October 8, 2004

How SCO launched an open source company

Author: Jay Lyman

Jason Macer never really cared what operating system was running on his servers when the Dallas area businessman's Web hosting resale business peaked with 26 servers last March. But Macer found out that lots of folks did care, and were leaving him because of it. It was not Windows that was the problem, it was SCO. Macer's hosting vendor, EV1 Servers.net, had signed on for SCO's Linux user license. Macer's customers reacted by seeking hosting elsewhere, cutting his business down to just two servers.

"[Customers] said they can't support companies that support SCO," recalled Macer. But he saw an opportunity in his loss, and has launched an all-open source colocation and dedicated service provider in OSI Hosting, which touted the addition of seven new datacenters last month.

In a press release this week, OSI said it was now offering hosting services on x86-based servers starting at about $80 a month and dedicated Xserves for $300 a month. The company is selling virtual and dedicated servers -- including single and dual-processor Pentium 4s, Opterons, Xeons, and Xserves -- as well as colocation services.

The response to a business that pledges dedication to open source through dedicated servers, Macer said, was greater than expected. Macer originally planned to have 2,000 to 3,000 servers available, but he has bumped the number up to more than 15,000 servers -- including half and quarter virtual servers -- because of the overwhelming response from customers who are open source advocates.

"Within three to four weeks, we had 16,000 people signed up for dedicated servers," Spencer said. "Demand was larger than we thought."

OSI Hosting is now expanding, with new facilities in Miami, Englewood, Colo., and Seattle, to give the company nine buildings where nearly all open source products are used for colocation and dedicated hosting. OSI has partnered with IBM, Novell, and Apple to provide servers using nothing but open source software (with the exception of Mac OS X) for their operating systems and applications.

In what the company described as "the largest known rollout of any blade server technology" from IBM, OSI is buying 25,000 rack-mount servers for deployment later this year. Dave Shafik, an OSI lead developer, said there is a realization in the industry that Linux and open source are best for any enterprise-level customers.

From Apple, OSI is deploying 1,000 Xserves. Novell is providing its newest version of SUSE Linux Enterprise Server for the non-Apple servers.

Macer said there had been fewer challenges and more enthusiasm than he expected for rebuking Redmond and SCO with his all-open source business. "The industry is looking for something new," he said. "They're looking for something that isn't Microsoft."

Throwing some criticism at larger competitors such as EV1 and Rackspace, Macer said the companies claim to be loyal to Linux and open source, but offer and often favor Microsoft solutions, continuing to sell Windows.

"[Customers] really don't want anything to do with it," Macer said. "They want a company, like them, that is dedicated to the open source community."

Yankee Group analyst Helen Chan did not doubt that OSI is finding success by tapping the frustration and fear of sticking to Windows. "Some people just have a bias and think anything Unix-based is higher quality," Chan said. "Definitely, the trend is more open source."

"There are lots of reasons people choose not to go Microsoft," Chan added, referring to performance, security, flexibility, and the need to update. However, the analyst -- who covers the small and medium business hosting market -- said there is still apprehension over Linux and open source because of its immaturity, the SCO suit and fear of litigation, and general resistance to change.

"There is more interest [in open source], but a lot of small businesses are risk-averse, and they probably wouldn't adopt it unless they were completely confident," Chan said. That means the market for OSI hosting is limited to technologists, hobbyists, gamers, and developers looking for a Web environment to test and code, according to Chan. "It's clearly not for the mass market," she said, citing the lack of support compared to that for Windows.

However, Chan called OSI's prices "highly competitive" and said the endorsements of IBM, Novell, and Apple would lend credibility to the open source-oriented company.

Frost and Sullivan analyst Jarad Carleton agreed with Chan that OSI was looking at a niche market. He said that most hosting operations that offer Linux and open source applications do so "on the side."

"The majority of companies are on some kind of Microsoft," Carleton said. "If a company has standardized on a certain platform, it's harder to leave it. The other thing is familiarity."

Still, Carleton said OSI may benefit from the seemingly constant security issues that have plagued Windows in recent years. "A thing in favor of OSI Hosting could be some people getting tired of all the security holes being found," Carleton said. "There is also an
attraction to open source because there are more people actually in the open source community trying to make the platform more secure. You don't have to wait for a major corporation to go close up the holes."

While he indicated Linux may be benefiting from a more secure image simply because it is not under attack to the extent that Windows is, Carleton said the security issue in general sways in favor of Linux.

"I'm not a guy who says go with Microsoft, because I don't think they have the best solution all the time," Carleton said. "There are massive security issues. That actually would make a solution like [OSI] more appealing, especially when Microsoft is getting bad press almost on a weekly basis."

In the end, however, Carleton said the Windows brand recognition, installed base, and "massive marketing machine" all make OSI's continued growth an uphill battle.

"That's the way it's always been for Linux-based solutions," he said.

Novell spokesperson Bruce Lowry said with a Web hosting landscape that favors the reliability, stability, and flexibility of Linux, OSI should not need to trade on the cachet of open source.

"We have been in business software for a long time," Lowry said. "The thing we have and that we continue to espouse is business value. If there are a bunch of technologies from vendors you don't think are making an openness play, yeah, we'll help, but it's against our approach to argue anything but business value."

As for turning to open source "because you're pissed," or for other, more psychological reasons, Lowry said it was an interesting idea, but was not the way business people operate.

"That's not obvious, it's not technical, and it's not quality of service," Lowry said. "We really think it is the value of freedom and openness [that sells open source solutions]. Most businesses are going to make decisions based on level calculations."

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