Linux explodes onto the scene

In the 12 months of 1999, Linux rose from obscurity to overexposure.

The year began with a bang for the upstart operating system. In January, IBM, Compaq Computer, Dell Computer and Hewlett-Packard started selling systems designed for use with Linux. And the pace didn't let up. By the end of the year, four successful Linux-related initial public offerings raised hundreds of millions of dollars, at least three executives became paper billionaires and the operating system had grown from a counterculture hobby into a corporate mainstay.

Linux is a modern-day clone of the Unix operating system born decades ago. It began as a project on Linus Torvalds' computer in 1991 and since then has grown to the point where the biggest computing companies typically either include it in their own product lines or take it seriously as a competitor.

Red Hat, the seller of Linux instrumental in fueling this growth, embodies the history of Linux in 1999. Red Hat set the stage in 1998, securing investments from Intel and Netscape. Red Hat then led the first wave of Linux adoption, providing the technical support and a stable point of contact the computing heavyweights needed.

In the spring, Red Hat then cemented the legitimacy of Linux by soliciting investments from IBM, Novell, Oracle, Compaq, SAP and Dell. For Matthew Szulik, who took over as Red Hat CEO in November, this was the single biggest event in 1999--bigger even than Red Hat's IPO in August.

When the year began, Red Hat had 40 employees. Now, with the acquisition of Cygnus Solutions, Red Hat has grown tenfold to about 410, Szulik said.

And some of those employees are crucial. Red Hat snapped up Alan Cox, Stephen Tweedie, David Miller and other programmers at the heart of Linux development. "We were fortunate to have folks like Alan and Stephen choosing to join us way back before it became fashionable, before there was a true value established for the Red Hat stock," Szulik said.

Red Hat's IPO raised $84 million, providing serious capital for expansion and further development of Linux. It was followed by Cobalt Networks, Andover.Net and the biggest of them all, VA Linux Systems, which set a record when its stock closed at 698 percent above the IPO price in the first day of trading.

None of these companies are making profits as yet. Their strategy is similar to that of the Internet companies that are more famously lacking in profitability: Stake a claim, hold an IPO to gain an unbeatable lead over competitors, then reap the profits at some undetermined point in the future. And, like a number of Net companies, profits eventually will derive not from technological products but from the necessary trappings of technology: advertising or support.

Red Hat reported a net loss of $5.2 million for the six-month period ending Aug. 31. VA Linux, which specializes in Linux-tuned hardware, lost $10 million for the quarter ended Oct. 29. Andover.Net lost $5.4 million for the year ended Sept. 30. And Cobalt lost $13 million in the nine months ended Oct. 31.

Being unprofitable while paying for expansion is unavoidable. "We're competing against organizations that have been in business for 20-plus years," Szulik said. And he was cagey about when the company will start focusing on profits instead of just revenues. "Our emphasis is going to continue to be on growing the top line.... We will continue to make investments and scale our business and brand."

Microsoft probably stands the most to lose from ascendance of Linux. Microsoft set up Windows NT as the server operating system that would take on Unix. But while Windows NT in 1999 benefited only from bug fixes and its successor was delayed, Internet companies revived interest in Unix. And though most agree Linux is still rough around the edges, few deny it has moved ahead rapidly.

Linux benefited from upgrades that made it more business-friendly, then improvements aimed at desktop use and visions from Torvalds that the next frontier would come in gadgets. While Red Hat, TurboLinux, SuSE and VA Linux Systems aimed Linux at the server, Corel fulfilled its promise to begin selling a version aimed at the Microsoft desktop stronghold. It even has the potential to be used in the world's fastest supercomputer.

The extent of this seriousness is visible in the efforts of the Trillian group, a consortium working to get Linux working on Intel's upcoming 64-bit chips. Where typically Linux has lagged other operating systems that usually were ready for a new chip arrival, the Trillian project, newly beefed up, aims to have a 64-bit Linux for Intel ready by the time the Itanium chip arrives in 2000.

Microsoft has been ambivalent toward Linux. In March, a spokesman denied that Linux is a threat, and in April, Microsoft chief executive Bill Gates predicted Linux would have a limited impact.

At the same time, however, Microsoft has established and augmented its efforts to study and counter Linux.

Microsoft also tried to argue that Linux posed a competitive threat in arguments to a federal judge that Microsoft doesn't hold monopoly power. The judge was unconvinced, though, saying Linux doesn't yet compete in the desktop market where Microsoft is strongest. Linux companies, many of whom are motivated by the possibility of taking Microsoft down a peg, were delighted by the judge's finding that Microsoft is a monopoly.

Meanwhile, Linux has been expanding its turf while Windows NT contracts. Since the Windows NT debut, Microsoft has abandoned plans to have it run on Mips, PowerPC, and Compaq Alpha chips, NT now has a future only on Intel processors.

Linux has gone the other direction. It began on Intel chips and has expanded to all other major chips with corporate help. Compaq hopes Linux will boost Alpha sales. HP is quietly funding efforts to bring Linux to its own PA-RISC chips. Even Sun Microsystems, a tepid supporter of Linux, has begun selling Red Hat for its UltraSparc-based computers.

Intel, though, is among the most aggressive boosters of Linux. It led the field with its investment in Red Hat, and now has invested in Red Hat competitors SuSE and TurboLinux. It invested in hardware makers too, VA Linux Systems in March and eSoft in November.

Linux connections have been the Midas touch for companies such as Applix, K-tel and V-One and Corel.

But will Linux popularity become too much of a good thing? LinuxOne, which filed its IPO plans in September when its first Linux product just entered beta testing, hopes not. Despite the fact that large sections of its Securities and Exchange Commission filings are identical to similar documents from Red Hat, that it has zero revenue, and that it has sparked continuing animosity from the Linux community, LinuxOne plans to go public as soon as January.