Opening the door to open source. (Enterprise Networking).

It wasn't long ago that the phase "open source" rather I snidely referred to a kind of software developed by quirky idealistic computer geeks. After all, who else would collaborate for free on creating code to be shared by anyone for any purpose, with the anticipation that the participants would improve upon it for the betterment of the community?

OSS makes available software code that has traditionally been considered proprietary. With the source code at their fingertips, developers can more quickly improve on the software and create new applications. As 055 has matured, the economy has softened and organizations have begun scouting around for a better way to operate their businesses. The result has been a shift to a new business model.

Other than Walmart's $299 Linux-based PC, there is little talk about open source for consumer consumption. But open source has secured a place among enterprises, the most high-profile examples being the Linux and Apache operating systems. Market research firm IDC expects spending on Linux operating environments to increase over the next five years from $80 million in 2001 to $280 million in 2006. Paint maker Sherwin-Williams last May announced that it was installing the Linux operating system in its 2,500 stores. Meanwhile, CS First Boston has converted its trading system to Linux, and IBM notes that more than 4,600 of its customers are running Linux. As for Apache, which was first written in 1995, it now is running on about 22 million Web servers. That's nearly 60 percent of the total number of servers on the Internet, according to tracking firm Netcraft.

It doesn't hurt that mature companies like IBM, Sun Microsystems, HP and others have adopted open source as part of their business model. It also helps that companies like Red Hat and Covalent have figured out, where others couldn't, how to create a sustainable business to compete against the big Kahuna of software, Microsoft.

Why Open Source?

In 1992, about 1,000 people around the world were using Linux. This year, A.D.H. Brown Associates estimates that 20 million people are using it, primarily on corporate networks. According to a Morgan Stanley survey of chief information officers, 29 percent of companies now use Linux servers and another 17 percent are considering purchasing them. It's not a number that would have the competition quaking, but it does point to a growing interest and a significant customer base.

For IBM, the business case for open source is straightforward. "We sell hardware underneath, software on top and services all around it. It's becoming a commodity we pick up from our distribution partners. We just repackage it' says Dan Frye, director of IBM's Linux Technology Center. "Customers want it because it's less expensive, highly reliable and available from multiple vendors. It changes the balance of power between customers and vendors."

Mitchell Baker, general manager of Mozilla.org, an open-source Web browser, agrees. "With open source, as a customer, you always have the last word," she explains. "You're never locked in. You can follow the vendor, hire someone to fix the bugs or fix them yourself."

Additionally, she points out, open source creates a range of testing unheard of in the proprietary world. "You find a set of people you have no way to find otherwise. That means that as people move around, you keep their expertise. And, you get expertise in unexpected places."

That, say experts, has made for much more stable, bug-free software, as well as a faster improvement curve. "There's lower development time and costs," notes Jason Hunter, president of Hunter Digital Ventures. "You're sharing your tools so others might sharpen them."

Is that idealistic? Not to Matthew Szulik, CEO of Red Hat, the leading vendor of Linux and a 2002 Deloitte & Touche Technology Fast 500 winner. Szulik views it as utterly pragmatic. "Bringing developers together globally allows software to be improved at a much faster rate than proprietary licenses allow. The customer benefits by getting a better product at the lowest possible price. This is an enormous paradigm shift in moving an industry forward."

And, he notes that contributors are increasingly not the lone hacker in the woods, but professionals in the commercial world. "Almost 80 percent of the software developed around the world is done for internal use," he notes. "When they encounter a problem and with confidence can make improvements and send in a bug fix, the anticipation is that when someone else encounters a different problem, that will be improved and shared as well."

Business Model or Development Model?

There is a debate, however, on whether the companies selling OSS are forging a new business model. "This is a development paradigm," insists Bill Claybrook, research director for open-source and Linux computing at Aberdeen Group. "Once you get past that, who cares? Red Hat and the others are just doing the same thing Microsoft is: creating a good product, providing good support and scaling it to the company. It has nothing to do with open source."

Others, including Red Hat's Szulik, disagree. "Our business model and technology strategy is based on collaborative open-source development;' he says. "It's allowed us to enhance the quality and security of our product. We're a $100 million software company. Our ability to become profitable as quickly as we have is in large part due to our basing this on open-source software.

Part of the issue also centers around licensing, a very complex matter given that there are 31 approved opensource licenses, according to Martin Fink, vice president and chief technology officer for HP's business critical systems and the author of The Business and Economics of Linux and Open Source.

"Basically, there are two types of licenses, reciprocal and non-reciprocal," he explains. "The reciprocal licenses force you to return enhancements you make to the community. It's a direct incentive for everyone to play together and creates the boundary conditions under which software is developed."

But, says Jason Hunter, it can also discourage development because there's little incentive to create something innovative when you're in a competitive environment.

The non-reciprocal licenses allow developers to make changes and keep those changes under their own licenses. As Mitchell Baker puts it, "It turns the code loose?' That, she notes, is a drawback to some people because code is being taken and privatized for profit without being shared.

Red Hat, for example, is a strong advocate of the reciprocal type of license. It uses GNU General Public License, otherwise known as GPL, perhaps the most pervasive public license in the world. "We do that because the copyright is protected in favor of the author of the work;' says Szulik. "As important, the technology can be advanced in a public environment, which is critical."

Covalent, on the other hand, uses the Berkeley Software Distribution (BSD) license, which allows developers to incorporate proprietary modifications to the BSD code and release the modified version as a proprietary product. Under GPL, the modified code would have to be returned to the community and governed by GPL.

"The advantage;' says Covalent's president and CEO, John Jack, "is that the code gets used more frequently, so it gets more participation by outside community interests."

Focus on the Fundamentals

That can provide a competitive edge. But so can the traditional issues that create a successful company, such as marketing, advertising and support. Mike Reid, senior manager in Deloitte & Touche's Integration, Development and Infrastructure Solutions Group, says that anyone who is going to base a business model on open source should pay attention to Microsoft. "People are drawn by advertising and marketing but somebody has to mainstream it, support it and take the risk of uncertainty."

In fact, he notes, it isn't going to be price that wins over customers to OSS like Linux or Apache, but the product and support. "Red Hat has taken open source and put a structure around it to reduce the risk of using Linux," he says.

It will also take more applications, notes Sun Microsystem's Jack O'Brien, group manager for the company's Linux Business Office. Sun introduced its first computers running Linux last summer. "Applications are key. We're making applications like our Web server and portal server all run on Linux." He adds that Sun is focusing its efforts on the problem of manageability. 'As more companies deploy, they want iron clad support;' he says.

Covalent's Jack acknowledges that his company is not just about the software itself, but what they build around it. "When it comes to things like management infrastructure or portal structure, that's where Covalent steps in," he says. "It's not programming against a standard; it's programming against a look and feel."

And, that's also where the support of established hardware vendors comes in to mainstream these upstarts in the marketplace as they mature.

Says Reid, "The model of having corporations support open source foundations as a green field for innovation, with the understanding that they can utilize the results to productize it and provide a support infrastructure, means we end up with a higher quality solution that benefits society as a whole."

Jeff Balentine is global leader of the Technology, Media & Telecommunications Group at Deloitte & Touche (San Jose, Calif.)

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