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Red Hat and Caldera get in the Ring

August 14th, 2000 · No Comments

February 4, 2008–This is a look at a future that never happened. When Caldera bought SCO, we assumed it would stay in the Linux business. We assumed that Red Hat and Caldera/SCO would duke it out for the Linux championship of the world. Instead, Caldera turned on Linux, changed it name to SCO, and, oh yes, destroyed itself along the way.

I wrote this article with Joseph C. Panettieri, now editorial director at Nine Lives Media, in the summer of 2000. It was first published in Smart Partner on August 14th 2000. And, now with no further adieu, let’s look through a broken crystal ball at a Linux future that never happened.

Caldera chief executive Ransom Love is a Novell veteran who was a very early champion of Linux for business. While at Novell in 1994, he suggested that Linux might serve as the foundation for future NetWare or UnixWare releases. When his idea fell on deaf ears, Love and Brian Sparks (now chief exec of Caldera’s sister embedded-Linux company, Lineo) ran for the door and launched Caldera.

Not far behind them, Red Hat entrepreneurs Bob Young and Mark Ewing also spotted Linux’s business potential early. Today, Red Hat is the biggest pure Linux software company, in terms of annual revenue.

Company chairman Young, with his trademark red hat, arguably is the Linux industry’s most recognized personality. No offence intended, Linus Torvalds… Meanwhile, Red Hat president and chief executive Matthew J Szulik is making a name for himself cutting worldwide business deals with the likes of Dell.

Neither Caldera nor Red Hat is profitable, but both companies expect to push into the black in the next 12 to 24 months. Still, the road to profitability won’t be easy. In Red Hat’s 17 July 10-Q filing with the SEC, the company concedes that no firm “has built a successful open source business”.

The filing says Red Hat “expects to incur significant losses for the foreseeable future”. Likewise, Caldera is very cautious in its latest SEC filing, stating that the company does not expect to be profitable until at least fiscal 2002. Caldera has lost $42.1m since opening its doors in 1994. Red Hat lost nearly that much money in fiscal 2000 alone.

Despite all the red ink, however, both companies can flex plenty of financial muscle. Caldera and Red Hat have $91m and $300m, respectively, in the bank. Most of the funds were raised through IPOs and equity investments from major high-tech players. For instance, The Canopy Group, run by former Novell chairman and chief executive Ray Noorda, has a stake in Caldera.

Both Red Hat and Caldera have used their funding to make strategic acquisitions. Red Hat has snapped up nine companies in recent months and is making a bold move into the embedded Linux market. “The server is critical to us, but we’re also pushing into new areas,” says Szulik. “We’re going to leapfrog the desktop and move to embedded portable devices.” Szulik doesn’t think competing with Microsoft for the traditional PC desktop is a wise use of Red Hat’s resources.

Meanwhile, Caldera recently plunked down roughly $110m in cash and stock to acquire SCO’s Server and Professional Services Divisions.

The Caldera-SCO combo positions Caldera as the world’s largest Unix license vendor. It also delivers lucrative partnerships with Compaq Computer and IBM, which resell SCO’s UnixWare. Perhaps most importantly, Caldera gains SCO’s massive reseller channel, notes SCO chief executive Doug Michaels.

David Gloria, an SCO Premier reseller and president of Ixorg, an SCO reseller organization, echoes Michaels’ point. “The real value that Caldera will get from the deal is not the Unix name, not the [SCO] customer base, not even the technologies,” says Gloria. “It is the reseller channel.”

Caldera also stands to gain SCO’s high-end technology. While most Linux companies must wait for the upcoming 2.4 kernel release before pushing into the enterprise, Caldera can leapfrog its rivals by migrating the best of SCO’s high-end UnixWare technologies to OpenLinux.

SCO already offers high-level clustering, scalable symmetric multiprocessing, Access Control List-based granular security and auditing, and excellent Logical Volume Management. As a result, Caldera could meet high-end customer needs before most Linux rivals develop similar alternatives. Linux inventor Linus Torvalds puts it a bit more diplomatically. “The most likely scenario would be [UnixWare and Linux] complementing each other especially in ‘non-core’ technologies,” says Torvalds. “There are pieces of UnixWare that are interesting to Linux, so migrating things over is not all that unlikely.”

In classic open source fashion, Caldera isn’t going to keep SCO’s goodies all to itself. Says Love, “While we’re having to look carefully at the licensing, we’re going to open up the [UnixWare] source as much as possible, and at least some of it will be under the GNU Public License.”

Still, critics say the 120-person Caldera could have trouble digesting SCO and its 900 staffers. And UnixWare has suffered from inconsistent ownership. The product’s roots stretch back to a joint effort between Novell and AT&T. When Novell’s plan to make UnixWare a de facto standard failed, the company sold the product to SCO. But low-cost Linux has destroyed SCO’s revenue base, forcing a business combo with Caldera.

Insiders say a successful combo will require top-notch management by Walter D Hammond, SCO’s vice president of operations and information systems, and David McCrabb, current president of the SCO Server Software Division.

If the Caldera-SCO merger doesn’t proceed smoothly, the combined company may never gain ground on Red Hat. Even Caldera admits as much. In a recent SEC filing, Caldera concedes that Red Hat has a more established customer base and a considerably stronger brand name than Caldera.

Market research reinforces Caldera’s view of the industry. Red Hat commanded nearly 70 percent of the US Linux server market in 1999, according to IDC. Still skeptical? Netcraft’s recent Web Server survey found that Red Hat runs 72 percent of Linux-based Web sites.

Red Hat got its customer base the old-fashioned way. It earned it.

Technically, Red Hat was the first company to release a cohesive Linux distribution by shipping it in an easy-to-understand format, known as the Red Hat Package Manager (RPM). Before this, Linux distributions were complicated hard-disk snapshots, multiple parts of the operating system often were crudely linked together over diskettes. With RPMs, Red Hat made Linux accessible to business users as well as to Linux lovers.

Red Hat used its early momentum to attract big-name partners, including CA, Dell and IBM. Those partners, in turn, have helped Red Hat to attract major customers.

Two prime examples: eToys uses Red Hat Linux and CA’s Unicenter TNG to support and manage its e-commerce site, notes JP Corriveau, senior vice president of research and development at CA. Similarly, Weather.com is replacing its Sun Solaris servers with IBM NetFinity systems running Red Hat, notes Scott Handy, director of Linux solutions marketing at IBM. (Handy, however, takes the high road and declines to discuss potential consolidation in the Linux market.)

Despite Red Hat’s momentum, many commercial customers remain wary of Linux. Just ask Immersant, a New York-based Web integrator. The company has installed Red Hat Linux at several not-for-profit sites, but Immersant’s core Wall Street customers have yet to deploy the operating system. “To a large extent, Linux is still taboo with our financial customers,” says Glenn Archer, a technical architect at Immersant. “But Red Hat is developing a commercial presence. It’s the market leader. They have key partners in place.”

Even Dell is on board. The PC giant recently inked a One Source Alliance with Red Hat. The deal makes Red Hat Linux Dell’s third global, strategic operating system (the others are Windows NT/2000 and NetWare). It is the biggest deal ever between an OEM and a Linux vendor. Dell has a similar, but much less extensive, agreement with Turbolinux in Asia.

Red Hat hopes to become a global power, but it faces stiff competition. After all, Turbolinux dominates Asia, and SuSE owns the German market. And in recent months, SuSE and Turbolinux have made aggressive and somewhat successful moves into the US market.

Still, there’s no denying Red Hat’s momentum. Just ask Dan Kusnetzky, vice president for system software research at IDC. Recently, Kusnetzky was in Brazil talking about server operating systems. During the presentation, he used Red Hat as a symbol for the Linux market. Audience members understood the symbolism — even though Red Hat is not distributed in Brazil.

Red Hat’s brand is backed by plenty of brains. Chief technology officer Michael Tiemann and director of engineering Erik Troan give the company a powerful technical punch.

Experts say only VA Linux, the first Linux hardware vendor, and Transmeta, with Torvalds, are in the same ring.

It’s not all wine and roses for Red Hat, though. Chief financial officer Hal Covert recently resigned to join SGI. His departure came only three days after Szulik told Sm@rt Partner that the company needs to retain its top managers. According to a source close to Red Hat, SGI made Covert a financial offer he couldn’t refuse.

Thanks to savvy management, Red Hat and Caldera are often mentioned in the same breath as Microsoft and Sun in the server market. And despite their corporate focus, neither Red Hat nor Caldera is about to abandon the wild and woolly world of open source — which is the real winner in the current operating system wars.

What does the future hold for Linux? The simple answer is massive market consolidation. Says Ken Rother, chief technology officer of Immersant: “There isn’t enough differentiation between all the distributions. Not everyone will survive.”

CA’s Corriveau compares the current Linux market to the Unix industry, where niche players like NCR and Sequent ultimately raised the white flag and embraced Unix offerings from high-profile partners.

Which Linux contenders will be left standing in the US business market? The smart money is on Red Hat.

Tags: Business · Linux · Novell · Red Hat · SCO · Unix