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Chapter 4. Part 5:
The Sunset of Linux Hype

POLL: Do you think that the embrace of open source by big companies has killed the movement's idealistic drive?
49.1%  No - the movement is still going strong, and is transforming corporate cultures from the inside
25.9%  Yes - the revolution has turned into just another way to make money
17.2%
  A lot of it's about cash now, but you can still set up your own project that reflects your ideals
7.8%    Hey, I've always been in it for the money

open.itworld.com, July 1, 2004

 

No longer a rock star: Linux companies stock crash

The Linux scene at the end of 2000 and the beginning of 2001 was much like the pop music scene, with faded stars littering the roadway. There's little question that the "Elvis days" of Linux are in the past. Dot-com crush changed the situation overnight. Although Linux in general and enterprise distributions in particular established itself as an important player in the OS market politically the situation changed dramatically. The first signs of coming shape-up appeared in spring 2000. As early as in May 2000 downturn of stock market forced TurboLinux to cut its staff by 52 people, about a sixth of its employees. 

In the beginning of 2001 if one would collect Dotcom closing announcement he/she might get a Yellow Pages thick book. Expectations were low, particularly for the deeply troubled Linux business. And layoffs from almost all major Linux companies followed. For example SUSE cut its US office from 60 to 15 and then completely closed US office. Several smaller distributions (Corel Linux,  Stampede, Stormix) disappeared from the face of the Earth.

Also the situation started to favor established players. IDS reported this that Red Hat managed to get nearly three-quarters of the $80 million in U.S. Linux sales in 2001. Most of the balance went to SuSE Linux AG, the report said.  And that's the entire sum of Linux sales in the US. Interesting, is not it?  When Bob Young in 1999 predicted that the server market (as in the money it generates) to decrease by an order of magnitude he was right. The only thing he got wrong was his Linux "gold rush" inspired hallucination that it will happen because of Linux.  It happened sooner that he thought and not because of Linux, but with Linux market...

In April, 2001 S&P 500 returned to the level it was two years ago (on April 4, 2001  S&P 500 closed at 1100). On the same day the NASDAQ set a low not seen since Oct 98. Those Linux companies that got IPO money prior to the market correction acquired a huge competitive advantage over the smaller guys who need to operate on venture capital. Many Linux firms became, to say politely, less optimistic about their future. Here is what Red Hat wrote to in his early 2001 filing with the Securities and Exchange Commission and compare it with Bob Yong's self-congratulation book: 

We have not demonstrated the success of our open source business model, which gives our customers the right to freely copy and distribute our software. No other company has built a successful open source business.

Later the loss of customers and hard economic times helped to evaporate the spirit of cooperation that was so often mentioned in good old days. In his (probably only) spring 2001 interview one of former Linux billionaires, now a modest multi-millionaire Bob Yong desperately wanted his company to become a Microsoft of a Linux world said:

Q. Where do you see Red Hat's position in a slumping technology market?

A: We see the market is really going back to the way it was. It values earnings, and it values quantifiable data as opposed to vision.

In the last six years, people were buying into the vision. What's interesting is that some of those companies will in fact become the next International Business Machines Corp. or the next AT&T Corp. No one was arguing that all of them would.

The fact that some of them literally are going to disappear is not really a surprise.

What it does do, in a perverse sort of way, is actually a good thing.

Our competitors, who were being funded by these venture capitalists because of the vision, would give away the very same services. It was very difficult for us to expand our business to become more profitable.

Cut-throat completion became norm among Linux companies.

And much like Microsoft Red Hat decided to leverage his market domination in Linux to enter other potentially lucrative areas. For example, Great Bridge, which tried to sell database software based on the open-source PostgreSQL project announced in early September, 2001 that they will go out of business. The company lowered its pricing scheme after Red Hat joined the fray, but it found difficult to compete with RH the company that essentially controls Linux OS market "We could not get customers to pay us big dollars for support contracts," Batten said. In their press release RH was not mentioned at all: 

Press Release -- NORFOLK, Va., September 6, 2001 -- Great Bridge LLC, the company that pioneered commercial distribution and support of the PostgreSQL open source database, announced today that it has ceased business operations. Great Bridge, founded in May 2000 by Norfolk, Virginia-based media conglomerate Landmark Communications, Inc., initiated a search for additional investors or an acquirer in July of this year. This search did not generate a qualified investor or acquirer, and Great Bridge's board decided to close the business.

During its 16 months of operations, Great Bridge recorded an impressive list of accomplishments, including assembling the industry's deepest talent pool of PostgreSQL expertise; releasing the first-ever commercially distributed version of PostgreSQL; recording more than 19,000 downloads of its Great Bridge PostgreSQL software and 40,000 downloads of its Great Bridge PostgreSQL documentation; launching www.greatbridge.org , a development community which hosted more the 100 PostgreSQL-related projects; and being named to FORTUNE magazine's '25 Coolest Global Companies.' The company was not able, however, to turn this momentum into revenues that met its business plan milestones.

"We remain convinced that open source solutions, and in particular the PostgreSQL database, present compelling and viable alternatives for business computing," said Frank Batten Jr., chairman of Landmark Communications and founder of Great Bridge. "The board was not convinced that, given the current economic climate, the company could generate revenues at a level to meet the required expenses of the business within the company's funding horizon."

Great Bridge will retain a limited number of employees to manage its closure.

Since RH debut in August 1999 a dozen of Linux companies went public,  a couple of them saw stock soared to several hundred dollar highs, and everyone wants Linus autograph. A couple years later, stock of these companies was trading close or below to their IPO price and that negatively affects the number of  fans who sit to the end of Linus' speeches, especially fans who own stock of one or more Linux companies.  

At the end of  2001, the stock of all Linux companies stock declined further. Call it collapse of the pyramid, investor backlash or a simple return to sanity after months of outrageous excess, but whatever you do, don't call it temporary. IPO dreams of several Linux companies were put on hold and layoffs became a common measure to keep companies afloat. "Surprised by wealth" Eric Raymond was the first to bless 25% layoff in VA Linux. Yes money change people. At this time the VA Linux founder Larry Augustin, who invited Eric Raymond to the board of directors lost his job.  Still he managed to avoid jail. 

To add insult to injury most stock analysts became openly negative. For example Pat Dorsey a senior stock analyst at Morningstar said in his December 13, 1999  Morningstar.com column Surprise! Linux Doesn't Cure Cancer:

Let's get one thing straight: Neither VA Linux LNUX nor any of the other Linux companies that have come onto the market lately are worth anything remotely close to their current valuations. Period.

And he was right. On Jan 12, 2001 Red Hat shares traded $8.67. It was better than it's 52 weeks low of $5, but far less then its 1998 high of more than $150 (adjusted for split). That means that shareholders lost approximately 23 billions to "make money fast" penguins. Here is a Jan 16, 2001 assessment of the Linux stock market situation from http://www.ragingbull.altavista.com :

... I think itís extremely important to revisit, reexamine and reevaluate one of the fair-haired segments of last year: companies touting various versions of the Linux operating system.

Last year this sector had all the drama and glamour of a Hollywood flick, as Linus Torvalds, the Finnish native who helped create this free UNIX-based operating system, got almost as much press as Bill Gates.

Throughout the Linux world, where users soared past 15 million, the mantra was that Linux was well on its way to co-opting Microsoftís (MSFT) dominance.

At the same time, shares in companies such as Red Hat (RHAT), VALinux soared as others Linux vendors like Caldera (CALD) and Linuxcare rushed to stake their claims in the open source gold rush.

Moreover, Red Hat and VALinux last year appeared to be trying to outdo one another as Red Hat shelled over about 400,000 of its shares from open source software company Hellís Kitchen Systems, while VALinux forked over $800 million and cash for Andover Net, a company owning several Linux Web sites.

Certainly the euphoria surrounding Linux then, and today bolstered by numerous cult-like developers and users that embrace this operating system, made it as difficult then as it is now to cut to the chase about the systemís real progress in the marketplace.

From the investorís point of view, the Linux picture has been nothing short of disastrous.

Some Linux executive started to receive a death threats instead of interview invitations. As Red Herring reported in June 2001

Death threats have arrived at the doorsteps of some Wall Street analysts and CEOs. Class-action lawsuits are gobbling up the time and precious cash of technology companies, who are turning out to be the prime targets of late: more than half of investors' lawsuits targeted technology companies in 2000, up from 35 percent in the 1990s. Meanwhile, investment banks are under fire from regulatory bodies for allegedly rigging the IPO process during the height of the Internet craze. No one is beyond suspicion; everyone is on edge.

"My kids' ages are off limits, because of security. We get death threats at work from dissatisfied shareholders," says Matthew Szulik, CEO of Red Hat (Nasdaq: RHAT), whose stock plummeted from a high of $143 in December 1999 to a low of $5 a year later, erasing $23 billion worth of market capitalization. "People bought in when the stock was hot and the movement was hot," Mr. Szulik groans, "and now they're pissed."

With IBM Global Services deploying massive resources for Linux outsourcing, how can any start-up respond to that? They wanted a piece of service pie and it was eaten by bigger guys. IBM is a pretty daunting competition.

Access to venture capital in 2001 became a problem for many Linux startups. On Jan 12, 2001 Embedded Linux company Lineo scrapped IPO plan,  a sign that investor pessimism has swept into the most optimistic part of the Linux landscape -- imbedded market. The regular Linux market lost its luster:

"I think people are saying this is going to be a longer slog" than originally anticipated, said Booz-Allen & Hamilton analyst Barry Jaruzelski. "People are getting a little more sober about expecting real revenue and real profits."

Covert, too, acknowledged that investors are less patient with the general business strategy of IPO now, profitability later. Disgruntlement was most noticeable during last week's market bludgeoning.

I think a lot of the disgruntlement and anger over corporate Linux in spring 2001 were generated not only by layoffs, but also by the fact that volunteers were in essence participants, pawns and often victims of a new pyramid scheme, the pyramid that enriched a few Linux players that include Linus Torvalds and other members of so called "Linux cash community" (i.e. the portion of the Linux community which got substantial amount of shares and managed to sell some of them before the crash). As Linus formulated this in one of his interviews: 

Q: How much of your stock have you sold?

A: Yes, I've sold the stocks. I'm not stupid. I sold when the market was crazy. I said I'd rather have a house than worry about where the stock market is going.

If you look how owners of the companies sell their shares during initial, most difficult after-IPO year the impression is that none of them believed in the success and just wanted to jump from the sinking ship with as much money as possible.  For example Yahoo! Insider Trades - VA LINUX SYSTEMS INC   demonstrates that Larry Augustin really was determined to take as much gold from the sinking ship as possible.  Full table also contains interesting information about other shareholders and top officers of VA Linux. It also helps to explain why VA Linux does not support AMD. 

30-Aug-00 AUGUSTIN, LARRY M
President, Director, Chief Executive Officer
* 3,000
LNUX Sold at $48.45/Share.
Proceeds of $145,350.
30-Aug-00 AUGUSTIN, LARRY M
President, Director, Chief Executive Officer
30,000
LNUX Sold at $48.45/Share.
Proceeds of $1,453,500.
30-Aug-00 AUGUSTIN, LARRY M
President, Director, Chief Executive Officer
30,000
LNUX Sold at $51.19/Share.
Proceeds of $1,535,700.
14-Jun-00 AUGUSTIN, LARRY M
President, Director, Chief Executive Officer
3,599
LNUX Sold at $31.32/Share.
Proceeds of $112,721.
13-Jun-00 AUGUSTIN, LARRY M
President, Director, Chief Executive Officer
* 552
LNUX Sold at $31.04/Share.
Proceeds of $17,134.
13-Jun-00 AUGUSTIN, LARRY M
President, Director, Chief Executive Officer
7,198
LNUX Sold at $31.04/Share.
Proceeds of $223,426.
9-Jun-00 AUGUSTIN, LARRY M
President, Director, Chief Executive Officer
* 2,020
LNUX Sold at $36.28/Share.
Proceeds of $73,286.
9-Jun-00 AUGUSTIN, LARRY M
President, Director, Chief Executive Officer
40,640
LNUX Sold at $36.28/Share.
Proceeds of $1,474,419.
8-Jun-00 AUGUSTIN, LARRY M
President, Director, Chief Executive Officer
* 400
LNUX Sold at $37.51/Share.
Proceeds of $15,004.
8-Jun-00 AUGUSTIN, LARRY M
President, Director, Chief Executive Officer
7,997
LNUX Sold at $37.51/Share.
Proceeds of $299,967.
7-Jun-00 AUGUSTIN, LARRY M
President, Director, Chief Executive Officer
* 3,028
LNUX Sold at $38.23/Share.
Proceeds of $115,760.
7-Jun-00 AUGUSTIN, LARRY M
President, Director, Chief Executive Officer
60,566
LNUX Sold at $38.23/Share.
Proceeds of $2,315,438.
7-Jun-00 AUGUSTIN, LARRY M
President, Director, Chief Executive Officer
120,000
LNUX Proposed Sale (Form 144).
Estimated proceeds of $4,800,000.

Actually fraudulent insider trading is especially tricky to prove with technology companies, because so many tech companies use stock and options as compensation. If an executive is selling, when does that activity allow you to infer that he knows that stock is going down in flames and "acted with conscious intent to defraud?" Otherwise you need to prove that the executive was engaged in the dissemination of materially false and misleading statements concerning, among other things, the company's deteriorating financial condition, the lack of demand for the company's products, its inability to control costs and maintain profit margins, and the effects these adverse undisclosed conditions would ultimately have on the company's operations, liquidity, and stock price.

The next logical step was Linux companies fighting with Linux piracy, which is pretty interesting because of GPL licensing. But Red Hat managed to do exactly this without any smiles. The Red Hat enterprise agreement was specifically designed in a way typical commercial license works or even worth.  They essentially converted "free/open software" into one year agreements cash cow by withholding both the source and patches, from those who are unwilling or unable to pay the rent. They also reserved the right to audit customer each year for compliance. Here is the Red Hat subscription agreement (see Red Hat License Agreements  for the most current version) in full glory:

This Subscription Agreement (the "Agreement") is between Red Hat, Inc. ("Red Hat") and any purchaser or user ("Customer") of Red Hat products and services that accepts the terms of this Agreement ("Customer").

PLEASE READ THIS AGREEMENT CAREFULLY BEFORE PURCHASING OR USING RED HAT PRODUCTS AND SERVICES. BY USING OR PURCHASING RED HAT PRODUCTS OR SERVICES, CUSTOMER SIGNIFIES ITS ASSENT TO THIS AGREEMENT. IF YOU ARE ACTING ON BEHALF OF AN ENTITY, THEN YOU REPRESENT THAT YOU HAVE THE AUTHORITY TO ENTER INTO THIS AGREEMENT ON BEHALF OF THAT ENTITY. IF CUSTOMER DOES NOT ACCEPT THE TERMS OF THIS AGREEMENT, THEN IT MUST NOT USE OR PURCHASE RED HAT PRODUCTS AND SERVICES.

The Effective Date of this Agreement is the earlier of the date that Customer accepts this Agreement or the date that Customer uses Red Hat's products or services.

I. Terms and Conditions
A. GENERAL TERMS AND CONDITIONS

The term "Services" as used in this Agreement means, collectively, the Support Services provided under the purchased subscription and defined herein, RHN Services as defined herein, and any Learning Services purchased under this Agreement and defined herein. The term "Software" means the subscription for the family of software products purchased under this Agreement and defined herein, if any. The term "Installed Systems" means the number of Systems on which Customer installs or executes the Software. The term "System" means any hardware on which the Software is installed, which may be, without limitation, a server, a work station, a virtual machine, a blade, a partition or an engine, as applicable. The initial number of Installed Systems is the number of copies of the Software that Customer purchases. The parties agree that the terms of this Agreement will govern future purchases by Customer of Red Hat's products and services unless otherwise agreed by the parties in writing.

1. TERM AND TERMINATION

1.1 Term. The term of this Agreement shall be for the duration of all Services provided under this Agreement. The initial term for Services shall commence on the Effective Date of this Agreement and shall continue for a period of one (1) year unless a different term is specified by the parties at the time of purchase. Thereafter, the term for Services shall renew for successive terms of one (1) year each unless a different term is agreed to by the parties at the time of renewal and unless either party gives written notice to the other of its intention not to renew at least sixty (60) days prior to the commencement of the next term; provided, however, Customer shall have the right to terminate this Agreement at any time after the first year by giving sixty (60) days prior written notice of termination to Red Hat. Customer shall remain obligated for all fees through the date of termination.

1.2 Termination for Breach. Red Hat may terminate this Agreement (a) in the event Customer fails to pay an invoice when due, (b) in the event Customer commits a material breach of this Agreement and fails to remedy that breach within thirty (30) days of receipt of written notice of material breach, or (c) as otherwise provided in this Agreement. Customer may terminate this Agreement in the event Red Hat commits a material breach of this Agreement and fails to remedy that breach within thirty (30) days of receipt of written notice of material breach.

2. PRICING, INVOICING AND TAXES. Customer agrees to provide Red Hat with accurate and complete billing information (including legal name, address, telephone number, and billing or credit information). Customer will report to Red Hat all changes to this information within thirty (30) days of the change. Red Hat reserves the right to suspend or cancel Services for non-payment. All fees are stated and must be paid in United States Dollars. If Customer is paying by credit card, then Customer authorizes Red Hat to bill Customer's credit card for the Services for the initial term and for the amount due at the time of renewal. If Red Hat has approved Customer to be invoiced, then Red Hat will invoice Customer for the total fees at the time of execution of this Agreement, and payment shall be due within thirty (30) days of the invoice date and any additional fees shall be due within thirty (30) days of the invoice date. All prices and rates quoted by Red Hat are exclusive of any foreign, federal, state, or local sales, excise, use, or similar taxes. Customer agrees to pay all such taxes, when applicable, regardless of whether such taxes are originally charged on Customer's credit card or appear on Red Hat's original invoice, or are later levied on Red Hat or Customer by a taxing authority, excluding any taxes levied solely on the net taxable income of Red Hat. Any renewal of this Agreement will be at Red Hat's list prices in effect ninety (90) days prior to renewal; provided, however, the first such renewal shall be at the same price per Installed System paid during the initial term.

3. PAYMENT. Except in the case of breach of this Agreement by Red Hat or termination of this Agreement as provided in Section 1.1 hereof, any and all payments of amounts due under this Agreement are non-refundable. In the event Customer fails to make payment to Red Hat in the manner provided by this Agreement, Red Hat's remedies include (a) suspending Services until Red Hat receives full payment from Customer for all fees, including late fees and interest, due, or (b) terminating this Agreement without notice.

4. REPORTING AND AUDIT. If Customer wishes to increase the number of Installed System, then Customer will purchase from Red Hat additional Services for each additional Installed System. During the term of this Agreement and for one (1) year thereafter, Customer expressly grants to Red Hat the right to audit Customer's facilities and records from time to time in order to verify Customer's compliance with the terms and conditions of this Agreement. Any such audit shall only take place during Customer's normal business hours and upon no less than ten (10) days prior written notice from Red Hat. Red Hat shall conduct no more than one such audit in any twelve-month period except for the express purpose of assuring compliance by Customer where non-compliance has been established in a prior audit. Red Hat shall give Customer written notice of any non-compliance, and if a payment deficiency exists, then Customer shall have fifteen (15) days from the date of such notice to make payment to Red Hat for any payment deficiency. The amount of the payment deficiency will be determined by multiplying the number of underreported Installed Systems or Services by the annual fee for such item. If Customer is found to have underreported the number of Installed Systems or amount of Services by more than five percent (5%), Customer shall, in addition to the annual fee for such item, pay liquidated damages equal to twenty percent (20%) of the underreported fees for loss of income and administration costs suffered by Red Hat as a result.

5. NON-TRANSFERABLE. This Agreement, and all Services provided by Red Hat pursuant to this Agreement, may not be transferred, assigned or distributed without the prior written consent of Red Hat. Any attempted transfer, assignment or distribution without Red Hat's prior written consent shall terminate this Agreement, and Red Hat shall have no further obligation hereunder.

Even the leading Linux evangelist ESR well known for his economic determinism ("vulgar Marxism")   was forced to depart from his CatB platform that Linux is a new and better method of producing software and being a new economic order magically can ensure business success of  any startup that adopted it.  In June, 2001 VA Linux were he serves on the board of directors decided to fire 35% of staff as well as went out of hardware business (Linux-based servers). And VA Linux board member Eric "surprised by wealth" Raymond managed almost completely forget his CatB fairy tale commenting the event   in Linux Today :

LT: On a broader level, what does this mean for Linux in general? A couple of years ago, it seemed as if the question many were asking wasn't so much whether Linux and open source software could get a piece of the pie: people seemed more convinced that there was a whole new pie to be carved up. Now there's been some culling and attrition, and companies are either specializing in order to cater to the needs of larger companies (like SuSE working so closely with IBM on high-end computing) or they're diversifying (Red Hat making big moves in embedded computing while introducing new services offerings and a database product). In other words, it seems as if we've returned to a sense that there's really only one pie after all, and that the Linux market has a constrained piece of that pie. How much of the contraction we're seeing in Linux companies is a result of broader economic forces, and how much is a cooling of enthusiasm over Linux?

ESR: To quote some politician or other, "It's the economy, stupid." :-)

Don't take that personally, because you're asking an intelligent question that doesn't have a simple answer. Yes, I think there has been some cooling of the initial enthusiasm for Linux -- Wall Street's trendoids are notoriously fickle that way, always looking for the next buzzword.

But I think that has only been a minor factor in the recent troubles at VA and elsewhere. All the market surveys and projections still show Linux as a technology doing extremely well against its competition. The trouble is that capital spending is in collapse, hardware is commoditizing, and it's getting increasingly hard to find decent profit margins anywhere you turn. It's tough all over, and Linux companies aren't the only or the worst affected.

In a macroeconomic rainstorm like this, the best you can do is hunker down, minimize the burn rate, work on getting the close-to-profitable bits of the business really profitable, and hope the sun comes out soon. That's what VA is doing. We want to be there for our stockholders and stakeholders, with our skills still sharp and our commitment to open source still powerful, when the next expansion begins.

LT: On a related note, aren't the same forces that caused VA Linux to find itself in trouble on the hardware side similarly arrayed against it on the web content side? While no one's going to buy into a "ZD-Dot" or a "Fresh|Net," aren't the same risks of widespread acceptance present -- the risk that a larger, better established player will just say "we're going to cover Linux and open source computing in general as another piece of the industry puzzle" and simply keep their existing reader base intact by saying, effectively, "we know you're interested in this 'new' technology, and we're covering it with n reporters?"

ESR: I'm not sure I ought to answer this one. Backing off from VA's business position a bit, I'll just observe that it's a lot harder to corral Web audiences than it is to boost hardware market share. Financial mass doesn't help in the same way; you can't buy audience share by lowering the margin you'll accept. Once a web community like eBay or Slashdot has reached a certain critical size, it's hard to lure people away from it to a competing service that's technically equivalent because most of the value to them is in *that particular community's* traditions and its trust network.

 

Animal Farm, Chapter 2: Transmeta IPO:
 more cash and more troubles for Linus

"All pigs are equal, but some pigs are more equal than others."
George Orwell
 

If you have never read George Orwell's barnyard parable of totalitarianism called Animal Farm, go out and buy yourself a copy; try not to be alarmed at how closely the farm is beginning to mirror our own society. In Animal Farm, a new order is established with lots of talk about freedom, but a certain species begins subjugating individual opinion and independent speech to the credo "All pigs are equal, but some pigs are more equal than others." If you are tempted to think that Orwell's gloomy story is nothing more than a fairy tale about a very naughty pig, read on. It is well applicable to penguins and it's funny that Linux Torvalds will do his best to help to enrich Microsoft founder Paul Allen. The rumors about Transmeta IPO started circulate in February 2000:

Transmeta appears to be taking its 'will they? won't they?' approach to chip announcements to the company's financial future. Speaking at a Banc of America Securities conference in San Francisco yesterday, Transmeta CEO Dave Ditzel told the assembled gathering of analysts that "it is possible we could do an IPO" during 2000. Or possibly not, he added, if circumstances change. For 'circumstances' read 'financial health of the company', and that depends on Transmeta winning sufficient customers for its x86-emulating CPU, Crusoe. The Crusoe launch was notably short on statements of support from computer and device manufacturers-- ie. there weren't any. Since then, the only significant announcement has come from S3, which has simply said it plans to ship a line of information appliances under its Diamond Multimedia brand, devices that will be based on the low-end Crusoe 3120. Ditzel said yesterday that notebooks based on the 700MHz Crusoe 5400 will appear by the end of the year.

And those rumors were actually true, so the next blow to the Torvalds' reputation came from the Transmeta IPO. Here is he supposed to he one of the key peddler of the shares of ultra closed, ultra secretive not profitable company:

Like a number of start-ups, Transmeta is not profitable. In the first nine months of 2000, the company lost $71.1 million dollars and pulled in $3.8 million in revenue. In 1999, Transmeta lost $41.1 million. Since it began in 1995, the company has lost approximately $147.5 million, according to documents filed with the Securities and Exchange Commission.

Currently, more than half of the company's product revenue comes from a contract with Sony. Sony accounted for 50.2 percent of Transmeta's product revenue, while sales to Fujitsu accounted for 20.3 percent.

Before this year, the company's main revenue came from license fees from IBM and Toshiba. Both companies had licenses to manufacture Crusoe-like processors. Transmeta, however, later bought the rights by agreeing to pay IBM $38 million over four years and give 1.2 million shares of stock to Toshiba.

Currently, IBM is the sole manufacturer of Transmeta microprocessors, but starting next year, chips could be made by Taiwan Semiconductor Manufacturing Corp. (TSMC).

But who cares if the there is a smell of money in the air:

In a sign of strong demand for its initial public offering, Transmeta Corp. (tmta) priced 13 million shares at $21, $3 above its range of $16 to $18. Shares trade Tuesday.

As NYT noted in the article Transmeta's Stock Offering May Buck a Cooling Trend

That public stock offering is widely expected to get a blazing reception, despite a market far cooler to new technology offerings than last year's. After all, the company is backed by two prominent billionaire investors, the financier George Soros and Paul Allen, co-founder of Microsoft. Its star employee is Linus Torvalds, the 30-year-old native of Finland who created the free Linux operating system and who is revered by many young programmers. And its Crusoe processors promise to be contenders in a rapidly growing market for laptops and mobile computing devices.

For some reason IBM was not completely happy, but Transmeta survived IBM torpedo (IBM announced just before IPO that power saving of Transmeta chips were not significant enough to justify creating of ThinkPad based on the chip):

But IPO analysts have not given up on what they continually describe as a very strong offering.

"This has taken a little polish off the apple, but it's still an apple," said John Fitzgibbon, IPO analysts with WorldFinanceNet.com.

The deal, originally slated for the week of Nov. 6, had so much buzz that it was brought forward a week in anticipation of strong demand. But on Sunday, Oct. 29, it was unexpectedly moved back to the original week.

Fitzgibbon said the pricing move was because the IBM announcement was coming down.

"They accelerated (the offering) because it was looking great," he said. "But if they had gone out this week they would have had a terrific first day, then the news would have hit and the stock would have fallen and they would have had to deal with a whole bunch of class actions."

Lead underwriters Morgan Stanley Dean Witter said they expect to price Transmeta's 13 million shares on Monday, Nov. 6, ready for trading the next day.

The company hopes to raise about $156 million pricing between $11 and $13. Santa Clara, Calif.-based Transmeta will trade as "TMTA" on the Nasdaq

Due to Torvalds Transmeta has done an amazingly successful marketing pre-IPO push, overhyping the fact that Crusoe has low power consumption, while downplaying speed and stability concerns. Actually there was no quantum leap in battery performance and no laptops that would allow laptop computer batteries to last a full workday were produced to prove this. But the hype machine cranked up, leading to a successful multimillion IPO in November 7, 2000, at a time when technobubble burst already started to take a toll and most hardware startups and Linux related companies were crying out for a capital infusion from Wall Street. Companies like Hitachi, Casio, and Sony signed up to use the chip in computers, looking for a competitor to Intel that could provide processing power combined with frugal energy consumption. Here is CNET coverage of the event:

Transmeta, maker of the much-hyped Crusoe microprocessor, raised $273 million yesterday in its initial public offering. 13 million shares were bought at $21 each, easily beating Transmeta's $16-18 estimate set last Friday (which had been upped from the original $12 target). Shares are supposed to be trading to the public today--under the ticker TMTA--at around noon Eastern time.

Despite the fantastic IPO, Transmeta's future is under scrutiny. Since its founding in 1995, Transmeta has lost about US$147.5 million, including $71.1 million this year (through September) and $41.1 million last year, when the company first started getting media attention. These losses compare to only $3.8 million in revenue this year, over half of which comes from its contract with Sony (a further 20% comes from Fujitsu). Sales of Crusoe chips in laptops were expected to begin boosting those revenue numbers, but recent processor benchmarks have shown less than stellar results for the Crusoe when compared to Intel chips (prompting noted Intel-defender Ashok Kumar of USB Piper Jaffray to question Transmeta's "lead" over Intel in power saving). IBM and Compaq were supposed to use Crusoe chips in some of their notebook computers, but IBM recently dropped plans to do that (despite being the only company currently producing Crusoe chips) and word this morning is that Compaq has also dropped the Crusoe from its Armada notebooks--despite the fact that Compaq is a Transmeta investor. Sony is still using Crusoes, however, and other product makers are as well.

For much more information on the IPO and Transmeta's future, please see CNET.
 

The next day shares went $46, which suggest good work by Morgan Stanley Dean Witter.  But soon reality needed to be faced and savvy marketing did not solve the problems of fighting uphill battle with Intel and AMD. After Intel and AMD  produced chips that consumed less power then Crusoe the game was over and Transmeta was left with a very narrow and not that profitable niche of ultra-portable notebooks, blades and wearable computers, if any. Most people was skeptical. For example on Linux Today forum bragging about getting Transmeta shares got comments like: 

devnull - Subject: What will happen with Transmeta's stock price in half a year ( Nov 7, 2000, 14:44:11 )
Be careful. Transmeta stock can dive below IPO price sooner than VA Linux. Losing money to make somebody rich is probably not what you want.

Even on Slashdot the news about Transmeta IPO generated a lot of criticism. There was much less friendly discussion that in the case of Red Hat IPO or VA Linux IPO. A lot of people questioned Linus Torvalds PR role in the ultra secretive company that rely on "on a combination of patents, copyrights, trademarks, trade secret laws and contractual obligations with employees and third parties to protect our proprietary rights."

As one Slashdot correspondent put it "It probably means our fearless leader will soon be our *rich* fearless leader." (He forgot that Linus Torvalds was already pretty rich person living in a multimillion house and driving BMW :-) There were several other unusually tough for Slashdot crowd (usually very favorable to anything connected with Linus Torvalds) posts from the same discussion:

What does Slashdot think (Score:3, Insightful)
by Anonymous Coward on Thursday August 17, @10:20PM EDT (#108)
about this:

We rely on a combination of patents, copyrights, trademarks, trade secret laws and contractual obligations with employees and third parties to protect our proprietary rights.

Still support this company, just because Linus is on board, right? If it were any other company that declared this, everyone here would be up in arms like "boycott them! i hope they go out of business" yada yada yada...

Crash & Burn Scenario....... (Score:1)
by hajk on Friday August 18, @10:39AM EDT (#149)
(User #12707 Info)
With a quick overview of the Edgar filings, I get the distinct feeling that the management is not gunning for success.

They are taking quite reasonable salaries, generally if they were hopeful, they would take less income and more stock options. Also, they have borrowed quite large amounts from the company: 5 people or so each took $750K out.

I smell trouble. Crusoe and the Codemorphing engine may be great products, but unless they can sell it and give the buyers some confidence in the continuity, then, uh oh!

How to scam the world for millions of dollars (Score:2, Funny)
by Dr. Acronym on Thursday August 17, @05:52PM EDT (#30)
(User #218075 Info)
Listen up folks!

YOU too can make hundreds of millions of dollars in days by starting a company and going IPO without even shipping a product!

All you need are some good Wall Street buzzwords like "Linux" and "code morphing" to descibe your nonexistent product! Be sure to cut in people like Linus Torvalds in on your deal so that you can leverage their names to maximum effect.

By the time the public realizes that you'll never ship a product, you will have enough money to buy your own private island in the Pacific, far, far away from all the angry Wall Street investors and the FTC. Remember, this may take a little work to make people initially believe you (sucking up to Slashdot editors doesn't hurt), but it will be well worth the work!

Later things get really nasty for the Linus reputation and his Transmeta stock peddling to Linux enthusiasts became one of the worst parts of his biography. Not so power-stingy Crusoe-based notebooks materializing out of the pre IPO press release/trade show demo vapor demonstrated that like any real CPUs Crusoe chip has its problems.  Accordingly Transmeta stock took a nosedive.

Some of the major laptop makers had been sending discouraging signals about their plans for Transmeta-processor-bearing products even before the IPO (IBM, Compaq). IBM complained that the Transmeta chip's power-saving gains have been overstated, and that these benefits fail to outweigh the research and development costs of rolling out a new processor in their product lines.  Moreover much of what was available seemed to fall into the Asian-markets-only category. The other problem the Transmeta chip is connected with the performance hit that accompanies it. For the same frequency you get only 50-75% of the performance of the Pentium III CPU and Intel was not sleeping.  

In Jan, 2001 Intel started to ship an "ultra-low-power" mobile Pentium III chip. With notebook sales going strong, especially compared with the current desktop market, Intel took steps to protect its mobile market share. The 500-MHz chip originally had been planned for introduction in the second half of the year but was moved up to Jan, 2001. The price was $200 which was better than Transmeta offerings. The new mobile Pentium III chip also had a better  power consumption than Transmeta's current 5600 chip.  Intel also introduced an ultra-low-power 500-MHz mobile Celeron chip for around $100 which has much better price/performance ratio that any Transmeta offerings including 5800.  Moreover Mobile Pentium III with SpeedStep won a prestigious Microprocessor Report Best PC Processor 2000 award in mobile category.

The Transmeta's stock price, which had been in the 50s, took a plunge and in April, 2001 was around $18. Later stock fall into a dollar range or approximately 50 times from its high. After the first Transmeta recall people start asking unpleasant questions and draw to unpleasant conclusions like in this message from ZDNet News Talkback

Well, hello. I think everyone saw that the whole Transmeta thing was a giant ploy to get media attention. Hire Linus and expect everyone to buy your product, I think not.

And here the choice of Linus Torvalds looks really suspicious because from the point of view of architecture this chip can really benefit from VM (Virtual Machine) based OS, not from Linux monolithic kernel. And power saving alone is a pretty weak marketing tool, if they lead to substantial performance hits. News like recall also did not help:

Transmeta Corp. confirmed Wednesday that it is working with Japanese computer maker NEC Corp. to recall notebook computers built with flawed versions of its power-saving Crusoe microprocessor.

Transmeta (stock: TMTA) said in a statement that the recall would take in "fewer than 300" NEC (stock: NIPNY) computers that are at risk of failing if the user reinstalled operating software.

The company said that the recalled Crusoe chips came from a limited manufacturing batch, and it said any remaining inventory of the defective chips had been returned to Transmeta.

Transmeta said on Thursday that the flawed chips could have been used by computer makers other than NEC, but added that it was unlikely.

"Right now, we have no clear evidence that any other customers are affected. Should we find evidence to the contrary, we will certainly deal with that," said James Chapman, Transmeta's senior vice president for sales and marketing.

The Crusoe chips are also used in computers made by Sony Corp., Fujitsu Ltd. and Hitachi Ltd.

Hitachi said in a statement it had found no problems with any of its computers that used the Crusoe chips.

Sony said on Thursday it had started to check its notebook computers which use the same Crusoe chip after seeing possible malfunctions, but had not decided whether to recall them.

Shares of Transmeta tumbled 15 percent to close at $23 13/16 on Nasdaq Wednesday after a Japanese newspaper reported that NEC was considering a recall.

In after-hours trade, Transmeta shares extended that slide, taking the cumulative loss on the day to nearly 25 percent. The shares last traded on Instinet at $21.

The stock had surged to $50 on its first day of trading following its highly anticipated $273 million initial public offering on Nov. 7.

On May 7, 2001 shares plummeted 23% ($3.40 from $11.17) in a single day after investors were freed from a restriction on selling stock. I suspect this day was not very good for Linus Torvalds as many people bought the stock due to the fact that he is employed at Transmeta. But this was just a start of troubles. Transmeta's Black Friday, when Linus needs to walk and tell his colleagues that they were laid off, was still a more than a year ahead...  I also doubt that he might be too excited about commenting on Transmeta-IPO related investor lawsuits.

Greedy leaders of Linux gold rush under fire: 
lawsuits against the major Linux startups

In Jan 2001, long before real market decline,  Red Hat shares traded around $8 and later declined to $5. The same is true for VA Linux, who managed to establish of the record for the first day stock gains: initial IPO price $30 rocketed the first day to $239.25. The stock closed at $8.94 on Jan 12, 2001 and was $3.95 in April, 2001 -- an almost 100 times decline. 

Instantly the question arise why stock flied so high and who is responsible for such a rapid decline. It looks like this disaster partially was provoked by actions by actions of the IPO underwriters and executives of those companies. There were allegation about direct manipulation of post IPO stock price.

The first suit against VA Linux Systems, Inc. was announced in Jan  2001 by Cauley Geller Bowman & Coates, LLP. In this Class Action Lawsuit they are seeking damages on behalf of shareholders. VA Linux Systems, whose shares had a record first-day run in December 1999, has been accused of deceiving investors.  The suit, which also names the company's lead underwriter, Credit Suisse First Boston, says VA Linux failed to reveal in its prospectus that Credit Suisse promised shares in the stock offering to investors who pledged to buy more shares in the aftermarket at predetermined prices. "Such tie-in arrangements were designed to and did maintain, distort, and/or inflate the market price for Linux shares in the aftermarket," says the complaint, which was filed in federal court in New York.

The Law Firm of Cauley Geller Bowman & Coates, LLP announced today that it has filed a class action in the United States District Court for the Southern District of New York on behalf of all individuals and institutional investors who purchased the securities of VA Linux Systems, Inc. (``Linux'' or the ``Company'') (Nasdaq: LNUX) between December 9, 1999 and December 6, 2000, inclusive (the ``Class Period'').

The complaint charges Linux and certain of its officers and directors with violations of the federal securities laws. On December 9, 1999, Linux completed an initial public offering of 4.4 million of its shares of common stock at an offering price of $30 per share (the ``Linux IBO''). In connection therewith, Linux filed a registration statement, which incorporated a prospectus (the ``Prospectus''), with the SEC. The complaint further alleges that the Prospectus was materially false and misleading because it failed to disclose, among other things, that: (i) Credit Suisse had solicited and received excessive and undisclosed commissions from certain investors in exchange for which Credit Suisse allocated to those investors material portions of the restricted number of Linux shares issued in connection with the Linux IBO; and (ii) Credit Suisse had entered into agreements with customers whereby Credit Suisse agreed to allocate Linux shares to those customers in the Linux IBO in exchange for which the customers agreed to purchase additional Linux shares in the aftermarket at pre-determined prices.

In March, 2001 the number of federal lawsuits against VA Linux was close to 20. Most of them  have been filed both against VA Linux and its lead underwriter, Credit Suisse First Boston. Other defendants charged in those suits read like a list who is who in investment banking: Salomon Smith Barney, Morgan Stanley Dean Witter, Merrill Lynch, Lehman Brothers, Goldman Sachs. A pretty interesting demonstration of the sexual appeal of Tux, the Penguin to the Wall Street ;-)

Steven Schulman, a partner in the law firm Milberg Weiss Bershad Hynes & Lerach, which specializes in filing shareholder suits, and has sued VA Linux and CSFB over the VA Linux IBO said the VA Linux initial public offering is a prime example of market manipulation in an IPO by investment banks, their customers and the issuing firm. Because certain favored customers of the investment banks agreed to buy shares in a new issue at inflated prices in the aftermarket (in return for getting an allocation of the shares at the initial offering price) the share prices to which the IBO eventually soared were actually driven by artificial market forces. Schulman said. "That is a manipulation and its purpose and effect, and it's illegal, is to cause a squeeze that pushes up the stock price very rapidly... It's an interrelated very lucrative set of arrangements that went on." 

Red Hat also has been accused of violation of federal securities laws in a class-action lawsuit that alleges investors were misled about aspects of its initial public offering. The suit, filed in US District Court, Southern District of New York in April, 2001, charges the Linux distributor, its senior executives and securities houses of granting preferential share allocations during Red Hat's August 1999 IBO. These privileges were obtained, it is alleged, in exchange for "excessive commissions in transactions on other securities". Red Hat's shares were offered at $14 and almost quadrupled on the first day of trading, closing at $52 and the lawsuit rests on the argument that Red Hat made misleading statements in its prospectus and did not give smaller investors a fair slice of a lucrative pie. On April 4, 2001 the price was $4.74.

Law firm Milberg Weiss Bershad Hynes & Lerach has named Red Hat, and its executives Robert Young, Marc Ewing and Matthew Szulik in its action. Unspecified damages are also being sought from Goldman Sachs, the underwriters of the offer, and brokers Credit Suisse First Boston.

As previously reported, the Securities in Exchange Commission is investigating whether Wall Street firms made illegal payments in exchange for more shares in hot IPOs. The accusations made against Red Hat follows the pattern of charges against hardware firm VA Linux, which is accused of similar financial skulduggery in connection with its IBO.

Another Linux firm that was investigated was Linuxgruven, a controversial Linux tech support and training company Linuxgruven, which was launched in a blaze of glory in February 2000 and has offices in seven states. Investigation started in February 2001 was performed by the Missouri Attorney General's Office, local law enforcement and the Better Business Bureau. Linuxgruven, was allegedly involved in a scheme promising employment and then requiring prospective hires to pay several thousand dollars for training. There are also charges of bounced checks, false advertising and unethical business practices.  Linuxgruven was closed after several months of investigations. In the paper "Linux Training Pyramid Topples"  Wired reported that job applicants were asked to pay $3,900 for the eight-week training course, and most said that they had the impression that they would be hired only if the fee was paid: 

"Essentially they were selling training, but they found a novel way of doing that -- they told you that you had a job, but then said you needed training to do that job properly," said Michael Browner, who applied for a job with Linuxgruven.

"Their interviewing process was a joke, essentially if you could keep from picking your nose at the interview, you got "hired," so long as you could write out a check for a few grand, that is," Browner said.

Linuxgruven hasn't made an official announcement of its closure yet, but its phones are disconnected, and directory assistance has no current information for its St. Louis headquarters. The website is "being redesigned," but e-mails and calls to the site administrator were not answered.

"The company essentially hired anyone who walked in the door and coughed up $3,900 for training," said a former employee who requested anonymity because he is suing Linuxgruven for bounced paychecks and the promised reimbursement of his training fees.

"Their ads said that you needed two years minimum experience in programming or system administration or equivalent experience. To them, the 'equivalent experience' was you having $3,900 in the bank that you were willing to hand over. You could have been the most skilled systems guy in the world, but they still wanted you to cough up for their classes before they hired you," the source said.

Linuxgruven continued despite allegations that the company was nothing more than a scam. In March, company founder James Hibbits said Linuxgruven would continue to do business even after most of its top executives resigned.

In an e-mail dated February 5, 2001, company founder James Hibbits said that Linuxgruven was not involved in any deceptive hiring practices.

"What we have done over the last year is amazing. We've actually introduced Linux to over 100,000 people who never even heard of it. We have offices in eight U.S. cities and will have 16 by (the) end of 2001," Hibbits said.

Hibbits referred to Linuxgruven's practice of asking employees to pay for training as "a different business model.... Instead of raising a pile of cash and burning through it and hoping we're right, we had to make money from the beginning."

But when Hibbits was arrested for a two-year-old fraud charge on April 19, the company disappeared.

Hibbits could not be reached by phone or e-mail after his arrest, but in previous e-mails he strongly refuted the charges that Linuxgruven had been accused of in posts on geek-site Slashdot. "A lot of those flames included false information and misrepresentation of what our company does and how we train and hire employees," Hibbits said. Hibbits had claimed, in previous e-mails, that the company was training "roughly 200 people a month." Hibbits also noted that all the costs of Linuxgruven training were reimbursed to employees after a year's employment, a statement that Browner acknowledges was made to him during the interview.

But Browner questions how many people "hired with no qualifications to be a Linux tech besides a checkbook" would have managed to be employed for a full year. There's no way to tell, as the company had barely been in business for a year when it disappeared this week. "They planned to go ahead despite all the furor and problems, but when James (Hibbits) was arrested last week for an old insurance fraud charge, that was the straw that broke the camel's back," said a former employee of Linuxgruven, requesting anonymity since he is also involved in legal action against the company.

Hibbits has been accused of taking payments for car insurance but not providing the insurance coverage. He was served last week with a warrant for his arrest, and then released on a $10,000 dollar bond. A dozen or so former employees are suing Linuxgruven because of bounced paychecks in March. But some Linuxgruven employees said they were happy with the training they had received, and felt that the company's failure was due to the softening tech market. "The classes were good, I was learning something, and I had no problems paying for that training. Linuxgruven offered me a chance that I probably won't get anywhere else. I am sorry to see them go out of business," said Michael Venders, a former employee.

Others said that they had no qualms about paying for training, but were angered when their paychecks started bouncing, or when their classes were cancelled and no refunds were offered. "As soon as the CEO left I knew it was doomed. Matthew (Porter) was a great guy, and I think he got sucked into something he didn't fully understand with Linuxgruven," said a source, who also requested his name not be used because of pending legal actions against Linuxgruven. Matthew Porter, once a chairman of the St. Louis Linux Users Group, had replaced Hibbits as Linuxgruven's CEO in January 2001. Hibbits remained with the company as chairman of the board. Porter resigned in March, and sources said he left when he realized the company would be unable to pay employees. "Matthew has said that he was disgusted by the fact that paychecks would bounce. He is a solid guy, and a true supporter of Linux, and he is sad over what happened here," said the source. Hibbits told the St. Louis Post-Dispatch on April 19 that all debts would be paid. "The company is going to go forward," he said. Hibbits was arrested on the insurance fraud charge by St. Louis police two hours after making that statement.

This situation with greedy little yellow penguin presents a interesting parallel development to the Microsoft's legal troubles.

Mac OS X stole desktop from Linux
As of the end of 2001 the ration is 3:1 in favor of Macs

If you treat someone as if they are your enemy, 
theyíre likely to become one.

A Russian proverb  

Linux is an Intel centric system. Yes, Alpha port does exist, as well as PowerPC and mainframe ports, but please remember than the only platform were Linux is relatively competitive is Intel platform. On less known platforms NetBSD is the king of the hill and  Linux is not even close. And bloated kernels does not help Linux to enter markets were memory is a premium, or there is no alternative for the old machines that are no longer supported by manufacturer but still are nice and usable systems (like old Suns or HPs workstations).   

Linus Torvalds was especially bad in dealing with Mac users and PowerPC platform. Historically he learned Alpha architecture because Alphas were his first freebies: he got free Alpha servers from DEC when just before Compaq acquisition DEC tried to play a Linux card for this very interesting CPU. But Intel platform grasped almost all his attention and situation even deteriorate after he joined Transmeta. As Linus controlled kernel development that means that outside Intel(and may be IBM mainframes) Linux does not have much sense. Not surprisingly Intel was early and major investor in the several Linux startups.  And about the problems with Linux non-Intel ports you can get a lot of interesting information talking to any IBMer involved with running Linux in VM environment.

At the same time Linus not only ignored existence of Mac and Mac users but made a political blunder that converted some previous allies into enemies. With his careless remarks he created a problem that later became even worse: in March, 2001, Apple helped BSD accomplished what Linux has been promising for years: they put the power of Unix into a desktop system and made it available to the mass user. The launch of Mac OS X instantly turned Apple into the largest distributor of desktop Unix-like OS (neither Linux nor Mac OS cannot formally be called Unix because they never passes Open Consortium compliance tests) .

"On March 24, Apple Computer, Inc. released its next-generation operating system, Mac OS X (the "X" is pronounced as "ten," for the version number of the operating system) to Mac addicts around the world. While this isn't such a big deal to some, others view it as a new beginning that could squash all thoughts of a desktop Linux for the general public.

What's this, "Apple out-maneuvering Linux?" you say? Well, maybe not as a server platform for the immediate future, but just think about this for a second: Would it be possible for Apple to deflate the hopes and dreams of developers worldwide of bringing Linux to the desktop? The short answer to this is yes, but it's more complicated than that.

... ... ...

At the core of Mac OS X is a kernel built on the Mach 3.0 kernel, BSD 4.4, and Darwin (Apple's open source kernel project), giving network and system administrators the ability to use Unix programs and add them to their Macs. When combined, these components offer a rock-solid operating system that's hard to beat. (OK, I know that Mac OS X has its fair share of bugs, so no flames, please.)

One of the advantages of Mac OS X is that it now offers Macintosh users with a command line on top of a slick, stable GUI, known as Aqua. With OS X's BSD core, Macintosh users will now be able to use GNU software. This means they will be able to run tools like Emacs, vi, Apache, and even XFree86 and the GIMP (something that Adobe Systems should fear). If you're looking for a place to download ports of GNU tools that run under Mac OS X, you should visit the GNU-Darwin Project on SourceForge.

... ... ...

So how does this make Mac OS X a threat to Linux? If you've given this any thought, the answer is quite clear. One of the challenges that the Linux community has been plagued with in recent years is the development of a stable and easy-to-use GUI. While some view X (or any GUI) as a hindrance to Linux's performance, a usable interface is a necessary evil if you want to convert users from Windows. And while the Linux kernel might be stable, the GUIs are, at times, buggy and less desirable for most people."

Now anyone with a desire to learn and run Unix can purchase it for about the same cost as a Microsoft operating system. For the regular user, it looks and acts just like a MacOS user would expect. However, all the powerful features that make it Unix are available for  the Mac developers and power users who want to take the OS to its limits. That make Linux much less attractive as a desktop environment, especially in USA.

Linus reacted to this news in a pretty arrogant manner: he slammed OS X microkernel in his autobiography.  As ZDnet reported in Torvalds rubbishes core of Apple's OS X:

"The forthcoming autobiography from Linux Torvalds, creator of the Linux operating system and figurehead of the open source movement, Just For Fun, promises to cast a shadow over Apple's newly released OS X, which Torvalds describes in less than flattering terms."

"'Frankly, I think it's a piece of crap,' Torvalds says of Mach, the microkernel on which Apple's new operating system is based. 'It contains all the design mistakes you can make, and manages to even make up a few of its own.'"

"Torvald's comments promise to upset not just Apple fanatics, but also some quarters of the free software movement. The Mach microkernel is also being used as the core of Hurd, a kernel project from the Free Software Foundation that will be an alternative to Linux as the heart of the GNU (Gnu's Not Unix) operating system, originally devised by free software advocate Richard Stallman."

That political blunder (may be not Linus own fault as autobiography was co-written (read written ;-) with David Diamond) did not win him any friends in MAC crowd and for many MAC users saw this as an attempt to help Microsoft in their fight with Apple. As John Tachek  put it in this column:

"It's also arrogance. So is the decision of the Linux god himself, Linus Torvalds, to ridicule the Mac OS X operating system. He's apparently ingested way too much of the Linux freedom fighters' fodder while forgetting that people just want their things to work."

Even Linux zealots in Linux Today were mildly embarrassed. As one reader put it (Torvalds likes bananas! News at 11)

Please, enough of the Torvalds' preferences stories. His opinion is really only important in a narrow channel. This isn't one of them.

By choosing to build Mac OS X on BSD Unix Apple opened up thousands of new applications to Mac owners--potentially expanding Apple's market share--and gave Unix developers (and especially BSD and System V applications developers) access to a lucrative new audience. The reason behind Unix developers' interest in Mac OS X is simple: it is the first desktop, Unix-based operating system to reach the mass market. Apple has gone down the Unix road before. Steve Jobs created a very innovative Next computer with Next OS based on BSD. In the early 1990s, Apple sold A/UX, a version of Unix System V, designed to run on Apple's Macs and servers as an alternative to the Mac OS. But A/UX didn't easily run existing Mac applications and attracted few buyers. It was discontinued.

Mac OS X can also be thought of as NeXTStep 6.0. It's built upon many technologies and descendants of technologies from that innovative system. Technically  I probably would have preferred a BeOS design. But, still it's a great OS -- the first truly usable Unix desktop. Some design decisions might have a bright future. I think DisplayPDF will be a boon to the DTP industry, and especially to Adobe, as workflow starts shifting towards PDF for creation, presentation, preview, proof, etc. It may also be the secret to resolution independent displays as displays get bigger and bigger (19" displaynow is  normal, 21" looks like nothing special; it was gigantic five years ago).

Instantly OS X got important applications unavailable for Linux: Macromedia  released FreeHand 10, Adobe Systems and Microsoft, promised to deliver software in six month. To facilitate Unix developer relations, Apple has entered a partnership with the O'Reilly Network

"Right now, there's definitely curiosity about Mac OS X" from Unix developers, said Derrick Story, managing editor for O'Reilly Network. "What they find when they begin poking around inside (Mac OS X) will have a lot to do with whether that interest is sustained or remains a curiosity. It's hard to say right now how that's going to go."

Apple's biggest inroad into the Unix community may not come from developers but from the education market. The education market offers two tremendous advantages: Apple is de-facto standard in USA K-12 schools. At the same time Unix is extremely popular in universities. Moreover education community in general, and university crowd in particular, firmly believes in open standards. And for the university community BSD Unix was and is the most appealing flavor of Unix. Now there is a possibility to have university graduates that can say "I learned on a BSD and I grew on the BSD," instead of a more typical current situation "I learned Mac at high school,  moved to Windows and BSD at the university and went to Solaris at my first job." And the first operating system is very important almost life-defining experience for any computer professional.

David Coursey,  Executive Editor of ZDNet AnchorDesk  formulated this very clearly in on of his columns (ZDNet Story Hey, desktop Linux fans Buy a Mac... or just go away). I especially like "Like scientific socialism, it will go down as an idea that sounded good on paper but didn't work in the real world. If the proponents of desktop Linux are really honest, they will move to a Unix platform that has all the things Linux lacks: a great user interface, a large number of applications, support of a profitable major vendor, an industry guru who's taken extremely seriously, and even the cover of Time  magazine. The only thing I disagree with Mr Coursey is that Linux has a bright future on the server. With all due respect  I am inclined to see Linux place as a new free "superBIOS" and the best it can do is to became a workhorse for pilots and low to midrange departmental and small ISP servers. But here is a more complete version of David Coutney vews on the subject: 

Let's get something straight right away. I don't mind Linux, and I certainly don't require an operating system to come from Redmond to be acceptable. Linux can be a great operating system when used for the server tasks that suit it best. Heck, I was even married to a Unix person, and Doug Michels, a Unix pioneer, is one of my best friends.

But it would be just fine with me if the Linux-on-the-desktop people--at least the ones who leave TalkBack responses to my columns on seemingly any topic--would please go away. Read someone else's column. Harass that person for a change.

THESE DESKTOP LINUX people are just like the adherents to any concept that has failed in the marketplace of ideas: They don't know when to let go, and make fools of themselves as a result.

The commercial Linux community, as represented by Red Hat Chairman Bob Young, has come to the conclusion that Linux on the desktop is a non-starter. Further, the controversy and distraction the issue creates takes attention from Linux as a server OS, where it really shines and provides a real alternative to Microsoft products.

I encourage those of you who are willing to share my pain to check out the reaction to my Monday column, "Try a Mac? Why it won't hurt as much as you think." Reading between the lines of some of the TalkBacks, I see a five-letter word: CHEAP.

YES, DESKTOP LINUX is almost free and doesn't require tithing to Microsoft. But soon the desktop Linux folks won't have the free StarOffice to throw at me as proof of their platform's superiority and zero cost of entry.

According to published reports, Sun Microsystems, which bought the German-built multiplatform productivity suite a few years ago, is going to start charging for versions adapted to non-Sun platforms.

This means Sun has given up on the idea that giving away StarOffice would mess with sales of Microsoft Office. Sun now wants the program to pay its own way. StarOffice is a decent enough suite and is certainly worth the $50 to $100 Sun is expected to charge for it.

BUT I WONDER how many desktop Linux zealots will be willing to pay for StarOffice? My guess: not many. My perception of these folks--and it's very likely I am describing only a vocal minority, so if this isn't you, I apologize--is that they don't want to spend a dime on software and consider themselves deserving and even superior because they possess the high level of technical skill required to make Linux work.

How you build a vibrant computing platform when nobody is willing to spend money on it escapes me.

Running Linux on servers is different, mostly because the Linux that's available today is clearly capable of doing that job quite well. Server Linux is also becoming something the big systems companies seem to throw in as a way to sell expensive hardware, expensive server applications, and expensive services contracts.

MAKE NO MISTAKE: Linux servers are a cause for concern in Redmond and a source for happiness in data centers worldwide. Desktop Linux, on the other hand, is rapidly being assigned to the trash pile of computing history. Like scientific socialism, it will go down as an idea that sounded good on paper but didn't work in the real world.

If the proponents of desktop Linux are really honest, they will move to a Unix platform that has all the things Linux lacks: a great user interface, a large number of applications, support of a profitable major vendor, an industry guru who's taken extremely seriously, and even the cover of Time  magazine.

I'm talking about buying a Macintosh, of course. But running OS X would actually cost these Linux geeks money, and that's something I am not sure any of them are willing to spend. Still, if these people hated all things Microsoft as much as many of them proclaim to, you'd think rallying around Unix-based OS X would be the best way to advance their cause.

But only if they're willing to put some money where their much-too-loud mouths are.

As of the end of 2001 the ratio is approximately 3:1. According to Google, Macs represent 4% of users, Linux -  1% and all other non-Microsoft OSes - 4% See http://www.google.com/press/zeitgeist.html.  And Apple's elegant user interface and the quality of the kernel does matter. Scientists at places like NASA are unplugging their old Sun workstations and replacing them with Macs, not with Linux.

The only problem with Mac is its cost: Linux is running on a more democratic hardware supported by two giants: Intel and Microsoft.  In an interesting paper in  Boston Globe Online the author aptly had shown why OS X represents a threat to Linux on desktop:

Linux, a cheap, highly compatible substitute for the advanced Unix operating system, has seized more than a quarter of the market for heavy-duty server computers. But at most, 2 percent of desktop users are running the software, partly because it's notoriously difficult to use.

That makes Apple's Mac OS X operating system at least as much of a challenge to Linux as it is to Microsoft. Mac OS X is Unix, but with Apple's elegant user interface bolted on. Scientists at places like NASA are unplugging their old Unix workstations and replacing them with Macs. How long before Linux desktop loyalists abandon the digital wrestling match and switch to Apple as well?

The latest Linux release from market leader Red Hat Inc. should stave off a few defectors. While not exactly Mac-like in its ease of use, Red Hat 8 is far superior to earlier versions.

It starts with setup. Linux installations can be hellish affairs. There's the matter of laying out all the necessary hard drive partitions, for one thing. Then there's the question of compatibility - will your monitor, graphics card, mouse, CD-ROM drive all work? And even if they are compatible, how do you make sure Linux installs the correct driver?

In our test of Red Hat 8, none of this mattered. The disk partition process is automated now. As for compatibility, the software identified and self-installed all the vital peripherals on our test machine without incident. And there was none of this Microsoftian nonsense about software authentication. As a result, Red Hat is actually easier to install than Windows XP.

There's a new user interface called Bluecurve, a polished version of the Gnome interface that's familiar to Linux loyalists. Gnome's gaudier excesses have been tamped down a bit. The icons and menus have a more modest, graceful style, and a more consistent appearance.

As always with Linux, there's a lot of useful software built into Red Hat 8. The Web browser is Mozilla, the open source version of Netscape Navigator. While Microsoft Internet Explorer remains, for better or worse, the best browser out there, Mozilla holds its own for run-of-the-mill surfing purposes. There's Sun Microsystems' OpenOffice, with a spreadsheet, presentation graphics program, and a word processor good enough to use in writing this article. Boston's own Ximian Inc. has contributed Evolution, a personal information manager that does a fair imitation of Microsoft Outlook.

In short, a PC loaded with Red Hat 8 can handle about 95 percent of the average user's needs. This much software from Microsoft would cost about $400. But Red Hat 8 can be downloaded from the Internet for free. To get service and support, you have to pay for the software, but only $39.95 for the basic desktop version.

However, cheap is not enough. Red Hat 8 is still a ragbag of code, written by amateurs and part-timers and jumbled all together. And it shows. For instance, the feature for allowing you to share information with a Handspring handheld computer didn't work properly. A Red Hat engineer admitted that he wasn't sure of the reason, because the underlying software was written by somebody outside the company and he knew little about it.

Corporate users pay for Microsoft products largely because they get a decent level of support from the company. Because Linux isn't controlled by Red Hat or any other company, delivering the same level of service is far harder. But it'll have to be done.

There are other off-putting problems. The Bluecurve interface still has its share of kinks. For instance, sometimes open windows are too large to fit onto the screen. Certain functions still assume the user is a software engineer. Dialing onto the Internet, for instance, requires clicking ''Network Device Control.'' Now there's the first place the average guy would look. Indeed, the menu is crammed with programs that'll mean nothing to the typical user. The Red Hat designers should hide them to avoid confusing the newbies.

Still, Red Hat 8 is a major advance, and at just the right moment. Microsoft's new software licensing scheme has driven up the price of its software for thousands of its corporate customers. One survey from the research firm Giga found 36 percent of corporate software buyers were getting mad enough to consider switching to another supplier. Moving to Mac would require installing a lot of new computers, while Linux will run on any late-model PC. Which means that, in the elephantine struggle between PC and Mac, Linux still has a fighting chance.

The author cites reasons that Linux is not ready for everyone. Linux trails both MS-Windows and Mac OS X in terms of third-party vendor support; more people are familiar with those OSes than Linux; those other OSes have significant advantages in implementation of high-level integration between applications. Linux is making progress, not is pretty small while the enthusiasts continue to show signs of an Amiga Persecution Complex.

Decline and Fall of VA Linux -- VA Linux exists hardware business

VA Linux was undermined by warring internal factions, out-of-control spending and a management team hell-bent capitalizing on their IPO shares.  The result: VA Linux's ship  took too much water and surviving executives had found themselves desperately scrambling to keep the company afloat. I remember how Eric Raymond said about Linuxcare (sited from News Can Linuxcare stay afloat):

"Linuxcare's management screwed up big-time," said Eric Raymond, open-source luminary and a member of VA Linux Systems' board of directors. "They had a lot of good people at the line level, too. This was definitely a case of top-down incompetence."

Now it's time to apply this harsh words to Eric Raymond himself as well as to Larry Augustin and other members of VA Linux Systems' board of directors. 

In June 27, 2001 VA Linux too a drastic measure; it decided to exit hardware market. Afer reading this news I  got the feeling that this is the last desperate measure, doomed to be a failure.  Much like Michael Cowpland's "new vision" for Corel last year.  And we know how this move affect Corel as a company and Michael Cowpland as a CEO... On August 24, 2001 VA Linux stock felt below $2. And many analysts predict that the days of the company are numbered. Morningstar has given them just five more quarters.

Lets be realistic about LNUX (Score:4, Insightful)
by Ars-Fartsica on Friday August 24, @09:32AM (#2213187)
(User #166957 Info | Last Journal: Saturday August 18, @12:35PM)
The target market for proprietary SourceForge extensions is tiny. The market for SourceForge at all, even the free version, above and beyond plain CVS is small as it stands.

While its admirable for a company to strike out for new business, its probably time for the VA execs to fess up to the reality of it - the negative momentum on earnings is too much for the stock to bear. Once LNUX inevitably goes under $1, the dilution of the stock will bring the market cap to ridiculously low levels. Once the market cap gets under $80 million, the assets of the company are valued more than its valuation as a publically traded company (I believe VA has $83 million cash and securities).

Why not just sell off the assets and simply redistribute the funds to shareholders? Really, this isn't a slag on the company or its employees - the math is simply against them. Morningstar has given them five more quarters and then they predict it is all over for them.

I can't figure out why companies insist on spending every last dollar when its obvious that it isn't going to happen.

VA's dim outlook (Score:1)
by dmelomed (
dmelomed@home.com) on Friday August 24, @10:12AM (#2213369)
(User #148666 Info)
This will probably me moderated as flamebait, but anyhow.

VA didn't make much money with run-off-the-mill PC hardware. Sure they could capitalize on the dot-bomb hype of 2000 (when some places were too lazy to install Linux themselves, check hardware compatibility, etc, and were willing to pay VA for a box with preinstalled Linux). One would think that now for VA the services is where it's at, but if they can't even generate much revenue with the services what's left? Oh wait, we have developed a web application that was never meant to go commercial, but since now it might very well be our last chance to stay afloat, what the hell. And if that doesn't go well (I can't see how this can be as popular as VA would need it to generate revenue) it's definitely bust for VA.

The product isn't that great (Score:1)
by Anonymous Coward on Friday August 24, @07:57AM (#2212852)
It isn't like the product was that great.

The only selling point might be the ease of starting new projects. Even that isn't all that great.

The whole thing is basically just some basic open source software development tools haphazardly latched together.

Now is the time to create a backup copy of the sourceforge CVS archive somewhere safe.

Please.

Are they planning to sell buggy software ? (Score:4, Informative)
by chrysalis (
j&4u,net) on Friday August 24, @07:43AM (#2212814)
(User #50680 Info | http://www.jedi.claranet.fr)
Sourceforge is a marvellous thing for developpers and it helps a lot the free software community.
However, Sourceforge is very buggy. Sometimes the CVS server refuses authentication. Sometimes, uploading new releases is impossible. Sometimes, I have to authenticate dozens of time. And it doesn't like Opera.
Maybe VA should fix Sourceforge before selling it.

Paradoxically Linux Today comments were even more harsh:

Donna Lika Geepe'el - Subject: pot/kettle/black ( Aug 24, 2001, 05:12:31 )
Where shall I start.

When Wind River or Caldera do the same thing then this is posted all over VA's slashdot.

Or how about, "Code belongs to everyone" -- why is it going to be proprietary? Even a little bit of "freedom" lost is ... well freedom lost

And how can that silly ESR fellow stay on the board while that company is costing users their freedom?

Welcome to the real world!

Oh, and first :-)

Andrew Grygus - Subject: Gee, the Caldera business model . . ( Aug 24, 2001, 05:19:13 )
... seems to be catching on.

The world starts to look a little different when you have to meet payroll out of income.

www.aaxnet.com

Carl Rodin - Subject: bye linux ( Aug 24, 2001, 09:08:43 )
i used to be an opensource freak and i used to think that is was the way to go.
it isn't ; giving things away is plainly stupid. all linux companies in the world are dying or dead. even the smaller ones in my neighbourhood are starting to sell windows and sell opensource programs for mucho cash because they are falling down fast. there is no money in free things and we need money. without people paying simply what software is worth, companies won't have cash to improve the software and we get what we have on freshmeat; 6000 v0.01 of program blabla which nearly, almost functionality, but absolutely not the way people want it to be. Most OSS products never get finished, they go too slow and die without anybody even trying it out. Linux is a great system and it will be around for a loooooooong time, but if crazy utopia weirdos think anything great will happen when this 'everything must be free' stupidity remains then they are mistaken; all software and hardware companies supporting linux only and giving away software free to let people pay for services will be gone in one year.
James - Subject: leaving your core business is deadly ( Aug 24, 2001, 15:16:23 )
If VA would have stayed small, never gone public and sold well designed Linux boxes all would be well. If nobody wants pre-installed Linux(and some do) it still provides a compatability test. VA went big time and that is a huge risk for new investors.The only marking(and I stress marketing) edge Linux has over MS in many areas is lower cost.Linux is a good way to sell a Samba server much cheaper and at higher profit than a $3,500 100 client connect licence.Only a few non-MS proprietary software companies remain and I expect those will soon die as well. VA is really in trouble here.
Patrick - Subject: *Linux* ins't the problem ( Aug 24, 2001, 15:31:50 )
Linux is a great money making potential, and could develop into the most superior technology available.. presuming of course it was supported and organized business wise.

The community (Market???) is largely comprised of free loading prophets, majority of which contribute nothing is the problem.

How can any Linux company can even fathom surviving when the vast majority of its supposed supporters (Customers??? Ha!) will not only give a penny to support its own cause, but blast any distro that attempts to sell any of its technology and secure it.

Don't complain, You make it happen.

This is not rocket science, and has been predicted by everyone with the slightest business sense. It *is* happening.

Linux(most likely Debian) will soon be distributed via Cracker Jack and Cereal boxes in a grocery store near you.

Kent Nguyen - Subject: VA Linux and Slashdot hypocrite? ( Aug 24, 2001, 16:19:47 )
Linux One doesn't look so bad after all. It's hypocritical of Slashdot to influence the mass to go after Linux One like a mad dog going after a person. This was a malicious act to screw up a company. For this evil deed, I have no sympathy for VA Linux.

The community is starting to learn a valuable lesson in capitalism.

When I first read VA Linux SEC filing, it doesn't make sense at all. They have no way of differentiating themselves from the other players. You can't make money without differentiating. They were doom to start with.

Now that we have 20/20 hindsight, we can clearly see who are the winners. The winners are the people who make the hype happen. They are pretty rich now. They work for VA Linux.

If Linux One was in the picture, at least the money is better diversify.

--kent

But Eric Raymond managed to explain everything: it's actually not about betrayal of his own ideals, its about making money whatever it takes in short this reminds me Animal Farm:  

Eric S. Raymond: VA going proprietary? Naahhh...
Aug 25, 2001, 22 :10 UTC (86 Talkback[s]) (9437 reads)

(Other stories by Eric S. Raymond)
Date: Sat, 25 Aug 2001 02:24:41 -0400
From: "Eric S. Raymond" <esr@thyrsus.com>
To: lwn@lwn.net, editors@linuxtoday.com, malda@slashdot.org, editor@linux.com, editors@newsforge.com
Cc: eureka@valinux.com
Subject: VA going proprietary?  Naahhh...

VA's announcement that it would be selling proprietary add-ons to SourceForge has gotten big coverage [1], but there is less there than meets the eye. This is a change in tactics, not strategy.

What VA didn't say in the press release, and what Larry Augustin and the PR people knew in advance I was going to say on the community news channels, is the precise reason why this is happening.

What we've found out is that there is something of a disconnect, at the big corporate customers, between how the techologists and strategy people perceive open source and how middle management preceives it. The technology and strategy people, more often than not these days, actually get it. Middle managers, a more conservative group by nature and job description, often still don't.

This is specifically a problem because VA's sales guys often find themselves talking to middle managers who don't get it or only half get it. So they do their why-open-source-is-wonderful talk -- and the reaction they get is a sort of quasi-instinctive "uh, why don't we just download it from the web and install and maintain it ourselves instead of paying you to do it?"

Rationally, this is really pretty stupid. If you add up all the time and opportunity costs associated with having a bunch of your guys learn how to do this from scratch (and not necessarily doing it competently), renting VA's experts is clearly the smarter move. Usually the prospective customer knows that with the top of his mind, even -- but there are powerful instincts in the managerial underbrain pulling the other way.

So what do you do? Tell the customer he's being stupid? No, I don't think so.

What VA is doing instead is throwing a sop to those instincts by hanging some proprietary tinsel off the product. This makes it psychologically easier for Mr. Middle Manager to sign the check; he can think "I'm buying something real" -- as if bits on a disk are more real than the people-hours in the service contract that goes with it. But there it is; most sales and marketing is founded on the reality that people aren't very rational.

If we were still in a boom time, we might still have the luxury of perfect doctrinal purity. But face it, people, it's pretty much raining crap out there macroeconomically. Capital spending is in the tank and it's probably going to get worse before it gets better. Until things turn around, Mr. Middle Manager is going to be even more conservative than usual -- and thus more likely to be penny-wise and pound-foolish in the way that particularly hurts us.

We can hold on to the open-source vision, but under these circumstances we've concluded that we can't afford to be proud about how we pitch it. VA is a damn fine outfit with a lot of good people, but companies just as promising have already gone to the knackers' yard. It won't serve anybody if we go the same way. So we'll take any edge we can get, even if that means we MPL some stuff instead of GPLing it and have to have a few meg of closed code lying around.

And if you think VA has turned into just another corporate greed machine, ask yourself this -- how many companies would encourage one of their board members to post anything as brutally candid as I'm being here? But Larry Augustin knew I was going to do this and he smiled. We're still the same people and the same company that earned the Linux community's trust. I hope we'll never lose that. I'll work to be sure it's so.

So the real news here is that VA is still about open source -- if I didn't believe that, I'd be off their board of directors so fast it would make your head spin. We're just being pragmatic about how we sell the idea. Change peoples' behavior first, show them the advantages in doing so, and their hearts and minds will follow.

The religious fanatics out there won't be appeased by this, I know. I'm sure there will be cries of "Treason!", "Betrayal!", "Apostasy!" and so forth. We knew that. We'll stand it -- because surviving and thriving so we can continue to be the friends of open source is the most important service we can do for the community we come from.

As one of the LinuxToday's readers responded:

PR Spin
Sorry ESR, but this aren't gonna cut it. Face it your company sold out. I can't believe I actually bought a couple rackfulls of your overpriced servers back in the day, if I had known you where gonna sell out I woulda just bought em from Dell. I think ESR is fast on the way to becoming a joke.

So tell me this...how does the closed source version of Sourceforge increase my "flerbage"? *snicker*

ESR: sellin out for penny stocks
Wow you can't by that kind of PR power...oh wait they did. Hand a guy a pile of worthless stocks and he'll use up any good will he had with the community just to peddle some closed source software, haha.
  
gnuts
Aug 25, 2001, 20:07:01
 
    Maybe, but
.
 

 

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