IBM: Kill Bill

Daniel Lyons

June 7, 2004

Linux represents the biggest threat that Microsoft has ever faced. No wonder IBM is spending billions to promote it.

How is it that for eight months a team of up to a dozen IBM consultants has been toiling in the data centers and computer rooms of the Munich city government--free of charge? Having goaded Munich into embracing open-source software, IBM is helping it plan a migration of 14,000 computers off Microsoft Windows and onto the operating system known as Linux. Never mind that IBM doesn't sell Linux, which is distributed free. And never mind that Munich officials say they're not committed to buying IBM hardware or consulting services, despite all IBM's free help.

Though IBM did not invent Linux, does not distribute it and earns nary a penny on it, the computer giant (2003 sales: $89 billion) is spending billions in a crusade to make Linux the world's most popular operating system. All told, more than 12,000 IBMers today devote at least part of their time to Linux. IBM has invested millions in two leading Linux distributors, Red Hat and SuSe. It has spent millions more to cofound and fund the nonprofit organization that oversees Linux development. In developing nations IBM has opened 20 Linux training centers, where it schmoozes government ministers and explains how Linux can create jobs for the young.

Back home, Armonk, New York-based IBM blasts Linux commercials on television; one spot likens Linux to an omniscient child prodigy who resembles Eminem. The maker has devoted 200 programmers to writing Linux code, only to share it free with the world. It conducts Linux feasibility studies for customers and even helps software makers rewrite their programs to run on Linux.

To hear IBMers tell it, all this effort is a matter of giving more choices to customers tired of the Microsoft monopoly. "No one wants to be monopolized and controlled. Customers have been dominated by a single vendor. Linux gives you a chance to unlock that," says James Stallings, general manager of IBM's Linux business. "We've got 50 more deals like Munich going right now."

But IBM has a broader agenda: undermining Bill Gates' company. Here lies the next big battle in tech, pitting two erstwhile allies against each other in a fight to rule the computer industry in the years ahead. As big corporate customers seek to lash together worldwide networks and imbue them with more online commerce, a new $21 billion market for Web-linked software has emerged.

Microsoft wants to dominate this business and make it a Windows world. IBM has embraced Linux and in doing so has stoked the biggest threat ever to confront the Microsoft monopoly. While IBM's products run on Windows, it wants its customers to see how nicely they would run on Linux as well, using the free operating system as a lure. "Like getting free bread in a restaurant," says Irving Wladawsky-Berger, vice president of technology and strategy at IBM and a pivotal proselytizer of Linux inside the company. Ultimately, customers may not need Windows at all.

In the previous big battle in the computer industry, for control of the PC revolution and the Internet craze it spawned, IBM lost badly to Microsoft. It had anointed Microsoft as a future titan by picking it to provide the operating system software for the first IBM Personal Computer, which debuted in 1981. Back in 1986, when Microsoft went public, it was worth less than $1 billion, compared with $93 billion for IBM.

In the ensuing years IBM struggled in PCs, lost a few billion dollars and watched a huge portion of the industry's profits flow to Microsoft. By the early 1990s IBM had spent more than $1 billion to develop its own PC operating system, OS/2. It realized too late that Microsoft's endorsement of OS/2 was hollow and that Windows would send OS/2 to the junk heap. Some IBMers still view this as a betrayal. Recalls one ex-IBMer from the Linux group: "We had a saying at IBM that the ghost of OS/2 still haunts the halls."

Cut to today: Microsoft's market cap has roared past IBM's (see chart), to $280 billion, making Chairman Bill Gates the richest man in the world. IBM's market value is $146 billion. These days IBM probably makes no money from selling PCs--while Microsoft hauls in nearly $90 per machine just on the operating system, up from $10 in the pre-Windows days of DOS.

You couldn't blame some IBMers for seeing Linux as fitting retribution. "Today, because of Linux, people are buying IBM with Linux who would have bought Sun, or HP with Windows," says Wladawsky-Berger. "Is there schadenfreude? Of course. How can there not be? There are wounds from the past." Then he adds: "But it would be silly to gloat if we weren't getting revenues. Linux is helping us win business."

IBM's embrace of Linux attacks Microsoft at its very foundation. Windows provides 40% of sales and 65% of operating income for the software powerhouse. "IBM is trying to drive the value out of the operating system," says Martin Taylor, a general manager at Microsoft. "Idon't think it's a direct attack on Microsoft--but we are definitely a fairly big casualty."

Last year 828,000 servers were sold with Linux instead of Windows, denying Microsoft up to $1.7 billion in potential sales. The pain has just begun. Sales of Linux servers grew 48% last year to $3.3 billion, while Windows servers grew 11%to $15.5 billion. By 2008, predicts market researcher IDC, Linux server sales will reach $9.6 billion, versus $21.7 for Windows servers. Worse yet, while Linux has so far been confined to servers, developers now are pushing the free operating system as a way to run PCs, too.

Officially, IBMers insist that hurting Microsoft isn't the point. Wary of worrying customers who want to stick with Windows, IBM says it continues to support that platform and that its relationship with Microsoft is in fine shape. It's just that the Linux tsunami is overwhelming the globe, and IBM has no choice but to surf it. "If you become convinced that something is going to happen whether you like it or not, you are far better off embracing it," says Wladawsky-Berger.

But in fact IBM isn't simply riding this wave--it is adding to its momentum. And that has indeed strained IBM's relations with Microsoft, some Microsofties say. (Microsoft itself refuses to write Linux versions of its myriad applications programs.) Microsoft now claims stronger ties to hardware makers Dell and Hewlett-Packard, with whom it meets regularly.

"I don't think we've had those meetings with IBM in a while. We don't have the same level of partnership with IBM," says Microsoft's Taylor. Microsoft makes joint sales calls with Dell and HP "all the time, every day," but it "rarely" makes sales calls with IBM, says Kevin Johnson, a group vice president at Microsoft in Redmond,Washington.

That IBM is involved with Linux at all owes to Wladawsky-Berger, a wiry Ph.D. physicist who joined IBM in 1970. In the 1990s he put together IBM's successful Internet strategy. In 1999 his spider sense began to tingle again: He kept hearing about this thing called Linux.

Created in 1991 by a Finnish college student named Linus Torvalds, Linux was a rather primitive operating system popular among computer hobbyists. Wladawsky-Berger saw a key strength in Linux: its ability to run on any kind of hardware, unlike Windows, which runs only on machines that use x86 chips made by Intel or Advanced Micro Devices.

For IBM, which previously had to write software programs for four different operating systems inside IBM plus multiple versions of Windows, as well as others, Linux could be a one-size-fits-all solution running on PCs, midrange servers or even mainframes. Customers, too, would gain from having software that runs on a unified operating system.

Another part of Linux's appeal was its unfinished nature. Over the years Microsoft has added layers on top of Windows, things like its SQL Server database, crowding out rivals. Now it hawks its .NET ("dot-net") Web programs atop Windows. Because Linux lacked those pieces, Wladawsky-Berger reckoned it gave IBM a better chance to sell its alternative, Websphere, as well as its DB2 database. And IBM could generate hefty consulting fees installing and customizing Linux-based hardware and software for clients.

Wladawsky-Berger pitched Linux to Samuel Palmisano, then chief of IBM's server group. (Now IBM's chief executive, he declined to be interviewed for this story. An IBM spokeswoman also refused to double-check many of the facts in this story.) IBM granted $1 billion in 2001 for Wladawsky-Berger to build a Linux business. Inside IBM programmers began racing to rewrite virtually every IBM application to run on Linux. On the hardware front IBM created teams to optimize its computers, including mainframes, to run Linux.

IBM Global Services trained 3,000 people in Linux and launched a practice to help customers migrate to Linux. IBM also began using Linux in its own data centers. Linux now powers more than 3,400 servers inside IBM, including machines that run IBM's state-of-the-art 300-millimeter-semiconductor factory in East Fishkill, New York. Now IBM is considering erasing Windows from its desktops and moving them to Linux, too.

IBM also began working to improve Linux itself, joining the "Linux community" and submitting suggested improvements to Linux's progenitor, Linus Torvalds. In 2000 IBM helped found the Open Source Development Lab, a nonprofit organization that employs Torvalds and serves as ground zero for Linux development. OSDL's chief executive, Stuart Cohen, is a former IBMer. The chairman of OSDL's board, Ross Mauri, is an IBM executive.

Back then Linux lacked features that corporate customers need, like strong security and support for computers with multiple microprocessors. So IBM has created 45 Linux tech centers in 12 countries, where programmers crank out Linux code. These are not the hippie hackers who created the early versions of Linux.They are experienced engineers with backgrounds designing IBM's own operating systems, including AIX, its version of the Unix operating system.

IBM also has built close ties to the two leading Linux distributors, Red Hat and SuSe. IBM was an early investor in Red Hat, and last year it invested $50 million in Novell, which acquired SuSe, Red Hat's chief rival. Smart move: By supporting two distributors, IBM can keep either one from becoming the next Microsoft.

Next came application software developers. Linux cannot succeed unless a sea of applications can run on it. Toward that endIBM has been helping companies move their applications to Linux. Software maker PeopleSoft has rewritten 170 applications to run on Linux and bundles them with IBM software and hardware--after receiving assistance from IBM. Consulting firm Sapient accepted marketing dollars and discounted machines from IBM to rewrite a set of its applications for Linux and sell them on IBM servers instead of on machines made by Sun Microsystems. "IBM put an attractive deal on the table for us to switch," says Benoit Gaucherin, chief technology officer at Sapient in Cambridge, Massachusetts.

IBM dangles similar incentives before hundreds of tiny systems integrators who tailor their software to accounting, health care, insurance, retail and other industries. These little guys get extra bonuses from IBM if they push solutions on Linux instead of other platforms.

Next stop: developing nations like Brazil, China, India and Russia. Visiting Russia in February, IBM's Stallings, the Linux czar, met government ministers who want to put Linux systems into 50,000 schools. In China officials want to use Linux in 12,000 post offices. Says Stallings, "Customers want an alternative to Windows. This movement is unstoppable. There is unbridled enthusiasm."

IBM seems to go to any length to push Linux into customer sites. Last year at the U.S. National Weather Service, IBM offered a free demo machine and a guarantee to keep its systems up-to-date, even writing software drivers for components IBM doesn't build, such as video cards. The result? The NWS spent $3 million to buy a thousand IBM desktop machines running Linux, replacing 900 HP Unix workstations.

For online brokerage E-Trade, IBM offered access to scientists in its prestigious research labs, including Paul Horn, the senior vice president who runs all of IBM Research. "IBM opened up the whole company to us," says Joshua Levine, chief technology officer at E-Trade. This, even though E-Trade buys Linux servers from Dell and HP, not just from IBM.

IBM says the Linux crusade is boosting business. Last year IBM's Linux-related revenues grew 50% to more than $2 billion. Even IBM's supposedly moribund mainframe hardware business grew 7% to just over $3 billion, thanks to Linux, which shipped on 20% of the mainframe horsepower IBM delivered last year.

Customers like Boscov's Department Store, a 41-outlet chain based in Reading, Pennsylvania, and Mobil Travel Guide have moved applications off Windows servers and onto IBM mainframes running Linux. Though mainframe hardware is expensive, renting the use of these big machines with free Linux software can be cheaper than buying a network of Windows servers--25% to 30% cheaper, in the experience of Paul Mercurio, chief information officer at Mobil Travel Guide in Park Ridge, Illinois.

Linux is also speedier and more reliable than Windows, say the techies at St. Jude Children's Research Hospital in Memphis, Tennessee, an IBM customer, which last year switched some servers from Windows to Linux. In addition the hospital's center for biotech research last year yoked together 140 IBM servers, each with two Intel chips, to create a Linux über-machine that ranks as one of the 500 most powerful computers in the world, though it cost less than $1 million to build.

Undermine Bill Gates? Who, me? Says Wladawsky-Berger, "All we're saying is let's create a more competitive environment and see what happens."

To Microsoft, IBM's championing of open-source operating systems may seem a bit hypocritical. If Microsoft is to be portrayed as an evil empire plotting to lock customers into proprietary software, it should be remembered that IBM's mainframe monopoly wrote the book on how to do that; it's why the federal government spent a decade prosecuting an antitrust case against IBM (dropped in 1982).

And there is nothing to prevent IBM from turning its Linux installations into a lock-'em-in business for other software. "Companies are getting bamboozled into this IBM story," says William F. Zachmann, a longtime IBM-watcher and the president of Canopus Research in Duxbury, Massachusetts. "IBM snookers them in by giving them a free operating system, then they pay IBM for overpriced hardware and consulting services."

If free software is so great, Zachmann asks, why is IBM still charging money for its Websphere software and DB2 database? Why did IBM take in $14.3 billion selling software last year? "IBM's Linux pitch is either stupid or insincere. I think it's a little bit of both. It's not a sensible strategy for IBM in the long run," Zachmann says.

Indeed, all the billions IBM has pumped into Linux so far haven't bought it a dominant market position. IBM ranks third among sellers of x86-based Linux computers, with a 20% share, versus 28% for HP and 22% for Dell, says IDC. Rivals gloat that IBM's snazzy Linux ads are driving business to them, not IBM. HP claims it did $2.5 billion in Linux-related sales last year (25% more than IBM) and has done it without alienating Microsoft. "IBM has taken a religious view. Their message is Linux, Linux, Linux. Microsoft understands HP is not running a religious jihad," says Martin Fink, vice president of Linux at HP.

HP even uses Linux to steal away IBM customers. Charles Schwab & Co., a big IBM customer that runs IBM mainframes and an IBM "grid" computing system, last year replaced hundreds of IBM Unix servers with Linux machines from HP. "IBM was not exactly thrilled," admits David Dibble, an executive vice president at the brokerage.

Nor has IBM's Linux crusade put much of a dent in Microsoft. Windows still ships in 70% of x86 servers versus 17% for Linux. The December 2003 quarter was Microsoft's best ever, with revenue topping $10 billion, up 19% from the year before. And Microsoft has $56 billion in cash.

Worse yet, by blowing on the embers of the open-source movement, IBM is helping create a wildfire that could burn down its own software business. Mimicking Linux, new companies are sprouting up to install low-cost, open-source alternatives to IBM's programs. There's MySQL, which creates databases, and JBoss, which makes Web server software.

"IBM only supports open source when it helps them steal market share from Microsoft," says Marc Fleury, founder and chief executive of Atlanta-based JBoss.

Wladawsky-Berger is betting that IBM can make money selling software and hardware around those free layers. "More money will be made in services and less in acquiring the software itself," he says. "Make no mistake: This is a business." Could Linux shift the balance of power in the computer industry to IBM's favor? Wladawsky-Berger suggests Microsoft has made a blunder by fighting Linux instead of embracing it. "For five or ten years Microsoft will continue to do very well," he says. "But perhaps they will become more of a legacy business, like our mainframes."

For 20 years Microsoft has outearned, outsmarted and outmaneuvered IBM. At long last IBM may have found a way to get even.

It's Payback Time


© 2004 Inc.