Linux in 2004

19 Pages   |   5,328 Words

Linux in 2004
Thriving Business in a Competitive Environment

Executive Summary. 3
Introduction. 4
Linus Torvalds and His Idea of Linux. 4
Support from Red Hat, IBM, HP and Others. 5
Microsoft’ Contribution. 5
Linux over the Years. 5
The Problem.. 6
Income Statement Analysis of Linux 2002 and 2003. 7
Industry Analysis. 9
Pros and Cons of Microsoft and Macintosh. 10
Microsoft. 10
Macintosh. 10
Comparative Income Statement Analysis of Competitors. 11
Ratio Analysis for Red Hat. 12
Comparative Ratio Analysis. 13
Market Share. 14
Positives of Linux in Comparison to Competitors. 15
Would Linux Continue?. 16
Recommendations. 17
Conclusion. 18
2011 and Linux. 18
References. 19 

Executive Summary

This report is an analysis of a case study on Linux in 2004. The case study has been written by Pankaj Ghemawat, Brian Subirana, and Christina Pham. This case study entails about the emergence of Linux and its fast progress against the industry giants like Sun Microsystems and Microsoft who had been in the market for long. The idea that Linux came up with regarding technology was that of open source servers. This new array of technology took the industry by surprise.
Initially, Sun and Microsoft complemented the emergence of Linux positively, not realizing its strengths and how big a threat it could pose to them. Over time, Sun and Microsoft realized Linux as their biggest competitor as it was eating out on the share which previously they used to enjoy. Another problem was the shifting thoughts of consumers, be it individual consumers, small or medium organizations, big organizations or governments, they all considered open source to be a better alternate instead of proprietary source codes.
Open source codes gave them security and satisfaction that they had a level of authority over the software that they were using and their level of dependency over the parent company was reduced. This report is a summary of the case itself and also an insight into the possible options that Linux can come across in near future. The report answers questions like, will Linux be able to capture greater market share or maintain the current market share growth over the long run and wipe out or at least reduce the monopolized powers of the giants like Microsoft and Sun Microsystems.
Further the report includes analysis of the exhibits of the case study and predicts the future direction for the companies or how they should act in the face of such situations which are now arising in front of them. Lastly, the report includes the shift of trend among consumers and how their perceptions and responses toward proprietary source codes and open source codes would change over time.


Technology has been evolving every second and with every change, consumers are taken aback with both surprise and shock as to how to adopt as well as use the new technology. Yet, no force has been able to control or even slow down these rapid technological changes around the world. Many companies have gone out of business only because of technological changes. Those companies that could not adopt the new technological shifts went bankrupt and those who did adopt the changes and were flexible enough to shift their operations as per the requirements of technology are the ones that shine out like stars in the global arena even today.

The case of Linux is a similar example of a newer concept of technology. The concept of open source codes took the world by surprise. Companies had been used to operating on systems with proprietary source codes previously. But that kept them unsecure as they did not know what the code might have been and how the parent company might be utilizing the information they kept on their operating systems.

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Governments of different countries that used operating systems of Microsoft and Sun Microsystems had a fear that the parent companies might be using their information and those operating systems might have a back door through which their information, even if they did not want, would be accessible by the parent company. Thus their sensitive data was at stake as they were not completely aware of the source code of their operating system and did not trust the company fully.
Open source code operating systems on the other hand, provided the user with complete security. The user could be sure of how the system was being utilized. The governments could be certain that there was no back door or any other authority except them that could use their information with their permission.
Another problem with the proprietary source codes was that the user had to depend upon the parent company for any upgrades or any post purchase services. Whereas, in an open source code, the company could fix its own problems and even modify the code as per the company’s requirements.
Users could modify the code and debug their own operating system. The best part about Linux was that people from all over the world could suggest betterments in the code as it was accessible to everyone. Everyone’s expertise made it more powerful and more efficient over all other operating systems. Linux, using the edge of this new concept, entered into the market and started capturing customers that included individual users, small and medium sized businesses, large businesses, and also governments.

Linus Torvalds and His Idea of Linux

Linus Torvalds was the person who was tired of Microsoft’s proprietary source codes. He did not like those fixed operating systems over which, users had no authority. Users could not make any modifications nor could they customize it according to their needs. Linus Torvalds went public with the idea of open source code operating systems. Within very little time, he received response from many IT people from all over the world.
People came up with suggestions for improving the operating system and contributed to the formation of the code as well as simplifying it for the end users so that the user could easily understand it and modify it. Those experts helped debug the system and also simplify the code Dfor the operations.
Linus Torvalds, tired of those conventional restricted systems, wanted this operating system to be free. He made it copy left and made the rights that everyone who used the system could modify it and distribute the modified version among others. Unlike all other systems, that limited the access to their systems and created copyrights that protected their systems from being changed or passed on without the parent company’s permission, Linux went for an absolutely opposite right for its users. That was of using the system according to their ease of use and distributing the modified version. Every user could do that.
But, at times, modifications were fixed and that version was called “frozen version”. This version was used to unify the operations of the system. The newer modifications were then kept for the next version to incorporate. This idea was welcomed by customers who were tired on Microsoft’s almost monopolizing operations. Customers accepted and adopted this change of concept regarding source codes whole heartedly.

Support from Red Hat, IBM, HP and Others

IBM, HP and Red Hat supported Linux OS’s and came up with hardwares that were Linux-Compatible. IBM, in order to reduce the monopoly of Microsoft, supported Linux the most. It came up with Linux-Compatible softwares and hardwares. The reason Linux sold well was not only its source code. The price of Linux was also very low. The initial OS could be purchased for free where as the post purchase services had charges. Those charges were also lower than the upgradation charges of other OS companies.
Another edge that Linux had was its efficient operability. Those tasks that Microsoft softwares performed in hours were done with Linux in a matter of minutes. All these elements collectively made Linux competitive and widely accepted around the world in a very short time.

Microsoft’ Contribution

One of the reasons behind Linux’s success has been the market’s reactions to Microsoft as well. It is not only Linux that performed well in the market and gained the share rapidly. Microsoft also indirectly contributed to its success. The customers were so tired of Microsoft’s ways of doing business with its customers that they wanted a change and as Linux came up with one, they welcomed it with immediate adoption.

Linux over the Years

Linux has been faced with immediate acceptance and adoption by a wide variety of customers all over the world with experts still popping in and using their creativity in order to further simplify the OS. UNIX was already accepted to be better in OS in comparison to Microsoft but people kept going with Microsoft as it was the market leader and no big challenger had been in the market for a long time.
Linux, with its unique way of operating, emerged in the late 90s and was widely adopted by the early 2000s. But things do not always remain the same. Linux is now faced with a dilemma of so many users and so many codes and also so many vendors that sell its modified form that they have developed themselves.
Red Hat sells its own unified form of Linux and also suggests other softwares of red Hat to be used with it. This is how they have been earning well. Another problem that has been showing up lately is that of increasing service charges. The post purchase, up-gradation charges are almost equal to that of Microsoft. Red Hat sells the Linux OS for four different prices in which it offers the standard version, red Hat’s modified version, the enhanced OS, and the classical version with even enhanced softwares altogether. Now the consumers were beginning to perceive Linux as not a less pricey solution but rather a solution that saved them on cost in the long run through its efficiency of operations.

The Problem

One of the biggest problems that Linux came across was the law suit by SCO. It claimed that Linux’s OS had been using the code of UNIX in it and selling away as its own OS. This lawsuit was taken as a contemplating act against the rights of UNIX operations.
In response to that problem, the Linux OS were asked to provide with all the source codes that had been in operations worldwide and then prove through evidence that Linux was using its own source codes only and no breach of any privacy had been done or intrusion had taken place.
In order to deny this accusation, Linux and all those companies that were Linux supportive or were selling Linux OS had to accumulate all the source codes for Linux’s different versions. All the soure codes that were modified in versions or modified by individual users according to their own needs, had to be accumulated and presented in front of SCO as an evidence that Linux had been fair and square throughout its operations.
HP, Dell, IBM and other such companies were backing up Linux in this case. They were helping Linux accumulate its source codes that were widespread over the world due to its various modified forms according to the needs of the users.
Some other problems that Linux came across included:
  • Keeping track record of all modified forms of source codes
  • Continually coming up with newer versions to incorporate those improved source codes
  • The purchase of the OS free made it difficult for the company to break-even

Income Statement Analysis of Linux 2002 and 2003

  2003 2002 percent Change
Total subscriptions 48.5 42.3 14.66
Cost of subscriptions 9.1 9.9 -8.1
Gross margin 39.4 32.4 21.6
Service and other income 42.3 36.7 15.26
Cost of Services 22.4 18.7 19.79
Gross revenue 59.3 50.4 17.66
Operating expenses 48.2 46.9 27.72
Other Expenses 28.4 138.5 -79.5
Total Expenses 76.6 185.4 -58.68
Net income after taxes -6.3 -119.5 94.06
Looking at the position of Linux for the most recent income statements, it is clearly visible that the company has reduced on its costs heavily. This means that the company has now become more efficient. Efficiency had always been Linux’s strength and it seems that it has been further building over that strength.
The numbers show that there has been an increase in the number of subscriptions as well. The company has been successful in reducing its expenses to more than 50%. This has saved them on a lot of amount which could have cut down their profits otherwise. The thing to note is that there has been an increase in the operating expenses. This is due to the increased number of subscriptions. If there are more customers to be dealt with then the operating cost is directly proportional to that number of subscriptions requiring proper attention and certain level of investment.

Looking at Linux’s progress and steps toward stability, it can be said that Linux is way to go even higher on its market growth rate. This claim can be supported with the help of all those listed countries which are still lined up to switching themselves on Linux from Microsoft. This can slow down the progress of Microsoft tremendously. (See Exhibit 6: Pending Legislation on Open Source Software)

Industry Analysis

The OS industry is going through radical changes. The reason for these radical changes is the nature of the industry itself. Technology has no stopping it. There are newer and better solutions available everyday that win over the previous ones and suddenly the entire trend shifts. No one can predict the exact pace of the progress of this industry but the direction is certain and it is always going to be upwards.
If we have a look at the historical progress of this industry, then there are numerous surveys that can be taken as reference which have been boosting about the emergence of technology and OS and how fast the world has changed into a globalized and shrinking little village.
At present, the giants of the industry stand out to be Microsoft and Macintosh. Many other names like Google, Yahoo, YouTube, Skype, Nokia and many others also come in the race of this technological world. But they all serve to different demands of customers, pertaining to the same industry though.
The recent trend shift is toward monopolizing. The entry to the industry has become very difficult. The giants are eating in the small players and the new ones hardly survive.
Over the recent years, Microsoft acquired Skype and Google acquired YouTube. Such mergers and acquisitions are giving out signals to the new entrants to remain either silent or serve the niches and be happy with their little profit margins.

Pros and Cons of Microsoft and Macintosh

The positives about Microsoft include:
  • It includes Internet Explorer as an integral part of its OS. This eases a lot of hassle for the users of getting all windows drivers, softwares and other compatible stuff. They can now easily download it.
  • By providing the Intel platform, Microsoft has made it easy for its users to multitask, keep huge loads of data and handle complex tasks in their systems with Microsoft OS.
  • Microsoft, in its OS, takes care of all the antitrust laws that keep the user safe and secure.
On the darker side though, Microsoft also has some negatives attached to its OS which include:
  • Microsoft claims for IE to be absolutely free with its OS. Which cannot be considered as a sound claim to be made as IE is free with every other OS like that of Macintosh as well as UNIX also.
  • Microsoft went beyond concerns for consumer choice while integrating IE into its OS and monopolizing the market. Consumers were deprived of the choice to use any other navigator like Netscape or Mozilla Firefox. Microsoft could have let it to its consumers only to make the choice about the browser they would like to use instead of forcing a choice on them.
  • The system encounters a slow-down if run for a long time like 4 to 5 days.


The bright side of Macintosh includes:
  • Better at multitasking, file system management and memory management as compared to Windows.
  • The system does not encounter any slow-downs even after being run for too long times.
  • The OS is virus free. No virus can ever affect one’s Mac.
  • There are fewer malware problems.
  • The OS, for most of its part, is built on open source system and is more users friendly.
The negatives of Macintosh include:
  • Mac is a not-so-grammar friendly OS.
  • The windows media player software is not so compatible with Mac.
  • The compatibility of games as well is not good with Mac. One would need to install windows in order to enjoy games adequately.
  • Without FireWire, it becomes very difficult to recover data from a Mac if the system would not start.
  • It is very expensive as compared to other OS in the market.

Comparative Income Statement Analysis of Competitors

In the following table, the percent change of figures between 2003 and 2002 has been compared for the three competing companies. The figures have been taken from Exhibit 7 and then the changes have been driven out.
  Sun Microsoft Red Hat
Total subscriptions -14.3 13.47 14.66
Cost of subscriptions -21.1 9.54 -8.1
Gross margin 12.27 14.36 21.6
Service and other income 6.99 - 15.26
Cost of Services 3.66 - 19.79
Gross revenue 0.53 14.36 17.66
Operating expenses -12.53 20.99 27.72
Other Expenses 83.93 -26.66 -79.5
Total Expenses 24.37 -3.18 -58.68
Net income after taxes 88.68 27.64 94.06
This competitive analysis clearly indicates that the progress of Sun and Microsoft has been slower in comparison to Red Hat (Linux). The reason behind this slower progress is the shift of customer preference from proprietary source code operating systems to the open source code operating systems.
Another reason of this shift is the customer attitude toward Microsoft’s monopolizing operations in the market. Customers had really been looking for an alternate and here Linux came with what they actually preferred.
The numbers show that the level to which Red Hat has been successful in reducing its total expenses is far higher than that of both Sun and Microsoft. The number of subscriptions for Sun has decreased and for Microsoft, the number is less than that of Red Hat.
This was the point where Microsoft and Sun started taking Linux OS seriously and started to make competitive strategies instead of maximizing their own profit margins. The change in cost of subscriptions for Sun is greater than that of Red Hat. This is not due to Red Hat’s lower performance. Instead, this is because the number of subscriptions for Sun has also decreased and the cost of subscription has a direct relation to the number of subscriptions made. Therefore, the cost of subscriptions for Sun is even lesser than that of Red Hat.
Whereas, the cost of subscription for Red Hat is not due to reduced number of subscriptions, but it is because of their increased efficiency. Their cost per subscription has gone down resulting in lesser cost in spite of increased subscriptions. This should also be noted here than Microsoft does not have any services. This was one of the flaws that made the shift toward Linux even faster.

Microsoft came up with solutions which eventually made the user heavily dependent upon the parent company. The users did not have complete authority over the OS that they were using and in return to that, what Microsoft offered was a new solution instead of fixing the previous one.

Ratio Analysis for Red Hat

Taking reference from Exhibit 7 and 8, it can be said that the growth rate for Red Hat from all perspectives had been better than all other OS companies. Few of the major ratios have been calculated below.
  2003 2002 Percent Change
Total asset to total Liability 2.55 3.21 -20.56
Debt to Equity Ratio 14 11.3 23.89
Net Profit Margin -6.94 -151.46 95.42
Return on Total Equity -.0187 -.3649 105.1
Gross Profit margin 0.65 0.64 1.56
By having a look at these ratios we can see the improvement in the performance of Red Hat. The total asset to total liability ratio has decreased showing that the company is becoming self sustainable over time. The debt to equity ratio also shows that the equity of the company has increased over the past year. This is considered to be a good sign. The greater the company is equity based the better.
The third ratio analyzed here is the net profit margin. There has been a stupendous improvement in this ratio over the time period of just one year. The amount of net loss has gone down drastically. The return on total equity has also increased radically. The gross profit margin has been consistent over the past year though.
All these changes signify one critical thing and that is the stability and self dependence of the company.
The rapid adoption of Linux has made this progress and steps to success very easy for Red Hat. In a very short span of time this company has been able to compete head on with the industry giants.

Comparative Ratio Analysis

The following table entails the percentage change in the listed ratios for the year 2003 and 2002. Then the progress in accordance to those ratios is compared for all three companies.
  Sun Microsoft Red Hat
Total asset to total Liability 3.84 10.76 -20.56
Debt to Equity Ratio 16.09 -6.15 23.89
Net Profit Margin 87.4 11.54 95.42
Return on Total Equity 85.42 9.2 105.1
Gross Profit margin 9.97 0.77 1.56

From the comparative analysis, we can again see the same trend. The progress and improvements for Red Hat have superseded that of both Sun and Microsoft.

The slowest of all here seems to be Microsoft because the biggest shift had been from Microsoft OS to Linux. Sun seems to be less affected. The reason for this is also Sun’s move to integrate such solutions into its product range that were Linux compatible.
This is how Sun has been able to maintain its position somehow as compared to Microsoft which is badly hit because of the emergence of this new technology and customer mind shift. The debt to equity ratio for Sun seems to be competing with that of Red Hat but Microsoft in that context looks like it is doomed. The number of customers that Microsoft has lost because of Linux over the past 5 to 7 years throughout the world is in thousands.

Market Share

The market share of Microsoft still remains highest of all being 43% and then the next follower is Sun Microsystems with almost 14% of market share. The third competitor, in this very short time has become Red Hat with the power of widely accepted Linux OS.

Positives of Linux in Comparison to Competitors

With the help of exhibit 1, we can see that the positives of Linux in quantitative terms are less than that of Sun or Microsoft. But the weight age of those positives in greater than those on which Linux is lower than others. Sun seems to be somewhere on the middle of the road. It is neither too challenging to Microsoft, nor far behind in the competition. Linux has an emerging verve to it and Microsoft, even after such huge shocks, still maintains its position of the market leader, in a less strong manner though.
The strength of Linux (with reference to Exhibit 1) turns out to be stability, technical support, security and price. If we analyze the case from the very beginning, then the fact that would turn out is that the era in which Linux faced its boost was the era of an economic downturn. This fact had made customers consider price with slightly more importance as compared to all other times while economy was stable and money was not a problem.
This is how price became Linux’s strength as the OS could be purchased for free. The second element which the competition missed out on was technical support. It is not about selling once. It is about maintaining those customers for a lifetime. Linux had a focus on that and kept improving on the post purchase services that it gave to its customers.

Would Linux Continue?

Looking at the current position of the OS, and the nature of problems arising, Linux seems to be doing well. But standing on the same position over the long run requires more than too much of effort. Considering the competition, Microsoft is not sitting silent any more watching the show as to how Linux is grabbing its market share and growth.
The two important factors that are beyond Linux’s efforts for becoming successful are:
  • The Economical downturn
  • The market’s demand for a change
The two elements gave a boost to Linux’s rapid adoption. Its own efficiency has been the main driving force though but the impact of these two elements cannot be overlooked. Now that the economy is reviving, the pricing factor would lose its level of consideration while customers are choosing among all options available for their OS.
Linux still would outrun others due to its efficiency. But considering the response of the giants that are coming up with alternates of source codes like partly sharing of the source code with users or even complete access of the source code to governmental concerns, this would definitely slow down the pace of Linux’s progress.

Linux would need to develop some other competitive edge in order to remain competitive. Over time, one competitive edge might lose its value and become common and the company would then need to build up over another one in order to remain in the market and not lose its customers to other competitors.


In order to remain competitive, Linux would need to do the following:
  • Build up on its competitive edge of efficiency.
  • Improve the OS so that the need for service upgrades is reduced as people do not like things that need repetitive attention. Customers are more comfortable with solutions like one time investment and benefits for a long time with minimum attention required in between.
  • Standardize the best source codes so that the most efficient OS become prominent and widely accepted. This would help them maintain their source codes more easily.
  • Linux would need to directly address the customers instead of speaking through different companies. Direct interaction would gain them more attraction from customers.
  • Since the profitability of the company is low due to free purchase of the OS, the company, later on, can charge a comparative price for the OS and then invest some of that revenue on the services that they provide. Price speaks of prestige as well. Therefore, it is good to be expensive at times instead of being free.
  • Coming up with softwares that are Linux compatible and even perform better with Linux OS than with any other OS would help them remain ahead of the competition.
All these steps can help Linux, if not progress, and then at least maintain what they have achieved over time. Because the competition is not sitting idle, therefore, if Linux does not do anything considering its OS to be already better, then it would soon vanish out of the market.


Linux, using the edge of this new concept of open source code OS, entered into the market and started capturing customers that included individual users, small and medium sized businesses, large businesses, and also governments. If that fact is kept in view, then there are almost no chances that Linux is going to survive only on the basis of having an open source code. It would take nothing to other companies to come up with flexible policies for open source codes depending upon the user of their OS. Microsoft has already initiated it and many others will soon follow suit.
The concept of source codes can be customized according to the user of the OS. Microsoft has set a good standard of giving absolute access to the Governmental concerns and giving limited or partly access to other users who demand for it. Those to whom it does not make any difference, companies can choose to keep their source codes with themselves.
Linux would have to build over competitive edges and that also one over another, because nothing is going to remain competitive forever. Everything becomes common and acceptable over time. The demands of customers are ever increasing and always changing. Today, the concept of open source codes might fancy the world, but over time, it is certainly going to lose its charm and then Linux would be left with nothing at hand at all.
Looking at the rapid shift of demands and emerging global competition. It would be wise to think ahead of time instead of looking at today only. Linux would need to provide more compatible solutions so that it remains a priority of majority. Those compatibility solutions may involve softwares that are supportive of Linux and in fact perform better with Linux OS instead of Windows. For this step to be taken, Linux would need to have collaborative networks with many companies that are serving the same industry in a different manner.
It is not only Linux that would need to consider the need of building competitive advantages, one over another, but every company would need to do it if they want to remain in the market and serve the customers with happy feedbacks. Nothing is permanent but change. To technology, it absolutely applies.

2011 and Linux

At present, as recommended that Linux should come up with versions that are compatible with more softwares, Linux’s latest version (as said by Alameda CA on March 2009) is compatible with more than 500 softwares.
With this edge in compatibility, Linux has lost over its competence of efficiency. The number of unsatisfied users has increased over times that are complaining about the speed of the OS and are not completely satisfied with the solution that it provides in comparison to what it proposes.
The current market share of Linux (as quoted on W3Techs, updated July 2011) is 32.1% in comparison to UNIX’s 63.9%. This market share is given with reference to all the websites that are running their OS on either UNIX or Linux.
This indicates that Linux at present is still striving to compete and remain in the main field against the Industry giants like Microsoft, Sun, and Macintosh.


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