Linux INC.

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Linux Inc.
Linus Torvalds once led a ragtag band of software geeks. Not anymore.
Here's an inside look at how the unusual Linux business model
increasingly threatens Microsoft

Five years ago, Linus Torvalds faced a mutiny. The reclusive Finn had
taken the lead in creating the Linux computer operating system, with
help from thousands of volunteer programmers, and the open-source
software had become wildly popular for running Web sites during the
dot-com boom. But just as Linux was taking off, some programmers
rebelled. Torvalds' insistence on manually reviewing everything that
went into the software was creating a logjam, they warned. Unless he
changed his ways, they might concoct a rival software package -- a
threat that could have crippled Linux. "Everybody knew things were
falling apart," recalls Larry McVoy, a programmer who played
peacemaker. "Something had to be done."


The crisis came to a head during a tense meeting at McVoy's house, on
San Francisco's Twin Peaks. A handful of Linux' top contributors took
turns urging Torvalds to change. After an awkward dinner of quiche and
croissants, they sat on the living room floor and hashed things out.
Four hours later, Torvalds relented. He agreed to delegate more and
use a software program for automating the handling of code. When the
program was ready in 2002, Torvalds was able to process contributions
five times as fast as he had in the past.

The Twin Peaks truce is just one of the dramatic changes during the
past few years in the way Linux is made and distributed. The
phenomenon that Torvalds kicked off as a student at the University of
Helsinki in 1991 had long been a loosey-goosey effort, with little
structure or organization. Young students and caffeine-jazzed
iconoclasts wrote much of the code in their spare time, while the
overtaxed Torvalds stitched in improvements almost singlehandedly.

TURNING PRO
Today, that approach is quaint history. Little understood by the
outside world, the community of Linux programmers has evolved in
recent years into something much more mature, organized, and
efficient. Put bluntly, Linux has turned pro. Torvalds now has a team
of lieutenants, nearly all of them employed by tech companies, that
oversees development of top-priority projects. Tech giants such as IBM
(IBM ), Hewlett-Packard (HPQ ), and Intel (INTC ) are clustered around
the Finn, contributing technology, marketing muscle, and thousands of
professional programmers. IBM alone has 600 programmers dedicated to
Linux, up from two in 1999. There's even a board of directors that
helps set the priorities for Linux development.

The result is a much more powerful Linux. The software is making its
way into everything from Motorola (MOT ) cell phones and Mitsubishi
robots to eBay (EBAY ) servers and the NASA supercomputers that run
space-shuttle simulations. Its growing might is shaking up the
technology industry, challenging Microsoft Corp.'s (MSFT ) dominance
and offering up a new model for creating software. Indeed, Torvalds'
onetime hobby has become Linux Inc. "People thought this wouldn't
work. There are just too many people and companies to hang together.
But now it's clear it does work," says Mark Blowers, an analyst at
market researcher Butler Group.

Not that this Inc. operates like a traditional corporation. Hardly.
There's no headquarters, no CEO, and no annual report. And it's not a
single company. Rather, it's a cooperative venture in which employees
at about two dozen companies, along with thousands of individuals,
work together to improve Linux software. The tech companies contribute
sweat equity to the project, largely by paying programmers' salaries,
and then make money by selling products and services around the Linux
operating system. They don't charge for Linux itself, since under the
cooperative's rules the software is available to all comers for free.

How do companies benefit from free software? In several different
ways. Distributors, including Red Hat Inc. (RHAT ) and Novell Inc.,
(NOVL ) package Linux with helpful user manuals, regular updates, and
customer service, and then charge customers annual subscription fees
for all the extras. Those fees range from $35 a year for a basic
desktop version of Linux to $1,500 for a high-end server version. The
dollars can add up. Red Hat, which employs 200 programmers, is
expected to see profits triple, to $53 million, in its current fiscal
year, as revenues surge 56%, to $195 million.

Those numbers are dwarfed by the winnings for computer makers that
sell PCs and servers preloaded with Linux. IBM, HP, and others
capitalize on the ability to sell machines without any up-front charge
for an operating-system license, which can range up to several
thousand dollars for some versions of Windows and Unix. At HP, sales
of servers that run the Linux operating system hit nearly $3 billion
during the past fiscal year, almost double the tally three years ago.

In the Linux community, this kind of red-meat capitalism is combined
with the sharing philosophy of the open-source movement. Dick Porter,
a T-shirted coder who often works under an apple tree in his garden in
Wales, is on the same team with Jim Stallings, a hard-charging
ex-Marine who travels the world making deals for IBM. What they have
in common is a keen interest in making Linux ever more capable. The
result is a culture that's cooperative, meritocratic -- and Darwinian
at the same time. Any company or person is free to participate in
Linux Inc., and those with the most to offer win recognition and
prominent roles. "Linux is the first natural business ecosystem," says
James F. Moore, a senior fellow at the Berkman Center for Internet &
Society at Harvard Law School.

STRANGE GROUND
To understand the inner workings of Linux Inc., BusinessWeek took a
journey through the fast-evolving ecosystem. The unusual trip included
everything from sitting in on gritty developer meetings to
interviewing dozens of tech execs and engineers from Germany to China.
One stop was Torvalds' home, just south of Portland, Ore. The
34-year-old moved from Silicon Valley last summer, in part because he
was hired by the Beaverton (Ore.) Linux advocacy group Open Source
Development Labs Inc. (OSDL). He spent several hours talking about
Linux as his three towheaded daughters played nearby. Something of a
rock star in techie circles, he was preparing for a flight to Los
Angeles for the premiere of Shark Tale -- which was animated on Linux
computers -- and was taking along his oldest daughter, Patricia, then
7 years old.

What's clear from these interviews is that the organization supporting
Linux has matured more dramatically than most outsiders realize. While
Torvalds remains at its center, he has ceded some control and accepted
lots of help, thanks to some prodding from individual programmers like
McVoy and some coaxing from tech giants whose fortunes have become
inextricably linked to Linux. One important step was the move by IBM,
Intel, and others to set up OSDL as the focal point for accelerating
Linux adoption.

Perhaps most surprising, the legal attacks on Linux over the past year
have unified the community. There continue to be some internal
tensions -- for instance, Linux backers fret that different versions
of the software will become incompatible with one another. Yet a suit
by SCO Group Inc., a software company that claims IBM handed some of
SCO's intellectual property to Linux, gave Linux aficionados the
motivation to coordinate their efforts as never before. Tech companies
have opened their checkbooks to pay for administrative support,
including a legal staff that scans every stitch of code to make sure
it can bear patent scrutiny. Even Linux' original idealists, who have
grumbled at times about the corporatization of the community, put
their complaints on hold and rallied to defend their baby. The SCO
suit against IBM is slated for trial late this year.

Put it all together, and Linux has become the strongest rival that
Microsoft has ever faced. In servers, researcher IDC predicts Linux'
market share based on unit sales will rise from 24% today to 33% in
2007, compared with 59% for Windows -- essentially keeping Microsoft
at its current market share for the next three years and squeezing its
profit margins. That's because, for the first time, Linux is taking a
bite out of Windows, not just the other alternatives, and is forcing
Microsoft to offer discounts to avoid losing sales. In a survey of
business users by Forrester Research Inc. (FORR ), 52% said they are
now replacing Windows servers with Linux. On the desktop side, IDC
sees Linux' share more than doubling, from 3% today to 6% in 2007,
while Windows loses a bit of ground. IDC expects the total market for
Linux devices and software to jump from $11 billion last year to $35.7
billion by 2008.

In response, Microsoft has launched a counterattack against what it
calls its No. 1 threat. The software giant's "Get the Facts" publicity
campaign claims that Windows is more secure and less expensive to own
than Linux. Microsoft has notched some victories. The city government
of Paris, for instance, decided in October against a complete
switchover to Linux, citing the costs of such a change. Now that Linux
distributors are charging more for subscriptions, Microsoft figures
that it can use the same cost-benefit arguments that helped bury old
rivals, such as Netscape Communications Corp. "It's getting to be much
more like the old world instead of the new world for us, and we know
how to compete with that kind of phenomenon," says Microsoft Chief
Executive Steve Ballmer.

But Ballmer may have a tough time persuading customers that Windows is
cheaper than Linux. It often isn't. With Windows, end users pay an
up-front fee that ranges from several hundred dollars for a PC to
several thousand for a server, while there's no such charge for Linux.
The total cost over three years for a small server used by 30 people,
including licensing fees, support, and upgrade rights, would be about
$3,500 for Windows, compared with $2,400 for a Red Hat subscription,
say analysts. The situation where Microsoft can have an edge is when a
company already is using Windows. Then, in some cases, it can be
cheaper to upgrade to a newer version of Microsoft's software, rather
than replacing it with Linux -- once you take into account the
retraining expenses. Analyst George Weiss of market researcher Gartner
Inc. says that Microsoft may trumpet those individual cases, but
"there's no study that says Windows will be a better total cost of
ownership in general."

Microsoft isn't shying away from brass-knuckle tactics in an effort to
win this battle. Several sources say that its executives have been
warning corporations that they're taking a legal risk by using Linux.
A spokesperson for one company whose CEO met with Ballmer says the
implication of their conversation was that Microsoft is considering
suing outfits that use the software and claiming that it infringes
Microsoft patents. Although legal experts doubt Microsoft would
actually sue its own customers, Linux supporters say such warnings are
an effort to spread doubt and uncertainty. "Our friends in Redmond
[Wash.] are rattling their swords. They're trying to scare people into
not switching from Windows to Linux," says Jack Messman, CEO of Linux
distributor Novell. Microsoft acknowledges discussing legal risks with
customers but denies trying to intimidate them. It won't say whether
it believes Linux infringes on its patents.

COMMUNAL IMPULSES
That Linux is more than holding its own against Microsoft's onslaught
suggests it could become a model for others in the tech industry.
Otherwise fierce competitors -- think IBM and Hewlett-Packard (HPQ )
open-source philosophy of sharing work. By collaborating on the
operating system, they all get a stable foundation on which to build
tech projects and save millions in programming costs. "Much software
will be developed this way. It's especially good for infrastructure --
stuff that affects everybody," says Torvalds. "In the long run, you
can't sanely compete with the open-source mentality."

Linux Inc. has become so mature that it's clear it could continue to
thrive even without Torvalds. Already his chief lieutenant, Andrew
Morton, shares leadership duties and makes all the public appearances.
From 1997 to 2003, when Torvalds worked for chipmaker Transmeta Corp.,
putting out Linux wasn't even his full-time job -- yet its market
share in servers rose from 6.8% to 24%. Plus, this isn't the army:
Programmers don't wait around for orders. Linux' legions know how the
development process works, and they just do it. "I manage people, but
not in the traditional sense," says Torvalds. "I can't say, 'You do
this because here's your next paycheck.' It's more like we know what
we want to do, but we don't know how to do it. We try directions.
Sometimes somebody disagrees and has a vision. They go and sulk in
their corner for a year. Then they come back and say, 'I'll show you
it's much faster if you do it this way.' And sometimes they're right."

This mix of commercial and communal impulses has its roots in the
early days of personal computing. Academics and corporate researchers
originally shared many of their software innovations. But that started
to change in the 1980s as the industry took shape. In response,
programmer Richard Stallman launched the Free Software movement. His
answer: the GNU operating system, modeled on Unix, to be shared by a
community of programmers. It was Torvalds who came along with a piece
of software called the kernel, which is the control center of the
operating system and coordinates the work of other pieces, such as the
software that tells the printer to produce a page. Programmers called
the kernel "Linux," a contraction of Linus and Unix, and Linux caught
on as the name for the whole thing. Torvalds decided the group's
mascot should be a friendly penguin, named Tux, partly because a
pint-size Fairy penguin once nibbled his finger at an Australian zoo.

Stallman is still an evangelist for free software, but with his wild
long hair and odd behavior, he doesn't fit in with the suit-and-tie
crowd. He doesn't even speak to Torvalds anymore -- since Torvalds
decided to use a piece of software that wasn't open-source to help
develop Linux. "The place he wants to lead people is a mistake. It
isn't to freedom," says Stallman of Torvalds. During speaking
engagements, Stallman often adopts the persona of "St. IGNUcius,"
donning a robe and a halo made of a computer disk. Chris Wright, a
young programmer for OSDL, recalls a group dinner at a restaurant
where the trade group hosted Stallman. Wright was impressed with
Stallman's beliefs but put off by his style. "He wanted to taste
everybody's food, so it was a little awkward," says Wright.

Torvalds proved to be just the guy to lead the Linux charge. He was
only a casual programmer in 1991 when he started writing software to
run on a PC. But after he posted the first Linux code on the Internet
for others to contribute to, he got the knack for spotting quality and
handling the flow of fixes. Gradually, he developed a support
organization of volunteers.

Begun as a meritocracy, Linux continues to operate that way. In a
world where everybody can look at every bit of code that is submitted,
only the A+ stuff gets in and only the best programmers rise to become
Torvalds' top aides. "The lieutenants get picked -- but not by me,"
explains Torvalds. "Somebody who gets things done, and shows good
taste -- people just start sending them suggestions and patches. I
didn't design it this way. It happens because this is the way people
work naturally."

One reason that Linux Inc. bears little resemblance to a traditional
company is that Torvalds has almost nothing in common with classic,
hard-driving, and autocratic tech-industry leaders. He rarely appears
in public and largely lets other people set priorities for
development. Once others come up with improvements, he shepherds them
along. "Linus has power, but he doesn't have it by fiat," says Havoc
Pennington, a Linux contributor who works for Red Hat. "He has power
because people trust him. As long as he keeps making good decisions,
people won't take it away from him."

Yet for all of his seeming passivity, Torvalds is a strong leader. He
stays scrupulously neutral, never taking one company's side over
another. He focuses on the open-source development process. There, he
demands high-quality work. Things must be just so, with the least
amount of coding. As a result, Linux has few errors that can be
exploited by virus writers. That gives it an edge on Windows, which
has become a favorite target of hackers -- largely because it's so
widely used, but also because it has vulnerabilities that Linux
doesn't. "He has set a compelling vision and inspired people to follow
it," says Larry Augustin, a venture capitalist at Azure Capital
Partners and an OSDL board member: "It's leadership by example, rather
than leadership by hype."

Even today, Torvalds operates in a virtual world of e-mails and Web
sites. He works almost entirely from a roomy house that sits on a
wooded Oregon mountaintop and is decorated with taxidermic specimens,
including a piranha and a crocodile. He gets up early, making strong
cups of coffee for himself and his wife, Tove, a former karate
champion in Finland. Then he settles in for hours of reviewing code
and snapping off e-mail messages in his basement office. It's lined
with science fiction and fantasy books, including classics such as
Dune and the Wheel of Time series. In the afternoon, he coasts down
the hill on his bicycle to a quaint village, stops at a Peet's coffee
shop for a latte or Chai tea, and pumps back up the hill. Then he
returns to his computers.

Although Torvalds is physically near his comrades at OSDL, he almost
never sees them face to face. He visited the organization's office
only once in his first three months in the Portland area, and he
rarely meets with Morton, an Aussie who lives in Silicon Valley. "It's
a long-distance mind-meld," says Morton. In a rare encounter last
summer, they shook hands and made small talk at a picnic. The Linux
community, Torvalds says, is like a huge spider web, or better yet,
multiple spider webs representing dozens of related open-source
projects. His office is "near where those webs intersect."

The Linux development process begins and ends with the programmers.
While there are still some individual volunteers and government
agencies that chip in, more than 90% of the patches now come from
employees at tech companies. Many of those workers are formerly
independent aces who have been scooped up over the past few years.
Some of these people simply submit code, and others, called
maintainers, are in charge of improving specific functions.

From there on, it's a continuous cycle. Individuals submit patches;
maintainers improve them. Then they're passed off to Torvalds and
Morton, who review the patches, ask for improvements, and update the
kernel. Every four to six weeks, Torvalds releases a new test version
so that thousands of people around the world can probe it for flaws.
He puts out a major upgrade every three years or so. Unlike at
traditional software companies, there are no deadlines. The Linux
kernel is done when Torvalds decides it's ready.

Linux Inc. is a series of concentric circles radiating out from
Torvalds. In the first circle, you have Open Source Development Labs.
The top tech companies with a stake in Linux -- including HP, IBM, and
Intel -- have technical people on the board of directors. The board
sets priorities, such as getting Linux running better for huge data
centers and desktop PCs. In addition, the board is responsible for
raising $10 million to protect customers from potential
intellectual-property claims.

TAKING THE SUBWAY
The second circle is a dozen or so Linux distributors. Spearheaded by
Red Hat and Novell, this group also includes such regional players as
Red Flag Software in China and MandrakeLinux in Europe. They pick up
the latest version of the kernel about once a year and package it with
1,000 or so related open-source programs, including the GNOME
graphical-user interface, the Firefox browser, and the OpenOffice
desktop application suite.

The distributors race one another to be first out with Linux updates,
but their engineers spend most of their time on projects they share
with everybody else. For example, Novell employs open-source pioneer
Miguel de Icaza, who is both a Novell vice-presi- dent and the leader
of the Mono project -- software for building applications to run on
Linux. The 34-year-old Mexican coordinates 25 Novell employees plus
more than 300 other programmers, many of whom work for other tech
companies. So far, de Icaza says, there have been no conflicts. His
explanation: "Cooperating gets you further along than screwing your
neighbor."

These Linux companies have little in common with their brethren from
the dot-com boom. They're typically frugal. Matthew J. Szulik, CEO of
Red Hat, takes the subway rather than a cab when he visits customers
in New York and Boston. And rather than being motivated by big money,
Linux programmers say their goal is making Linux an ever-bigger force
in computing. Red Hat's Pennington doesn't covet expensive wheels,
proudly pointing to his 2001 Toyota Corolla in the parking lot, which
he jokes is "fully loaded."

For his part, Torvalds has been amply rewarded for his role, but he's
no Bill Gates billionaire. OSDL pays him a salary of nearly $200,000.
In addition, he sold initial public offering shares that he got as
gifts from a couple of Linux companies, including VA Linux Systems.
That helped him afford his house and put money away for his daughters'
educations.

ALL-PURPOSE SYSTEM
In Linux society, there's no bowing and scraping before the rich and
powerful. Executives and product managers at HP, IBM, Intel, and
Oracle (ORCL ) don't even try to pressure Torvalds and Morton to
further their interests. Instead, their input goes through their
engineers, who, as members of the open-source community, submit
patches for the kernel or other pieces of Linux software.

The tech powerhouses have learned to play by new rules. You can't meet
in private, come up with new features, and then drop massive changes
on Torvalds. A handful of companies, including Intel and Nokia Corp.
(NOK ), learned this lesson the hard way when they went about making
Linux capable of running telecom gear. About two dozen of their
engineers worked on the "carrier-grade" Linux project, and then, in
late 2002, they posted hundreds of thousands of lines of code on a Web
site. The response: outrage. "We were offended by the whole process,"
says Alan Cox, a top kernel programmer. The posting was quickly
removed.

Still, the cultures of open-source and commercial software are melding
together. Red Hat used to scatter employees around the world, the
typical open-source approach. Now the company brings its workers
together so young programmers can cross-pollinate with gray-haired
veterans. It works. Not only did 46-year-old Larry Woodman bond with
26-year-old Rik van Riel by teaching him how to drive a car, but the
two are working in tandem on improvements to memory management in
Linux. "We complement each other," says Woodman.

These collaborations are turning Linux into an all-purpose operating
system. It's secure enough that Lawrence Livermore National Laboratory
loads it not only on desktop and server computers but also on
supercomputers it uses to simulate the aging of nuclear materials.
"Linux is definitely more secure than Windows," says Mark Seager, the
lab's assistant department head for advanced technology. "There aren't
as many ways to break the system." With the latest improvements, Linux
now works on servers with more than 128 processors and can run the
largest databases. The newest versions also have features, such as
power management, that make them more suitable for laptop PCs.

Linux is so solid that staid corporate purchasers are adopting it
aggressively for run-the-company applications. Holcim Ltd. (HCMLY ),
the Swiss cement giant, just switched from Unix to Linux for some of
its accounting, manufacturing, and human-resource applications. The
attraction: 50% savings on hardware and 20% on software. "It was a
no-brainer to go with Linux," says Carl Wilson, chief operations
manager for the company's North American data center.

Cost isn't the only reason that companies are switching to Linux. The
data processor Axciom Corp. recently shifted some servers to the
operating system, after using Unix in the past. Alex Dietz, the
company's chief information officer, says he's thinking about
replacing the Windows operating system with Linux on the company's
desktop computers. One important reason: Axciom doesn't want to be too
dependent on Microsoft. "[Linux] has an innate guarantee that you
won't be held hostage," says Dietz.

Torvalds takes tremendous satisfaction in seeing his baby grow up.
"It's like a river. It starts off a bouncy small stream and turns into
a slower-moving big thing," he says.

Indeed, Linux Inc. has emerged as a model for collaborating in a new
way on software development, which could have reverberations
throughout the business world. Its essence is captured in one of the
mottoes of the open-source world: Give a little, take a lot. In a
business environment where efficiency rules, that's a potent formula
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