2005 was turning point for Linux: Business Week

A Watershed for Open Source By Sarah Lacy
Wed Dec 28, 8:13 AM ET



Open-source software isn't a new phenomenon. It has been winding its way through the tech world for decades, starting with Richard Stallman's Free Software movement in 1980s. But only in recent years have businesses warmed to the promise of low-cost, openly available software. In fact, open-source programs have become so popular, they now pose a legitimate threat to the established software giants.

Looking back, 2005 will likely be viewed as a turning point. It was a year when CIOs signed off on open-source projects, a big change from previous years when that happened only after low-level engineers started such projects on their own initiative. It was a year when venture capitalists woke up to the new business opportunities of open source. It was a year when open source was the word on the lips of not just early adopters but of an early majority. According to a new study by consulting firm Opteros, 87% of organizations are now using open-source software, somewhere.

BusinessWeek Online paused in the final days of 2005 to poll a dozen experts, investors, early adopters, and entrepreneurs to get their take on the five biggest open-source events of 2005 -- as well as what to expect for 2006. The following are based on their responses.

1. Red Hat finally proves to everyone it can make money from free software. It took Red Hat (NasdaqNM:RHAT - News), which sells and supports a version of the Linux operating system for businesses, nearly 10 years to find its footing, but boy has it. On Dec. 22 it announced stellar third-quarter earnings, with revenues up 43.6%, to $73.1 million, and profits up 114%, to 12 cents per share.

Finally, the Linux movement has a pure open-source success story to point to, and as practically the only vendor that's publicly traded, Red Hat has become a hot commodity. The stock is trading north of $28 as of Dec. 27, up from $13.06 at the beginning of 2005 -- a boost of more than 110%.

And Wall Street is bullish about next year. "Red Hat is one of the best-positioned stocks in software and should be able to further capitalize on the growing demand for open source," wrote Credit Suisse First Boston analyst Jason Maynard in a post-earnings research note.

2. Sun Microsystems open sources everything -- except Java. One reason Linux is becoming mainstream is the broad endorsement from just about everyone who matters in techdom, whether it's Dell (NasdaqNM:DELL - News) or Hewlett-Packard (NYSE:HPQ - News), whose servers run Linux, or IBM (NYSE:IBM - News), which is making a name in open-source support and integration.

Enter Sun Microsystems (NasdaqNM:SUNW - News), which made a bold move in late November to open-source almost all of its software except Java. The move transformed Sun into one of the largest open-source software players overnight. Yet critics have complained that what open-source developers really want is Java.

Several experts expect that Sun might finally capitulate in 2006. "It took them a long time to realize if you don't open-source and you're not a market leader, you're dead," says Peter Yared, CEO of open-source startup Active Grid and a former Sun executive.

Novell (NasdaqNM:NOVL - News) is another company trying to revive its business through open source. The results have been mixed since it bought Red Hat competitor Suse Linux two years ago. Look for 2006 to be the year it gets its act together -- or gets a new management team (see BW, 10/31/05, "Cold Realities for Novell").

3. Motorola bets big on mobile Linux. Linux is commonplace on servers and is working its way onto many desktops around the world. But desktop- and server-makers don't have to worry about details like battery life. Wireless-phone manufacturers do, and that's Linux' next great frontier. Open Source Development Labs, a nonprofit group that governs and advocates for Linux, formed a Mobile Linux Initiative in October to address these problems.

Even more exciting for penguin lovers, Motorola (NYSE:MOT - News), the second-biggest handset maker in the world, announced that Linux would be its standard operating system for the bulk of its future phones. If the OSDL makes progress on the code, other handset makers could follow suit in 2006 (see BW Online, 11/8/05, "Linux Answers Phone Makers' Call").

4. Firefox goes mainstream. The bulk of open-source strides have been made in the business world, as most Linux phones are only sold in China, and Microsoft (NasdaqNM:MSFT - News) still dominates the desktop. Firefox is an important exception. The popular browser marked its 100 millionth download in October just before its first birthday, proving how well a mass market can accept open-source software when done right.

"There was a question as to whether we (open-source developers) could do user interfaces, and that's much less of a question now," says Bruce Perens, head of developer relations for open-source startup SourceLabs. Perens and some others think Linux desktop programs could gain steam among consumers in 2006, particularly in emerging countries in Asia and South America where Microsoft's Windows hasn't gained dominance.

5. Venture capitalists wake up to open source. Industry estimates show some $400 million was invested in open-source startups in 2005. Two types of companies dominated the landscape: First, so-called application companies, such as SugarCRM which makes customer relationship management software for companies and aims to compete with Siebel (NasdaqNM:SEBL - News) and Salesforce.com (NYSE:CRM - News).

The other category is services companies, which play the middleman between open-source projects and the info-tech departments at large corporations. Companies such as SpikeSource and SourceLabs test and maintain applications like SugarCRM for companies (see BW Online, 10/3/05, "Open Source: Now It's an Ecosystem").

There's a lot of skepticism about these newer entrants. A few are hits, such as MySQL, which makes open-source database software and is said to be closing in on $40 million in revenues this year. But not too many others are showing much traction.

In 2006, they'll have to put up real revenues or shut down. "Half the companies that raised venture money in 2005 won't be able to raise money in 2006," says Matt Asay who organizes the annual Open Source Business Conference and is vice-president for business development at Alfresco, an open-source document-management startup.

All in all, it has been a pretty great year for open source. And 2006 may be even bigger and better.