April 22, 2019

The Yin and Yang of Open Source Commerce, Part 4

The Competitive Situation

  • November 4, 2005
  • By John Terpstra


So far in this series of articles, it has been demonstrated that there is a large and growing global IT market. The bulk of Linux business opportunity is demonstrably in the SMB/SME marketplace, a market that is presently under-serviced by Linux companies. The nature of the market as a whole has been discussed, and in this concluding part of the series, the competitive situation is briefly mentioned so as to round out the argument that it is time for seriously profitable Linux business activity from businesses that know the rules for success.

A business that earnestly wants to gain market share will choose those segments that offer rapid product uptake, economy of scale, short repurchase cycles, and a diverse distribution channel that can offer a suitable defense against retaliatory action from incumbent competitors. Beyond the 50,000 global enterprise businesses there are some 30+ million SMB/SME businesses. An incumbent competitor can mobilize a small team to defend themselves in 50,000 customer sites, but even the largest company in the world cannot long afford to retaliate in a large customer base.

Could it be possible that Microsoft customers are not happy with the products they have been sold? Perhaps virii, worms, and spam are taking their toll on the established market for MS Windows based products. If this is correct, then Microsoft is caught in a race against time to bring out a product that can be used to shoehorn customers and to lock them into a long term software service commitment.

Additionally, we may observe that Microsoft's sensitivities in respect of Linux are well founded. It is possible that Microsoft's attempts to counter Linux in the enterprise market is nothing more than a plan that serves to buy more time in the SMB/SME market, where the vast bulk of the company's profits are obtained. If this is true, they may be using the anti-Linux "Get the Facts" strategy as a smokescreen while they dig deeper trenches in which to embed their business before the Linux vendors wake up to markets outside the enterprise.

Microsoft's presence in the enterprise market is not as strong as it is in the SMB/SME market. The enterprise market is the stronghold of the UNIX players. Microsoft's foothold in the enterprise market is undermined by the level of technical competence of IT staff in large businesses. In the SMB market there is little to no on-site expertise; these sites depend on outside contractors and value added resellers (VARs) to provide the technical support needed to keep information systems operative. Traditional Windows VARs have not embraced Linux to the same degree that the more technical consultants have done.

Over the past two years, Novell has started to rediscover their roots. Novell rose to fame as a result of its efforts in the late 1980s and early 1990s to build a strong reseller and support network for NetWare file and print service products. Novell ran regular partner meetings at which they taught VARs how to build and manage a service business. This was a successful strategy for several years.

When NetWare 4.0 was released, Novell decided to milk the now committed VAR channel by demanding complete re-training and re-certification. At the same time, they started to enter into direct sales deals with the major hardware vendors so they could sell servers that had NetWare pre-installed. Overnight, Novell started to compete with the very channel VARs that had helped them to build their business. This competition (or more accurately--channel conflict) came at a price. VARs lost critical support revenue because the hardware vendors sought to sell support agreements to provide professional services for network installation and management.

This made many NetWare VARs very unhappy. The timing was bad for Novell because this happened just as Microsoft Windows NT4 started to gain market inertia. Microsoft saw the light and moved into the breach that Novell had created through channel conflict. It did not take long before Microsoft also saw opportunity to abuse the VAR channel in the same manner. They made training and certification a profit center and introduced the same style of channel conflict as Novell had done earlier.

Another example of the consequences of channel conflict can be seen in the old Santa Cruz Operation (SCO), who acted the way Novell had done by dictating to the channel in a manner that was prejudicial to their educational and reseller VARs, with the same predictable results. SCO in effect undermined their own business and then blamed to loss of business on Linux. It is no wonder that SCO VARs actively embraced Linux in the wake of the damage done to them by the company they had helped from its earliest days.

When SCO introduced UnixWare 2 to the reseller channel, they advised VARs they would need to complete re-training and re-certification to remain authorized. This practice of coercing resellers is not unique to the companies mentioned, it is a practice that has been far too common in industry.

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