The real challenge to Microsoft

What is LinuxInvented in the mid-1990s by Linus Torvalds, a young Finnish student at the University of Helsinki, Linux is a computer operating system with a difference. Unlike systems such as Microsoft Windows or the variants of Unix, it is an "open source system", which means that its codes are freely available to anybody who wants to download them. The software is under constant development by a large community of programmers, who deliver upgrades and fix bugs via the internet. It is also designed to run on almost any computer, which makes it a cheap, flexible option for big computer users. So far, Linux has mostly been used to run servers, the back-office machines that handle email, web pages, file sharing and printing.

Who uses LinuxUntil recently, it was little known outside the tech sector, but now it is gaining acceptance elsewhere. According to one enthusiast, "2001 was the year of interest, 2002 the year of pilot projects, and 2003 is the year of deployment". Linux now has more than 25% of the market for server operating systems. The market used to be dominated by Unix and Windows. It is also used by a third of all public websites. Companies that have embraced Linux include TimeWarner, Merrill Lynch, Morgan Stanley and Boeing. Linux is developing a similar following in the public sector: municipal governments from Munich to Tucson now use Linux, and the UK Government now insists that an open source solution is included in every project evaluation.

Why is Linux proving so popular?

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Firstly, it's cheap. Since the source code is free, users don't have to pay licence fees to developers, as they do with proprietary systems such as Microsoft Windows. Moreover, Linux allows users to run complex applications on low-cost ordinary computers, rather than expensive Unix servers. Firms such as DeutscheBank and Morgan Stanley claim to be seeing five to 15 times better price-performance running applications on ordinary computers using Linux, compared to the same application on a mid-range Unix system. Finally, governments are keen to promote Linux as a rival to Microsoft, whose increasing dominance of the software market is uncompetitive. Many users also want an alternative to Microsoft, particularly in the light of all the various security problems with Windows products over the last year.

Is anybody making money?

Not really. The industry has so far struggled to come up with a viable business model, given that Linux is available for free on the internet. Indeed, it is this that has been holding Linux back, say industry watchers: potential buyers can't be certain vendors will be able to continue to support their products. But there are signs that is beginning to change. Red Hat, one of the principal distributors of Linux, posted its first operating profit in the third quarter of this year, having shifted its business from simply providing free downloads to combining the Linux system with other services, such as access to updates and technical support. Equally importantly, some of the world's largest computer manufacturers, such as IBM and Hewlett-Packard (HP), have embraced Linux and are developing Linux versions of the applications needed by corporate computer users.

How has Linux affected the industryCompanies that were quick to embrace Linux have suffered the least damage. IBM first started building computers that ran on Linux in 1999, and now offers Linux across its entire range of computers, from the mightiest mainframe to the lowliest PC. Others that have done well selling Linux servers include HP and Dell. The losers have been companies that support rival proprietary operating systems. Hardest hit have been Unix-based systems. Sun Microsystems, for example, has seen a slump in server sales as users turn their backs on its expensive Solaris system. Microsoft has not been so badly affected, since Windows servers tend to be cheaper than Unix rivals and the server business is only a small part of Microsoft's business. But industry watchers say that Linux is undoubtedly a threat to Microsoft, and in time could even challenge Windows in the desktop PC market.

How have these companies respondedMost hardware manufacturers are embracing Linux. Sun now offers Linux servers alongside its own Solaris systems. But software groups, who have most to lose, have been more robust in response. Microsoft has attacked Linux, labelling it a destroyer of corporate rights. Chief executive Steve Ballmer calls Linux "a cancer that attaches itself in an intellectual property sense to everything it touches". And SCO, an Utah-based software group that owns the rights to Unix, is attacking Linux through the courts. It has launched a $1bn lawsuit against IBM, claiming that the world's largest computer maker has infringed its copyright by using Unix code in some of its Linux offerings.

How will this affect LinuxSo far, there is no sign that the lawsuit has led to a slump in sales of Linux systems, largely because firms, such as HP, are indemnifying customers against any breach of copyright claims. But if SCO wins its claim, the implications for Linux would be immense: users could be forced to pay licence fees to SCO, opening the doors for others to make similar cases. Indeed, as Linux becomes more established, such challenges will surely be more frequent. Linux is developed by thousands of programmers, so it's impossible to keep tabs on their processes. As it gets more established, the ideal of freely available open source may become harder to defend.