November 8, 2000

Dot bomb blowback: Open Source companies vulnerable?

Author: JT Smith

By Jack Bryar -
Open Source business -
Congratulations to our new president-elect (assuming a recount doesn't change the result). Now, fella, what are you
going to do about the dot.com recession?

It's no secret. One by one, the most stupidly conceived, under-researched and over-hyped dot.coms have falling by the
wayside. The most recent casualty has been pets.com. But the really bad news is just starting to surface for the firms that
have been providing software, services, and equipment to these collapsing companies.

Suppliers to Internet firms are feeling the heat. Communications companies, ranging from relatively new firms like
Turnstone, to industry giants like Lucent are having problems. The reason? Slowing demand.

Many Internet service firms have scaled back as demand for their services has failed to materialize. This is not the only
major problem, however. Many local telcos in the United States have tried to brake demand for cheap broadband, as many frustrated
would-be subscribers of DSL services can testify. On top of that, the weakness of the Euro has been a particular concern.
The soft currency there has been having a depressing effect on the market for American-made chips and equipment. While
networking giant Cisco System recently beat market expectations, even it declared that it is planning to "scale back its
inventory." Other major traditional tech firms have been dropping broad hints that they're worried about short-term growth.
In states like Virginia and Washington the fastest growing segment of the tech industry has been firms who specialize in
auctioning off recently purchased Internet equipment.

The tech industry is showing other warning signs. The biggest tech story right now should be Transmeta. And while
Transmeta's IPO was oversubscribed and there was a respectable first-day price runup, there's trouble ahead.

IBM has walked away from its deal with the company. The investment community continues to point to agreements the
company has signed with developers from Sony, Hitachi, and NEC, but the Japanese computer industry has been good about
signing agreements, and not so good at delivering products people want to buy. The market for wireless and low-power
devices still looks solid, but its not nearly as explosive as many analysts were predicting a few months ago. In fact, many of
those analysts have begun to scale back their estimates about the market for the type of portable and hybrid computing
devices that Transmeta's Crusoe chip was designed for. The weak Euro is a big potential negative for Transmeta as the
wireless market there has been far more robust than in North America.

The biggest question at this stage is not whether there's at least a modest tech slowdown in the offing, but what
segments are going to be affected. For example, the Open Source community has drawn a disproportionate amount of its
growth from new and smaller companies. That should be a real concern. Most of the dot-coms have been in this category.
An even bigger concern has been the fact that such a large percentage of Open Source spending has been concentrated on
the suddenly-vulnerable Internet server market. Is there trouble ahead?

Perhaps. However, one of the most reliable indicators of dot-com failure has been the type of equipment they have
purchased. I've been tracking the Web server hardware of the most recent set of failures. I have been struck by the fact that
so many of those systems have been Microsoft-based. Now, I'm also aware that a big percentage of all of the big
commercial B2B ventures have been built around Microsoft architecture. And it
would be a stretch to suggest that the purchase of IIS servers is indicative of both technical and marketing incompetence.
Still, it remains a notable feature among the trash heap of dot-com failures that so many of them have bought over-priced
computing equipment.

Most of these same firms had trouble with controlling their finances in a variety of other ways.
Many lavished huge funds on their executive "talent." They spent far too much on television and other high-profile
advertising. Many of these firms were effectively crippled before they even really began to develop their businesses.

But at the same time, the dot-coms have been an important contributor to the tech boom of the last couple of years. And
the blow-back from their collapse is going to have a significant negative affect on many other elements of the tech
economy. Certainly the Open Source community is not going to be immune from that collapse. The only questions are
whether or not they will be affected nearly as much as other, more mainstream vendors of computer systems and software, and whether other segments of the economy will be able to continue to grow and pick up the slack.

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