major Linux distributors have penetrated multiple geographic markets, this chart demonstrates only primary geographic focus. Source: Booz Allen & Hamilton analysis the common Linux kernel. The concern is that competition among vendors will lead to a split into incompatible versions of Linux, which will slow adoption as application developers will be less willing to support multiple versions. Linux could become just another splintered branch of Unix. As an example of this threat, there is already a split in the Linux community between two competing graphical user interfaces, KDE and Gnome. We believe that Linux is unlikely to splinter in the near term: First, in the past ten years, market power has dramatically shifted from hardware companies to software developers, who have a vested interest in a unified Linux. Second, any changes to the Linux kernel must be approved by Linus Torvalds, resulting in a single standard kernel. Of course, vendors will provide overlays and patches that improve the functionality for certain end-user environments, but all major Linux providers are currently supporting the Linux Standard Base (LSB) to prevent fragmentation beyond the kernel. The Linux license requires any improvements or modifications to the kernel to be shared. And, in the spirit of open source, Linux providers typically release the code for improvements or added functionality outside the kernel. For instance, IBM has contributed a Linux developer kit for Java and SGI has announced plans to contribute the XFS file system and OpenGL to the open-source community. Finally, we anticipate that consolidation will take place among Linux providers. Initially the bigger players will have an incentive to cooperate closely to grow the market. Yet, over time, there will still be challenges to a unified Linux. As hardware vendors attempt to push Linux into highend computing environments, there will be a conflict between tuned functionality and universal compatibility. For Linux providers, the challenge will be to deliver performance on Linux that can compete with proprietary Unix systems at the high-end without having to modify the kernel in ways that burden low-end users. Also, Linus Torvalds has stated that he anticipates that Linux may fragment according to the different devices it runs on. There are currently efforts under way to create an embedded Linux standard and different standards for the desktop and server environments may emerge as well. This sort of fragmentation may actually be beneficial, as it will permit Linux to optimize for specific platforms or devices, without creating competing standards within a device segment. Where Will Linux Succeed? We believe that if Linux avoids fragmentation, it will join Solaris and Windows NT as one of the three dominant operating systems. Linux has already demonstrated success in the Internet infrastructure and technical computing markets. We anticipate that Linux will also become a viable option for embedded systems, allowing it to further penetrate the enterprise. Contrary to the prevailing view among the press, which views Linux primarily as a challenge to Windows, we think Linux s greatest threat is to proprietary Unix operating systems, especially Sun s Solaris. Sun s recent move to make Solaris source code freely available is evidence of this. True, Linux s ability to compete with traditional 2
Unix is directly gated by its ability to scale to more processors. However, its widespread adoption in the enterprise depends more on commercial application availability and support by the major enterprise hardware vendors. Internet Infrastructure Linux has proven itself a robust operating system for single-use appliance servers in the Internet infrastructure market. Linux servers are projected to represent 24% of appliance server revenue, or $3.8 billion, by 2003. As Exhibit 2 demonstrates, most enterprises running Linux are using it to provide Web/Internet infrastructure, database, e-mail, file/print sharing, systems management, and network management. We estimate that more Web sites run on Linux than on any other operating system. Linux is also a popular choice for Internet server and rendering farms. Linux has succeeded in these environments due to its low cost, reliability, compatibility with older servers, and the availability of basic applications. However, though well suited for simple Web serving, Linux does not yet offer the high availability and monitoring tools required for larger e-commerce and application serving uses. Exhibit 2: Functional Use of Linux % of Enterprises Using Linux 80% 70% 60% 50% 40% 30% 20% 10% 0% Web/Internet Infrastructure Database E-mail File/Print Sharing Source: Booz Allen & Hamilton analysis, Information Week System Management Network Management Technical Computing Linux servers are being used in technical computing markets that deploy customized vertical applications, such as the scientific research, education, and bio/chem markets. For example, Linux is being used to run highend customized computing clusters (known as Beowulf clusters ) for universities and government research facilities. Higher-end systems for technical applications have been traditionally supplied by SGI and IBM. Since these computing intensive markets have traditionally been dominated by Unix and Linux is a Unix derivative users find Linux easy to deploy and manage. Many technical computing ISVs have already ported their applications to Linux and are just waiting for demonstrated customer demand to begin shipping them. General Enterprise/Commercial Use Enterprise Servers & Mission Critical Applications Although Linux has had significant success in low-end and technical computing server markets, it has made limited progress to date in the general enterprise serving market. Linux is projected to have only 3% 4% of traditional server revenues by 2003. Linux must make progress along several fronts in order to exceed these expectations: Technology gaps Service and support offerings Application availability Currently, Linux is not the optimal operating system for high-performance enterprise applications. Specifically, high-end networking is limited by the lack of a robust journal file system (JFS), and there is only basic support for symmetric multiprocessing (SMP), clustering and storage-area networks. Because of limited SMP functionality, Linux can only support up to four processors today, while high-end applications can require 64 or 128 processors. Also, administration tools and backup support are still limited. However, rapid progress is being made, and these technology gaps do not pose a long-term barrier to Linux adoption in the enterprise. 3
Similarly, while Linux offers only limited service and support for the enterprise today, the situation is changing rapidly. A significant amount of support is already available for free on the Web. Most Linux providers and hardware vendors have also begun providing Linux support, certification, and training programs. Of the traditional hardware vendors, IBM, HP, and SGI have made the most significant investments in their support capabilities for Linux, while a Linux start-up, LinuxCare, has also targeted this opportunity. Application availability remains the most significant challenge to the success of Linux in the enterprise. Organizations do not purchase operating systems; they purchase applications and then choose the optimal platform based on application performance and overall IT architecture concerns. Thus, Linux will succeed only if popular enterprise applications are already ported to and tuned for the system. All the major database vendors have ported to Linux, and IBM and Red Hat, with its Cygnus acquisition, are promoting Linux-based software development. Additionally, Corel s acquisition of Inprise/Borland should enhance the prospects for Linux development tools. Still, most enterprise applications are not yet available on Linux. For applications already running on a version of Unix, porting to Linux is not a significant challenge. But porting Windows NT applications is difficult and requires a much more significant resource investment from ISVs. Thus, until ISVs see enough demand from customers to justify porting, Linux s opportunities in the enterprise will remain limited. To summarize, Linux will continue to make inroads in the enterprise, but its penetration is likely to be slower than in other market segments. Exhibit 3 illustrates the markets where Linux is likely to succeed. Desktop Systems The corporate desktop is another challenging segment for Linux. In 1998, Linux had only 2% of client operating system shipments and is projected to have no more than 5% by 2003. The key barriers in this market include: The dominance of Microsoft Office Relatively complex installation and user interface Lack of emulation software or data translation tools Microsoft Office is the de facto standard on the desktop, commanding even higher market share in office suites than Windows enjoys in desktop operating systems. Porting Office to Linux is feasible, but would require an investment of Microsoft resources. More fundamentally, since such a move could threaten the Windows operating system franchise, it is unlikely that MS Office will be available for Linux. However, other vendors are targeting this market. For example, Corel and Sun are both offering office suite applications for Linux. Some Linux vendors have begun to target the desktop market by simplifying Linux installation and the user interface, offering office productivity applications, providing professional services and support for desktop users and allowing users to run Microsoft Windows applications in Linux environments. Such efforts will indeed make it easier for desktop customers to use Linux, but they are unlikely to threaten Microsoft s dominance. Exhibit 3: Where Will Linux Succeed? Market Opportunity Large High Growth Small Corporate Desktop/ PCs Low-end Desktop Enterprise Application Servers ASP Application Servers Source: Booz Allen & Hamilton analysis Embedded Systems Thin Clients Custom Applications Potential for Linux Penetration Low-end Server Farms/ Internet Infrastructure Technical Computing Limited Unclear Significant 4
However, there are significant opportunities for Linux in certain segments of the desktop market, namely: 1. Low-end desktop clients 2. Limited use, custom application environments 3. Thin clients In the low-end desktop market, for example, free Linux could be used in sub-$200 desktops, where Windows would be too expensive. Linux is also being adopted for limiteduse clients in environments that require stability and a high-degree of customization: Bristol Hotels & Resorts and Burlington Coat Factory have already adopted the system for their single-use desktops. Thin clients represent another potential opportunity. In the thin client model, application availability is not critical to an operating system s success because applications do not run on the client operating system. Therefore, if the application service provider (ASP) model proliferates, Linux may have an opportunity to win over corporate users as a thin client, due to its low cost, stability, and networking features. Embedded Systems Embedded systems are small-scale computing devices like set-top boxes, appliances, and palmtop computers that are typically built for a single use. Historically, these devices have run light, proprietary, and highly customized operating systems. In these segments, Linux offers low cost, stability, connectivity, easy to modify code and improved security and support features. In addition, by adopting Linux, embedded system developers gain access to the large and growing Linux developer base. Linux has had some recent big wins in this market. Intel chose Linux over Windows CE as the operating system for its low-cost Internet access devices. Tivo, an Internet generation VCR, and Itsy, a prototype palmtop from Compaq, are based on Linux. Red Hat s Cygnus controls 75% of the market for embedded systems compilers and recently released the first toolset for embedded Linux developers. Linus Torvalds is quite supportive of this market, as evidenced in the most recent release of the Linux kernel, which provides special support for embedded systems. There are two major challenges in this market. First, Linux providers must agree on a standard version of Linux for embedded systems, as the full operating system is too large for smaller devices. Multiple efforts are under way to determine standards and a consensus is emerging. Second, Linux will face intense competition from Microsoft s Windows CE and embedded NT and Sun s Jini. The market is still up for grabs, however, and this space represents a real opportunity for Linux to take the early lead in the market s evolution. How Can Technology Providers Make Money with Linux? Linux provides growth opportunities for existing technology providers, but the challenge is how to differentiate in an open-source world, and how to migrate or protect a company s existing installed base. As shown in Exhibit 4, multiple levers can be used to differentiate technology vendors. Each will be discussed in turn. Hardware Vendors Providing differentiated Linux hardware is far more difficult than with Unix, since the platform will be an Exhibit 4: Linux Market Opportunities Basis of Differentiation Hardware Industrial design Hot box Software Applications for enterprise/ desktop Value-added software Compilers/development tools Service & Support Solutions stacks Professional services Maintenance Limited Impact Source: Booz Allen & Hamilton analysis Market Impact Significant Impact 5
open-source operating system likely running on commodity Intel chips. As a result, hardware vendors margins are likely to decline, and some doubt that anyone other than Dell can make money selling boxes in the Linux world. In this way, the Linux business model for hardware vendors resembles Windows NT economics. Thus, while most major hardware vendors have released Linux-friendly products, only IBM and SGI have made a significant technology investment to date. However, limited opportunities for platform differentiation do exist. For hardware vendors, a strong industrial design team will be critical to optimize the footprint and manageability for customer environments, especially in the largescale Internet infrastructure farms where space is a premium and easy hot swapping is critical. There also may be opportunities at the high end to deliver superior Linux performance through innovative system architecture design. This will apply primarily to niche technical markets, where even small performance improvements are critical. In the open-source world, however, there is less room for pure hardware differentiation one of the main reasons why Digital, Sun, HP, IBM, and others splintered Unix over ten years ago. Going forward, if Linux succeeds, the major hardware vendors will have to adjust their business models, relying even more on support and services and strong customer relationships to capture value. Software Vendors Linux offers two primary opportunities for software developers: 1. Performance enhancement overlays or development tools 2. Ported applications There are several opportunities to improve the functionality of Linux. Developers can provide software overlays for improved performance or usability, or provide development tools and compilers that will make it easier for ISVs to develop additional applications for Linux. Software providers can also port popular applications. If already Unix based, this will not require a significant investment except at the high end. However, Windowsbased ISVs should conduct a rigorous cost-benefit analysis before making the investment. Porting makes sense where there is existing demand for applications, such as in Internet infrastructure and technical serving markets, or where there is no dominant operating system in place, such as the embedded systems market. However, in the desktop and general enterprise serving markets, ISVs must determine if there is a compelling reason for users to migrate to Linux. Service & Support Offerings In an increasingly commoditized hardware and software world, services remain the key opportunity to add value. To this end, there is demand for vendors to provide Linux solution stacks that combine hardware, software and services and are targeted to specific vertical markets or applications, such as turnkey Linux solutions for ISPs. In addition, there is an opportunity for service providers to provide customized Linux solutions for high performance end-users. Service and support providers can differentiate their offerings by leveraging the expertise of the Linux developer community. They can hire open-source developers on a contract basis, create Linux incubators (e.g., providing free office space or equipment in exchange for services or equity), or create on-line developer portals. In order to build long-term competitive advantage, service providers must first engage the Linux community, and then continue to incorporate what they learn into their organizations to develop expertise in-house. Retaining Existing Customers Prior to betting big on Linux, vendors must consider how they will retain or migrate their existing customers. There is a risk that current customers will perceive a Linux campaign as a lack of commitment to their current proprietary platforms. Also, migrating a customer to Linux may act as a catalyst for customers to reevaluate vendors, giving competitors an inroad. To address these risks, vendors must articulate a clear and consistent strategy, including a roadmap that demonstrates their commitment to existing customers. Vendors could also provide incentives to customers to migrate to Linux over time. 6
Conclusions To summarize, let s return to the questions posed at the beginning of this paper: Will Linux like Unix fragment into multiple flavors? In which segments will Linux become a competitive alternative to Solaris or Windows NT? How can technology providers make money under an open-source model? Linux is unlikely to splinter in the near term, and it has already become a viable platform in the Internet infrastructure and technical computing segments. It also has a real opportunity to become a leading operating system for embedded systems and thin clients, but its ability to penetrate the enterprise server or desktop markets are less clear. The critical gating factors are application availability and improvements in scalability and administration. Exhibit 5 illustrates how Linux compares to the other major operating systems for the enterprise. We anticipate that proprietary Unix operating systems will continue to lose market share to Linux. In addition, Linux may win share from Windows in some very low-end client and server segments; otherwise, it is unlikely to pose a major threat to Microsoft in the near term, particularly on the desktop. Exhibit 5: Relative Server Operating System Positionings by Year End 2000 High IRIX HP-UX Solaris In the open-source Linux world, there will be significantly less room for hardware differentiation, and major vendors will increasingly need to rely on support and professional services to generate profits. One of the biggest challenges for computer system suppliers and application developers will be articulating a clear roadmap for their current customers to mitigate migration risks. There are significant opportunities to develop solution stacks for specific verticals, which should provide customers a distinct value added and thus justify attractive margins. Software developers must clearly understand the investment versus return for porting or developing applications for Linux. In some cases, especially for non-unix applications, the economics are likely to be prohibitive. Finally, technology providers must leverage and learn how to work cooperatively with the often quirky Linux community. The open-source model is a powerful phenomenon in the computer industry, with implications for software development and industry structure that have yet to be realized. The rapid growth and popularity of Linux signify the real potential for an open-source, componentsbased software industry, where applications are assembled from pre-built and tested best of breed software modules developed by a broad base of premier software developers. Given the market s embryonic state, the full impact of Linux necessarily remains unclear. With the end-game still open, one thing is certain: for companies that can separate the hype from reality, there is still a substantial opportunity to join the competition and drive the Linux market. Scalability* Low SCO UnixWare Tandem Non-Stop Tru64 Unix Linux AIX Windows NT Windows 2000 Bibliography 1. Dataquest, Linux Opportunity Greater in Server Appliances than in Traditional Servers, Gartner Group, 1999. 2. IDC, Bulletin: Linux Operating System Market Overview, 1999. Limited Significant Enterprise Application Availability * Scalability in a single system, excluding clusters Source: Booz Allen & Hamilton analysis 3. IDC, Client Operating Environments: 1999 Worldwide Markets and Trends, 1999. 4. IDC, Server Operating Environments and Software Platforms: 1999 Worldwide Markets and Trends, 1999. 5. Information Week, Linux Comes Alive, Jan. 24, 2000. 7
Booz Allen s Communications, Media, and Technology team interviewed a range of executives at 24 companies, including hardware suppliers, application software developers, and Linux distributors, to prepare this report. Barry H. Jaruzelski Barry Jaruzelski is a Vice President in Booz Allen & Hamilton s Communications, Media, and Technology Practice (CMT) based in New York. As an undergraduate at the University of Pennsylvania, Mr. Jaruzelski studied engineering and economics and later received an MBA from Columbia Business School. His past projects have included defining a growth strategy for an e-commerce software developer, defining a turnaround program of a workstation and server supplier, as well as establishing a greenfield NT business unit for a computer systems provider. He can be contacted at 212-551-6773 or jaruzelski_barry@bah.com. Randy M. Lake Randy Lake is an Associate in Booz Allen & Hamilton s CMT Practice and is based in the San Francisco office. Prior to joining Booz Allen, Mr. Lake was employed as a corporate attorney with Brobeck, Phleger & Harrison in San Francisco. Mr. Lake received a BA in political economy from U.C. Berkeley, where he graduated Phi Beta Kappa. Mr. Lake also holds a JD from Harvard Law School. He can be contacted at 415-627-4258 or lake_randy@bah.com. Gerald C. Horkan Gerry Horkan is a Principal in Booz Allen & Hamilton s CMT Practice and is based in the San Francisco office. He recently transferred from the Tokyo office. He has worked at Hewlett-Packard in California and Japan, and at Sun Microsystems. He received a BS in electrical engineering from Columbia University, with a joint BS in physics and mathematics. Mr. Horkan holds an MBA from the Harvard Business School and is fluent in Japanese. He can be contacted at 415-627-4221 or horkan_gerald@bah.com. Booz Allen & Hamilton Founded in 1914, Booz Allen & Hamilton is a global management and technology consulting firm serving clients in 90 countries around the world. With a team of more than 9,000 professionals, our goal is to assist our clients in defining and driving successful strategic transformations. The Communications, Media, and Technology Group (CMT) is one of the largest practices within the firm s Worldwide Commercial Business. www.bah.com Worldwide Offices Abu Dhabi Amsterdam Atlanta Bangkok Beirut Bogotá Boston Buenos Aires Caracas Chicago Cleveland Dallas Düsseldorf Frankfurt Hong Kong Houston Jakarta Kuala Lumpur Lima London Los Angeles Madrid McLean Melbourne Mexico City Milan Munich New York Paris Philadelphia Rio de Janeiro Rome San Francisco Santiago São Paulo Seoul Singapore St. Louis Stockholm Sydney Tokyo Vienna Warsaw Washington, D.C. Wellington Zürich 8 COMM 002 4M: 2/00 PRINTED IN USA