.comment: Making Money on Free Software?

By: Dennis E. Powell
Wednesday, November 29, 2000 08:37:26 AM EST
URL: http://www.linuxplanet.com/linuxplanet/opinions/2708/1/

Is anybody actually doing it?

On the ride to Washington for Thanksgiving, my wife and I were amused by the fact that my company (which comprises: me) has actually made money from Linux. I write books about it, the occasional article, this column. These things cost me less to do than I am paid to do them. Ergo, I make money from Linux.

Which caused me to wonder if maybe I'm turning more profit from Linux than is, say, Red Hat Software, which, when it posts earnings next month, is expected to lose 2 cents per share, according to the analysts. So I did some research. Other publicly traded Linux companies, VA Linux and Caldera, are not listed among earnings estimates (they're relatively new to the scene), and Corel counts Linux as but a small part of its business and suffers afflictions that would skew the figure anyway.

I ended up with no evidence that any of the Linux companies that are publicly traded is turning a nickel's profit. The non-public companies I've talked with are facing hard times as well. One or two are just about out of money, with not much coming in. There may be some others--companies that resell books and T-shirts and distributions at discount--who are doing okay.

When I've interviewed people with companies that propose to make money from free software, I've always asked them how they plan to bring this about. Some, such as the highly motivated theKompany.com, say up front that they're selling the box and the book. Some say that they plan to offer value-added services--for instance, Helixcode hopes to become what amounts to a content provider, though they plan to do it seamlessly.

The Linux distributors, who sell the CDs plus the box and the book, themselves have hit a wall because you can purchase the distribution on CD for a couple of bucks, or download it, and buy a better book about it somewhere else. So they're trying other things as well. Caldera is, for instance, aiming for the enterprise and has done a great deal of work to make its distribution attractive to the business (which isn't all that likely to shop around for a $2 copy of a distribution and no technical support). Red Hat is banking--or, rather, hoping to bank--on the Red Hat Network.

VA Linux, like others, hopes hardware that works with Linux and preloads that are nicely tuned to that hardware will lead the company to profits.

All of which is small comfort to those who have invested in these companies.

The steep ride down

Anyone who has followed Linux-related business events for the last couple of years remembers last year, when Red Hat Software had its initial public offering. It was the darling of the market for a little while, during that weird and brief period in which anything that smacked of technology sold for ridiculously high prices. Some Linux contributors were offered the opportunity to buy Red Hat at its initial public offering price. Some had difficulty doing so. They were angry then. They aren't anymore. Though Red Hat did rise to more than $150 per share and even had a 2:1 stock split early this year, based on share prices at the close of business Tuesday even those "lucky" IPO buyers have lost money, were they to sell their shares right now. Red Hat share prices have dropped 92 percent since the beginning of the year.

(Analysts opine that Red Hat shares will oneday be worth $34, and they rate it what they call a "moderate buy," and at its current price of less than $8 per share, it may well be.)

Caldera has similarly been hammered. After its IPO in the spring, it rose to more than $25 per share. Tuesday, it closed at a little more than 10 percent of that price. Brokers say not to sell it, but not to go out of your way to buy it, either. V A Linux, another Linux company that went public this year, soared to more than $240 before the sled left the top of the hill; Tuesday it closed at $11.19. Some brokers rate it as a moderate buy, while one says it's a strong buy.

So while some people have made money off of Linux equities, by selling them, a whole lot have lost money.

Before we go much farther, a couple of things have to be noted.

A good friend who now lives in a gorgeous 18th-century house on a huge farm in a very trendy section of New York once told me that when investing "you should buy what you know." He meant that if you're familiar with an industry, you have a leg up in picking the winners and eschewing the losers. The entire stock market flung down and danced upon this rule for a couple of years, buying into buzzwords: Internet, networking, fiber optics, Linux. They thought that this was the wave of the future, and they were right. They thought that heaving huge amounts of money blindly at it all would yield vast and boundless profits. And they were wrong. This fall, some sort of sanity returned, and the entire sector all but collapsed.

A dangerous situation was compounded by the fact that the biggest generation in the history, the baby boomers, had a record amount of retirement money to invest and an unprecedented percentage of them were doing it. The simple law of supply and demand tells us that when a greatly increased amount of money is chasing a relatively fixed number of shares, share prices will skyrocket. A lot of this money was being managed by 25-year-old fund managers who had never lived through an economic downturn.

Much of that retirement money is now gone, thanks to those managers and to the law of supply and demand compounded by the need of fund managers to produce growth. (A good investment right now might be a bar in the vicinity of Wall and Broad streets in New York City.)

But a loss is not a loss until a transaction has taken place. If you buy a share for $10, watch it rise to $100, and watch it fall to $10, you haven't lost anything. Anyone with any sense at all is not buying shares to turn a quick profit by selling it when it appreciates, but instead getting it for the long haul, waiting for the company to become profitable and for share prices to rise, resulting in a good investment. Those who bought VA Linux for $242 will wait longer for that to happen than will those who bought VA Linux for $11.19. It might ultimately happen, though. (Day trading, meanwhile, is for idiots who would be better advised to load up their money and head for Las Vegas, where the odds are better and at least there's a good time to be had.)

If I were buying shares (which I do not do in companies about which I write, because it would be unethical to do so), I would probably be putting some money in Linux companies right now. A thousand bucks will get you 125 shares of Red Hat or 400 shares of Caldera. Twelve hundred bucks will bring you a hundred shares of VA Linux. I don't know anyone who thinks that Linux share prices are there to stay.

But even that is not a sure thing.

The dotcom terror

It has been published all over the place this week that dotcom companies--Internet sites--are firing people right and left because, big surprise, they've run out of money, aren't making any money, and can't find any more venture capitalists loopy enough to dump more bread down the rat hole. Some are profitable, but these are gems indeed.

And it is undeniable that a lot of people dreamt up some ideas for web sites, raised a lot of money from investors who paid no attention to my wealthy friend's rule, partied like it was 1999 (because it was) and essentially squandered the money. Even Amazon.com hit a cash crunch earlier this year; a friend tells me of a golf game interrupted because the others in the foursome, investment bankers, had to rush to an emergency teleconference to come up with several hundred million dollars. Amazon.com decided to rule the world, and that takes money, which it had apparently spent before it actually had.

A whole lot of Internet companies went into business with no plan ever to actually make a profit, at least none that could illustrate in any cogent way how profitability was to come about. Little wonder that they're struggling now. Truth be known, struggling is a sign of relative robustness--a lot are gasping like a fish ashore.

Which brings us back to the fundamental question: How does one make money from free software?

It would be nice to lay out a formula for it, and I expect that in three or four years we'll be able to point to one or two successful ones, slap ourselves upside the head, and say, "but of course!" Right now, it's not so simple. The idea of free software was cooked up by people in windowless rooms in ivory towers who are paid to--well, we don't quite know what they're paid to do, but it's apparently something sufficiently pristine as to avoid offending their delicate sensibilities. At least some teach college, and at least one I know of devotes his class time at an Ivy League school to describing what a wonderful fellow he is (as well he might, because it's not something you'd pick up immediately and it's not something that many of his students pick up after a semester of lectures) and what a terrible thing the idea of property is.

This makes it tough, as does the philosophy that says it's a Bad Thing when companies employ people and produce a product which they sell for money that is then distributed among employees, shareholders, and product development.

But I think that the Linux companies, at least some of them, have a better than even chance of succeeding despite the potholes and barricades. Here's why: They're committed to making it work. They're hard-working. Though some of them were maybe a little profligate after the injections of money, either by venture calitalists or IPOs, I don't think any has an immutable corporate philosophy of reality denial. They'll adapt.

As Kevin Reichard noted this week in his editorial, it would be a very good idea if Linux were to fragment somewhat. I suspect that survival will demand that this take place to a certain extent. Caldera already offers eDesktop and eServer products; problem is, they're not all that different. (And as a practical matter, within distributions there ought to be more choices, better described, as to what gets installed from the CD. A 10-page pamphlet describing these--"With Linux, you are likely to download and compile source code, which is much easier than it sounds. If you add this group of packages, you'll be able to do this." "If you want to have a web site on your machine, or an email server, or otherwise provide services to other computers and have the daemons that are necessary to do so started automatically at bootup, add this group of packages."--could allow much finer granularity to the new and probably clueless user.)

It is a commonplace that the producers of good software are terrible at selling it, and the producers of lousy software are great at selling it. Linux, which has broken many molds, will have to break this one if it is to become an industry. Whether it will remains to be seen. My guess is that it will, though there will be some companies that fall by the side.

But enough of that. I can show a profit. I'm off to prepare my IPO.