The Open Road

Someone needs to let the folks in Raleigh know we're in a down economy still. While much of the tech market lingers in the doldrums, Red Hat announced another strong earnings report for its fiscal third quarter 2010.

Here are some of the headline numbers:

1. Revenue of $194 million, an 18 percent increase year-over-year.
2. Subscription revenue topped $164 million, up 21 percent year-over-year (and 85 percent of the company's revenue).
3. Deferred revenue climbed 23 percent year-over-year to hit $619 million.
4. All 25 accounts up for renewal in the quarter renewed, and at 120 percent of value.

Small wonder, then, that the company elected to repurchase 1.9 million shares of common stock for $52.3 million.

While Red Hat's revenue growth rate has been sliding for some time, as The 451 Group has detailed, Red Hat's prospects remain bright. Piper Jaffray, for example, recently highlighted a range of factors contributing to its "Overweight" rating on Red Hat's stock:

Recent conversations with 40 Red Hat industry contacts point to an improved operating environment, an ongoing acceleration in the pace of Unix-to-Linux migrations, and Q3 results essentially inline with plan. We continue to see longer term catalysts for outperformance based upon the recently introduced virtualization products (RHEV), upsell to the premium priced Advanced Platform, adoption of cloud computing, and broadening awareness of open source offerings

In my own conversations with Red Hat executives, it's clear that the company has plenty of headroom in both its JBoss business (8 of the top 25 deals in the quarter included a JBoss component, and Red Hat CFO Charlie Peters said that it continues to grow faster than Red Hat's core RHEL business), but particularly in its virtualization strategy. Virtualization is effectively a way for Red Hat to sell much more deeply into existing accounts. Much deeper.

But Red Hat is also seeing traction in its nascent cloud-computing initiative. In the third quarter, Red Hat saw a major movie studio building a private cloud with its technology in addition to NTT choosing Red Hat for its cloud infrastructure, plus the signing of a six-figure Red Hat Enterprise Linux-based cloud deal.

Clearly, there is gold in the Linux hills for Red Hat, gold that doesn't seem to be running out, especially as Red Hat improves its ability to get free-riders (CentOS and unpaid RHEL users) to pay, as it did this quarter with two sizable "free-to-paid" deals. The only negative in Red Hat's quarter seems to be a back-loading of revenue, meaning that more deals closed at the end of the quarter than normal.

But Peters said that cash flow for the year would come in at the high end of his former guidance, so things remain on track.

In light of Red Hat's strong performance in its core Linux business, it's somewhat strange to see Novell reorganizing to emphasize its proprietary products instead of hitting hard on its still-solid Linux business.

But perhaps there's only room for one Linux vendor in the data center. Based on the last several years of Red Hat performance, that vendor appears to be Red Hat.

Ubuntu has led the Linux community's efforts to improve on form, not simply function, and thereby make the Linux experience as good or better than Mac OS X in terms of usability. Mark Shuttleworth, founder and CEO of Canonical, the company set up to shepherd development and commercialization of Ubuntu, is the heart of that effort.

Mark Shuttleworth, provocateur

(Credit: Matt Asay)

From March next year, I'll focus my Canonical energy on product design, partnerships and customers. Those are the areas that I enjoy most and also the areas where I can best shape the impact we have on open source and the technology market.

Is this good or bad for Ubuntu? And what about Canonical?

Canonical is reportedly doing $30 million per year in sales, and is working on some significant projects that may establish it as the de facto Linux distribution for Netbooks, if it isn't already. (Ubuntu is arguably the community choice for personal computers.)

Even so, Linux still has a long way to go to match the user experience of Mac OS X, or even Windows. Shuttleworth has given me a sneak peak of his vision for where Ubuntu can go from a UI perspective.

I was blown away. This is a man who "gets it."

Even so, he and the Ubuntu community still have a ways to go to match Microsoft or Apple in user experience, and certainly in market share. To get there, Ubuntu needs Canonical, and Canonical needs Shuttleworth fixated on improving Ubuntu's user experience.

When I asked what his resignation as CEO means for Ubuntu, and his involvement with it, Shuttleworth responded:

I don't expect to be less visible, just have stronger management for the business units.

As reported by CNET and as reported on Canonical's corporate blog, Jane Silber, currently Canonical's COO, will replace Shuttleworth as CEO. A search for a new COO will commence in the first few months of 2010.

This, I believe, is an opportunity for Canonical to tighten its focus. While Shuttleworth suggests that Silber's appointment "doesn't mark a change of direction," perhaps it should. With over 300 employees and products that span mobile, Netbooks and other personal computers, cloud computing, enterprise servers, and more, Canonical has its fingers in a lot of pots.

It's possible that the operations-minded Silber may channel Ubuntu's ambition into a few products where Ubuntu can dominate.

When I asked her for comment, Silber indicated that the move is more evolutionary than revolutionary:

This move should not be read as a precursor to a paring back in markets or as a dramatic shift in strategy. We continue to be committed to making Ubuntu the best possible platform, and to ensuring that Canonical provides high quality engineering, online and professional services to Ubuntu partners and customers worldwide....

I will still bring an operations discipline to company, but I will assume more responsibility and authority for the overall performance of the company including, I expect, greater participation in executive level sales and business development.

That involvement--i.e., working with customers and hearing them demand focus and discipline--may well prod Silber to instigate the changes she initially has disavowed.

Red Hat is instructive. Though many of us would like to see it broaden its focus, the company remains rooted in the enterprise server and middleware markets. Canonical, in my view, should take a lesson from Red Hat and channel some of its energy into fewer markets, markets where it can thrive.

Regardless of what happens, stay tuned to see how Shuttleworth's design aesthetic, now set to overdrive, can impact the cozy duopolies in "desktop" (Apple and Microsoft), servers (Red Hat and Microsoft), and more. With more time to focus on what customers and partners want, Canonical and Ubuntu may be set to take a more commanding position in the market.

Editors' note: This is a guest column. See John Mark Walker's bio below.

Quick, what were you doing on December 9, 1999? If you actually remember, then there's a good chance that you're an old-school Linux type. If you don't have any idea, then read on, and you'll discover what you missed.

I'll never forget where I was--at ground zero of the apex of dot-com ridiculousness. While I and all of my co-workers were in the office that day, about the only thing we accomplished was writing 15 gazillion Perl-based variations on the theme of stock tickers that displayed the price of LNUX, updated at regular intervals. Well, that and drinking champagne. Words cannot adequately express what it's like to look around the office and know that everyone in the building is a newly minted millionaire--on paper, at least.

Ten years ago today, shares of LNUX, the Nasdaq symbol for VA Linux Systems, went on sale to the eagerly awaiting public. You may recall that VA Linux Systems was the company that combined Linux, open-source software, and Intel-based hardware. Just six months prior to VA's initial public offering, Red Hat Software had gone public with a very successful IPO.

We were in the middle of the open-source pixie dust revolution, when many flagging companies jumped on the open-source bandwagon in a desperate attempt to recapture past magic. It was this phenomenon that led to the general conflation of the late-1990s open-source boom with the dot-com bubble, and it would be a few years before most industry analysts, pundits, and beat reporters figured out that there was a difference.

But back to IPO day. I strolled into work sometime after 9:30 that morning and was immediately greeted by Pay, my manager, with some astounding news. We all guessed that the day would be significant, but none of us were prepared for the tsunami of blissful, surreal numbness rushing to greet us.

He showed me a sheet of paper faxed that morning from the investment bank's office (truly ground zero on that day), that was copied ad nauseum and shoved into disbelieving faces. I'll never forget what was on it: just a simple table with 2 columns. The column on the left was a list of investors, and the column on the right was the price they bid for our stock. The numbers were astronomical: $320, $250, $200, $300, $290.

Curiously, some investor didn't get the memo and bid a paltry $50. We laughed at that because it was really funny--at the time. A year later, and I would recall that lone investor for an entirely different reason: on December 8, 2000, LNUX closed the day at $8.49.

On IPO day, we could all do the math, and on that day, the math was in our favor. The official IPO price was $30, and most of us owned options on shares with a much lower strike price. We had all won the lottery, hit the jackpot, (insert gambling metaphor here). Or so we thought. What actually happened was, as Don Marti so artfully described it, we had all become players in a game none of us truly understood.

To this day, the VA Linux IPO remains the Nasdaq's most successful, in terms of its first-day gain, but what does that success really mean, in the context of events that have taken place since? At the time, the LNUX IPO was lumped in with the rest of dot-com mania and treated as the poster child for the insanity that gripped the market.

The New York Times summed up that view best with its report on the IPO, "A Tiny Company with Dim Prospects Goes Public with a Bang." (Note: the Times has since changed the headline, but we remember the original.)

You'll be unsurprised to know that we viewed things slightly differently. But as the stock price plummeted, we went from a sign of the audacity of the times to a symbol of wasted effort, a gloomy future, and everything that was wrong with the go-go '90s. We were somehow expected to repent for the misdeeds of others.

It is simply wrong to view VA Linux as a dot-com vehicle or to attach a greater symbolism to its downfall. It was really neither; it was simply the dramatic rise and fall of a company that overreached. It was a real company that made real things and believed very strongly that open source was going to be a major component of IT very soon.

That we executed poorly and paid dearly for it does not diminish the original ideas behind the company. While VA was not profitable after the IPO, it was certainly not because of revenue. In fact, revenue growth was strong, but our unrealistic growth plan--to become Dell in less than two years--did us in. Only the convenience of timing allows VA Linux Systems to be mentioned in the same breath as eToys, Pets.com or Webvan. The revenue of those was rather paltry, in comparison.

To put the VA Linux IPO in its proper context, let's rewind and remember what was going on at the time:

• Red Hat had a great IPO the summer of 1999.
• IBM had jumped into bed with Apache and had started its first big push with Linux.
• Oracle and most other major database players had released native versions for Linux.
• A year earlier, Dan Kusnetzky famously authored the famous IDC report showing explosive Linux growth of 212 percent.

And yet, in spite of these obvious signs of traction and increasing market share with real customer demand, Linux and the rest of the open-source "bandwagon" were treated like Summer of Love refuse that had never really come down from the acid hits.

Every article about Linux included (stupid, irrelevant) questions about whether it would replace Windows 98. There was a widespread belief among industry observers that open source was fueled by the dot-com bubble and would wither away when the bubble burst. Every article referenced a ragged band of hippie programmers who did it out of love or ideology and just wanted to beat the evil empire.

At that time, no one had really figured out what was driving open-source development. It's worth pointing out that we card-carrying members of "the" open-source community played our part in that perception. Who can forget the famous Windows Refund Day? And if you never smelled Richard Stallman or Eric Raymond at a conference, then you clearly missed out.

It was a heady time of uncertainty, doubt, and eternal optimism. A time of green-field bliss, of "Linux without limits," and there was no problem that a few lines of Perl (Practical Extraction and Report Language) couldn't solve. After all, "the geek shall inherit the earth." It must be true; I read it on a T-shirt.

It truly was a time of the almighty individual weaving his magic and changing the world--and if you were lucky, getting paid well for it. We were young and naive, and those of us endowed with Y chromosomes were high on testosterone. We truly believed that we were on the right side of history but were too stupid to realize our own limitations. This was a blessing and a curse.

That unyielding belief in the omnipotence of writing code gave our army the energy to slay dragons we wouldn't have otherwise, but it also gave us the chutzpah to tackle issues that we ultimately could not solve. Case in point: that time when someone who shall remain anonymous tried to rewrite our ERP system from scratch. In Perl. He didn't last very long.

As it turns out, we were right about the open-source thing, but we somehow forgot the other history lesson: the one about how being on the leading edge of something successful doesn't mean you'll enjoy all, most, or indeed, any success. Those who ultimately reaped the benefits of open-source proliferation did so because they were smarter and took a more conservative approach.

The 10th anniversary of Red Hat's IPO passed without much fanfare last summer, probably because its management is too busy running a successful company to really take the time to pause and reflect. VA Linux Systems, meanwhile, was devastated by the tech bust because those start-up companies were a significant percentage or our revenue.

VA Linux Ssytems changed its name in 2001 to VA Software, after jettisoning the hardware business entirely, and it focused on selling licenses for SourceForge Enterprise. And when that didn't work out, it became SourceForge, a collection of Web sites deriving revenue entirely from ad sales. And it has since changed its name again, to Geeknet.

For the veterans of the VA Linux IPO, we're left to ponder what might have been and savor the unreal moments, while deriving some small consolation from the fact that our instincts were right: open source was not a fad; it was just the beginning. It's not going away, and VA Linux was ahead of its time. Small consolation, indeed.

The next time you feel tempted to laud the power of the open-source business model, take a look at Novell.

Novell has been struggling for over 10 years, yet it still manages to crank out nearly $1 billion in sales each year, most of which derives from the licensing of proprietary software.

Novell reported its fourth-quarter earnings on Thursday, along with results from its full fiscal year. They're not pretty, but they do suggest a path forward for the erstwhile software leader.

Novell saw its sales slump over 12 percent from its year-ago quarter to $216 million. For the full fiscal year, Novell stumbled to a $257 million net loss, versus a $5 million profit in 2008, on net revenue of $862 million and a net loss from operations of $206 million.

Perhaps not for long.

Much of that annual deficit came in the fourth quarter, which included a $279 million noncash impairment charge that sent Novell's quarter into the red by $259 million.

Not pretty.

Unless you look at Novell's Linux numbers. Linux remains Novell's most appealing business and was up 21 percent year over year to $149 million--and up 14 percent at $39 in in its fourth quarter over the year-ago period. While a far cry from Red Hat's booming Linux business, Novell's results suggest that there's life in its Linux business yet.

Life that Microsoft continues to seem content to grant.

Make no mistake, without Microsoft, Novell's Linux business would struggle, at least in the short term. Microsoft, after all, has been funding Novell's Linux business since 2006, when the two companies entered into an interoperability and Suse Linux subsidy pact.

And without its Linux business, all of the rest of Novell's business would be in jeopardy, as Suse Linux makes Novell's other products a palatable choice. Even so Novell's Identity and Security Management, Systems and Resource Management, and Workgroup businesses all dropped significantly (down 10 percent, 6 percent, and 13 percent, respectively).

Novell's needs
Clearly, Novell needs Linux. Equally clearly, it needs Microsoft to grow that Linux business. Microsoft has already plowed $247.5 million into Suse Linux Enterprise Server (SLES) subscription coupons, and Novell CEO Ron Hovsepian has indicated he's now dipping into the additional $100 million in coupons the companies negotiated.

But how can Novell accelerate its Linux business at a pace that will be comfortable for Microsoft, which has made no secret of its animus to Linux and desire to quash it? Microsoft partners with Novell to show a good interoperability face to its customers who use Linux and to prop up the No. 2 vendor against Red Hat, the dominant Linux vendor.

The day that Novell's Suse Linux business threatens Microsoft, and not merely undermines Red Hat, is the day Microsoft will pull its extensive financial support from Novell's Linux business. That same day Novell's Linux business will crumble, perhaps irreparably.

Unless.

Unless Novell can deliver a coherent strategy centered on Linux rather than merely friendly to Linux. For years Novell has packaged and repackaged a set of mostly stale offerings (e.g., Workgroup), pretending that they were part of a coherent strategy.

They weren't. The company was simply milking maintenance revenues as it sought to find a way forward. (I was in those meetings back in 2002 when the company discussed how to stanch the bleeding from maintenance declines. Those same conversations continue today, I'm sure.)

Then, as now, Novell's various product lines, and particularly Workgroup, offered little synergy, either in sales or engineering (i.e., the buyer of GroupWise is not the same as the buyer of Suse is generally not the same as the buyer of Identity Management).

Ongoing makeover
Novell is now entering a new phase of its repackaging makeover, but this one actually makes some sense. The company is calling it Intelligent Workload Management, arguing that a "new market [exists] for solutions that address the risks and challenges for computing securely across multiple environments."

Not surprisingly, Hovsepian argues that such an Intelligent Workload Management market "plays to the strengths of Novell--identity and security, systems and resource management, and our new Suse Appliance program."

Surprisingly, he may be right.

First of all, its wonderful to see Workgroup dropped from the discussion. Yes, it's Novell's biggest product by revenue, but no, it has almost no relevance for the rest of its business. Sell it off. Move on. The company has already offloaded much of its Workgroup development to India, anyway.

Second, Novell really does have a great deal of expertise in this area, with some assets that could go a long way toward helping it compete with the vendors that compete aggressively in the market: VMware, Microsoft, and increasingly Red Hat.

The key will be for Novell to really put Linux at the heart of its story, rather than simply using it as a conversation starter and loss-leader.

And yet, more is needed. Novell has the burden of a stale brand that it must shed. A few select acquisitions could help it to establish technology and brand leadership in the market. Companies like Reductive Labs (Puppet project for data center infrastructure management), VMOps or Eucalyptus (for building and managing private clouds), and/or Cloudera (for designing and analyzing large-scale data assets) could put Novell in the driver's seat on this market.

For the first time in years, the market seems to have moved in a direction that corresponds with Novell's rich technology assets. If Novell can make Linux the centerpiece of this campaign, bolstered by relevant, innovative technology, it will finally get its Linux business out of Microsoft's shadow and its overall business back on track.

The technology pieces are in place. It's now a question of brand and execution.

Most businesses would die without centralized marketing and operations. The Linux kernel, however, thrives under this model.

The closest thing to a CEO in Linux land is Jim Zemlin, executive director of The Linux Foundation. While Zemlin doesn't steer the Linux ship, he does a great deal to corral its competing interests--vendors, developers, customers--to guide Linux to the impressive market position it holds today.

Jim Zemlin

(Credit: ZDNet)

I caught up with Zemlin late last week to get a pulse on the state of Linux in the market. As ever, Zemlin didn't disappoint.

Q: Nearly a whole decade has gone by since the original tech bubble burst, and Linux has done quite well. How does the current recession compare to the hit that tech took ten years ago and how does it position Linux for the next decade?
Zemlin: IDC says the largest increase in Linux adoption took place in 2001/2002 during that bust. Since then, it has become mainstream and is being used everywhere.

Today's recession is quite different than the bubble and bust we experienced nearly a decade ago, since it has reached every corner of every market around the world. IDC already restated their growth forecast upwards for Linux due to the recession and I would expect analyst research to surface an even greater growth spurt for Linux over the last couple years as they get better at accounting for unpaid Linux and open source use.

Linux provides better value than Windows, and in tough times this difference makes all the difference.

But the recession isn't what's positioning Linux for growth in the coming decade. With or without the current economic climate, Linux is the only operating system (OS) that can help OEMs achieve any margin at all from devices that will soon be free.

The PC industry is moving towards a services business, much like the one we see in telecom. The OS must be free or nearly free or OEMs can't compete. This is why Microsoft is investing so much in search and other initiatives; it knows the business model for its former cash cow, Windows, is slowly dying.

There has been a lot of consolidation in the market. For example VMWare's Springsource acquisition and now the E.U. is saying they are concerned about Oracle's acquisition of Sun because of MySQL. Is this good for open source?
... Read more

When an open-source project is working optimally, can proprietary-software companies hope to compete?

Eat my dust, proprietary sloths

Greg Kroah-Hartman, a prominent Linux kernel developer and Novell fellow, suggests that the answer is no. Speaking to the How Software Is Built blog, Kroah-Hartman makes the case that the pace of Linux development leaves competition in the dust:

[The Linux kernel development team adds] 11,000 lines, remove[s] 5,500 lines, and modif[ies] 2,200 lines [of code] every single day.

People ask whether we can keep that up, and I have to tell you that every single year, I say there's no way we can go any faster than this. And then we do. We keep growing, and I don't see that slowing down at all anywhere.

I mean, the giant server guys love us, the embedded guys love us, and there are entire processor families that only run Linux, so they rely on us. The fact that we're out there everywhere in the world these days is actually pretty scary, from an engineering standpoint. And even at that rate of change, we maintain a stable kernel.

It's something that no one company can keep up with. It would actually be impossible at this point to create an operating system to compete against us. You can't sustain that rate of change on your own.

Microsoft might beg to differ, as would Apple, but the reality is that neither is updated as often or as extensively as Linux is, which supports a far broader hardware portfolio than any other operating system in existence.

Linux is pretty incredible. But it's not alone. Mozilla Firefox, Eclipse, and other projects produce best-in-class software at an almost frightening pace.

Can anyone compete with an open-source project at the top of its game?

The answer might well be no, as the top open-source projects are collaborative efforts between multiple companies that pool resources and expertise to drive development. And while it might seem reasonable that a single corporation could best open source's seeming "development by committee" approach, the reality is that well-managed open-source projects have none of the inertia that one might expect from a communal approach.

Quite the opposite.

Having said that, very few open-source projects actually meet the criteria that enable Linux's success. Most appeal to a too-narrow and too-small population of developers (i.e., single-company projects) to glean the benefits and scale of Linux-like development.

As such, the proprietary-software companies probably won't have to worry about competing with indomitable open-source competitors. Not most of the time, anyway.

For those that do, however, better stock up on the pumpkin pie. It may be the only thing to be grateful for this Thanksgiving season.

Greg Kroah-Hartman interview discovered via @glynmoody's ComputerWorld blog.

For those new to open source, whether on the business or development side, it's hard to appreciate just how far the movement has come in the past few years.

In 1998, when I had my first taste of open-source software through my company's investment in Cobalt Networks, virtually no one knew what open source was, including now-common projects like Linux. Things were a little better in 2000, when I joined a Linux start-up (Lineo), but I spent much of my time working with prospective customers to ease their concerns over open-source licenses like the GPL.

The world is open source's oyster.

By 2004, when a group of friends and I founded the Open Source Business Conference, there was significant, growing awareness of open source, but its adoption was still stymied by Fear, Uncertainty, and Doubt, much of it fomented by Microsoft (Steve Ballmer in 2001: "Linux is a cancer") and the SCO Group (lawsuit over the provenance of Linux code in 2003).

Today, SCO Group, once a high-flier, is struggling for existence. Meanwhile, Microsoft has committed another $100,000 to Apache Software Foundation, has started its own open-source foundation, and has embedded significant bits of open-source code within its proprietary programs, among other things.

Linux, for its part, struggled to get noticed in data centers back in 2003. It has since become essential, mission-critical infrastructure across the Global 2000 ranking of public companies

We've come a long way.

This progress reflects itself in the job market, where Linux-related jobs have seen a 6 percent rise in 2009 alone, while Windows-related jobs have plunged by 8 percent, according to data from Dice.com.

But it's also evident in enterprises' willingness--even eagerness--to discuss open-source adoption plans. Virgin America CIO Ravi Simhambhatla tells The Register that his need to do more with less drove the company to adopt open source and suggests that the open-source philosophy is a positive, disruptive force:

Our company doesn't need just another IT team, the more and more we get entrenched in the...way of doing things the less and less room we will make for ourselves to be innovative.

In 2004, when I was trying to find an IT executive to speak at OSBC, it was a lost cause. No one wanted to paint a legal bull's-eye on themselves for SCO or Microsoft. Today, company executives line up to talk up how they're differentiating through open source.

Open source has "arrived," and the signs are everywhere, from the U.S. Defense Department's efforts to boost its open-source adoption further to patent-rich Qualcomm's foray into open source.

Open source is no longer a question of "why" but rather one of "how." It's the way the industry does business, and the way it does development.

No, not everyone in the industry, all of the time. But for those of us who have been involved in open source for even the past five years, it's amazing to see how much things have changed, which suggests they'll evolve even further.

For some within the open-source world, this is unwelcome news. They defined themselves as freedom fighters, battling the forces of proprietary darkness. And as far as good-and-evil metaphors work in technology, they were.

But as that world embraces open source, they're largely left bereft of bogeymen, like old soldiers still struggling against an unseen enemy.

Winning can be a bit disorienting.

All the same, it's time to move on. There are no more vampires to slay, but simply further open-source education to undertake. Enterprises need open source now, more than ever, and they're adopting it now, more than ever.

What a long, strange trip it's been.

Linux jobs in the United States are booming, up 6 percent since January, according to data from Dice.com. This will come as small consolation to Novell employees, however, which weathered another round of layoffs at the Waltham, Mass.-based company.

According to several sources within the company, and confirmed by Novell's public-relations director, Ian Bruce, Novell last week laid off 100 to 130 people of its roughly 3,900 global employees.

While my sources indicated that the Workgroup division was particularly hard-hit, Bruce told me that the cuts came "across the company, both geographically and productwise."

Novell appears to be doing its best in caring for these employees, offering several months of severance pay, apparently based on the number of years with the company, among other factors.

For those remaining employed there, Novell announced this week that it would be suspending 401(k) matching contributions, which followed on the heels of its formal filing on Monday, to that effect, with the U.S. Securities and Exchange Commission.

Novell has spent the past few years attempting to reinvent itself as a Linux company, and it has managed to string together several quarters with strong earnings in its Linux business on the back of its controversial partnership with Microsoft. The company has struggled to compete effectively with Linux-leader Red Hat.

On November 2, a Novell PR representative contacted me to arrange a conversation with CEO Ron Hovsepian about Novell's "new focus in its strategic direction."

Whether this means more or less open source is not yet clear. It is clear, however, that Novell needs to focus more on top-line revenue growth, and not merely ways to cut costs. Until Novell learns to grow business, and not simply reduce expenses, its employees are going to remain all-too-familiar with layoffs.

The day open source became big business is the day that open-source development exploded. Yes, open source predates the moneyed interests hankering to use it to competitive advantage, but it really wasn't until IBM dropped $1 billion on Linux that companies began paying employees to write free software that the movement saw broad adoption.

That's when open source became more than an efficient way to develop software, and also became a great way to build a business.

However, adding open source to one's business is not magical pixie dust that guarantees its viability. As IBM's Bob Sutor explains:

The basic principles around revenue, profit, loss, taxes, payroll, overhead, accounting, sales, incorporation, health care, and human resources all apply. You can be a starving open source software entrepreneur as easily as a starving proprietary software entrepreneur. No one will excuse basic business failures and screw-ups just because you use open source. Make sure that you will produce a product that people want and in some way will pay for, no matter how indirectly.

Sutor's counsel applies to any company or individual that wants to build a business around open-source software, but arguably some of the industry's best projects are not the product of any one company, but rather of several. Linux, Mozilla, Apache Software Foundation, Eclipse, and other collaborative communities represent an interesting way to use open source to competitive advantage.

In many ways, open source has become a critical component of the software industry because the market has largely moved from vertical businesses (i.e., companies controlling all aspects of production, distribution, etc.) to horizontal markets (i.e., companies focusing on their core competencies and depending on others for complementary functions).

Linux: Peace, love, & squeezing Microsoft

But this business control system has a inherent risk. Should an organization monopolize a specific segment of a value chain system they can extract a higher percentage of its total proceeds. If the product, or service, in question is price elastic than those additional proceeds will come from other participants in the value chain system.

Case in point? Windows. By owning the operating system, Microsoft threw a wrench into the collective cogs of horizontally oriented software firms like Intel, IBM, and others.

The industry's response--Linux--is a classic example of the open-source approach to mitigating individual choke holds within an industry, as Prentice goes on to write:

What then does a CEO do when facing a squeeze on their profits because a direct, or downstream, supplier is dominating a segment of the value chain system? Besides negotiating a better deal - if they can - they've been left with little choice but to get directly into that segment of the value chain system themselves. But by doing so their organization is distracted from focusing on its own core competency.

The risk of such an undertaking can be mitigated if there is a collective response by similarly affected members of the value chain system. After all, it is usually a shared problem. But collective responses have always had an inherent, and often fatal, flaw. Who owns the resulting assets? Either organizations enter into complex joint venture agreements to sort this out or run the risk of shifting the distortion in the value chain system to another organization.

Again, Linux offers the perfect example. IBM, Intel, Red Hat, and others aren't investing in Linux because they're all chums at the country club together, but rather because they're looking for ways to reduce Microsoft's hold on their own businesses through its control of personal computer and server operating systems.

As an added benefit, it's a great way for companies to collaborate without running afoul of antitrust laws. It's collusion without the collusion.

Intriguingly, even Microsoft is getting into this game. Microsoft's partnership with open-source ad serving company OpenX indicates that Microsoft, too, is figuring out how to use open-source complements to loosen strangleholds competitors like Google may be hoping to throw in its way.

This is why open source is growing so much faster than the rest of the industry, as IDC finds. It's not because we love each other more. Quite the opposite. It's because proprietary vendors have figured out that open-sourcing key complements to their core businesses can be strategically decisive in hurting competitors while helping themselves.