December 5, 2001

Merger aims to create Japan's top Linux solution provider

Author: JT Smith

- By Mike Newlands -

As Linux shows signs of becoming the operating system of choice for Web

servers in Japan, there are moves toward consolidation in the Linux sector,
with the latest merger announced between 10art-ni and Northern Lights Computer.

10art-ni (for those who haven't figured it out) is intranet spelled
backwards, and the company specializes in consignment development of
Linux-based systems. Northern Lights specializes in providing
Linux-installed servers and brings with it experience in developing cluster
servers and super parallel processing servers, and in verifying systems
requirements.

When the companies merge next month, retaining the 10art-ni name, they will
concentrate on large-scale Linux-based systems -- a section of the market in
which they believe there is considerable growth potential, according to
company spokesman Makoto Sekikawa.

He told NewsForge: "The Linux market is growing rapidly here in Japan.
Northern Lights Computer is a hardware vendor focused on Linux, and 10art-ni
is a systems integrator focused on Linux and Java ... Merging the two companies will allow us
to be the number one total Linux solution provider in Japan."

Gary Barnett, a principal consultant with British analyst and consulting
company Ovum said: "This is potentially important for the market as a whole.
The development of a highly scalable Linux distribution is crucial if it is
to present a really viable alternative to high-end Unix. Bear in mind that a
number of vendors -- notably IBM -- are looking at clustered Linux so this is
going to be an exciting and dynamic space over the next 12 months."

Disagreement over the numbers

Akira Ishitani, senior vice president of Otsuka Corp, the largest shareholder
in 10art-ni, expects major growth in the Linux server business in Japan, according to his company's numbers. "Linux-based servers now have a 7.5% share of the Japanese server market, but we believe this share will grow to 30% in the future and if this is the case the need for large-scale Linux systems will increase," Ishitani said.

A survey conducted by Impress Communications Corp and Access Media
International reported that the Linux operating system is now used on more than
35% of corporate servers in Japan, although many also use other operating
systems as well. The survey results showed Linux to be the third most
popular OS after Windows NT and Windows 2000.

The survey, which was conducted during August this year, was based on
responses received from 700 corporate server users and 147 systems
integration companies. Nikkei Business Daily said it was the
first survey aimed at gauging the popularity of Linux in Japan.

Of the systems running Linux, the survey found 63.1% were used as Web
servers, 41.5% as DNS servers and 40.3% for file sharing. But use of Linux
servers for business software and e-commerce remains low.

According to International Data Corp (IDC), there will be 65,000 Linux-based
servers in Japan by 2003, an extraordinary increase over the 1998 total of
2,200. The IDC predictions are based on a 97% compound annual growth rate.

But Ovum's Barnett suggested there are difficulties getting figures for Linux
penetration in Japan, because it's used for several different functions. Some Linux advocates also suggest company IT departments deploy Linux without managers knowing about it. "I'm afraid we don't have any figures for Linux adoption anywhere -- and I would be deeply skeptical of anyone who says they have," he says.

Commenting on the figures provided by Ishitani he said: "If these figures
talk in terms of cash revenues, then the market share is way way below 7%
currently and will definitely not exceed 30% in 24 months' time. If they
relate to installed base (which I think is more likely) then this could
certainly be true on the surface. The problem is that Linux is installed as
both a desktop OS, a 'home server,' and as a mainstream server OS.

"Linux installations as a replacement for mainstream server OSes are
currently very, very low indeed (below 1%) -- but ramping up sharply, but my gut feel is that 10% would be more realistic over 24 months than 30%."

Growing the company

10art-ni goes into the merger with 94 employees, and its revenue for the
2000-01 financial year was 1.03 billion yen ($8.5 million USD). Northern Lights Computer has 30 employees and had revenue of 460 million yen in the last financial year. According to Sekikawa, the merger will give revenue a boost to 2 billion yen in the
2001-02 financial year. Ishitani was quoted by Nikkei Business as saying
this could increase to 20 billion yen ($164 million) the following financial year.

When it was established in 1997, 10art-ni's mission statement was to "drive
the paradigm shift from Desktop to WebTop computing using Java and
Linux-based solutions," according to its promotional materials. The company is a Red Hat Linux Master distributor for Japan, and developed the first Japanese sales management system using Java and IBM SanFrancisco application components. It has quickly migrated from small through medium to large-scale customers.

Established in 1998, Open Source solution provider Northern Lights Computer
designs high-performance products ranging from IA servers to storage
systems. It has also focused on the development of Linux-based e-business
solutions. The company markets its own brand of Linux-based systems
comprised primarily of rack-mounted servers, and customers include leading
ISPs and ASPs. CEO and company president Nobuo Kita spent six years in Silicon
Valley before returning to Japan to establish Northern Lights.

U.S. firms competing in Japan

Several U.S. firms have also been active in forging partnerships in Japan as the
Linux server market takes off there.

Linuxcare Inc. announced recently it had entered into a certification,
service and support-based strategic partnership
with Japanese company Inter
Space Planning Corp. Earlier in the year Linuxcare forged a
similar agreement with Hitachi Electronics subsidiary Densa Techno Tokyo
K.K. Under the agreements, Linuxcare Labs certifies the Japanese firms'
hardware against the Linux kernel and also provides high-level back-line
support.

Said Linuxcare president and CEO Fernand B Sarrat at the time: "Japanese
businesses are embracing the many advantages of the Linux operating system."

One of Japan's top IT companies, Fujitsu Ltd., recently entered into a
strategic alliance with Linux vendor Caldera Systems Inc. Fujitsu will
distribute the OpenLinux OS package on its servers and tap Caldera's
education and certification programs to add value to its new corporate-level
Linux-based solutions.

Turbolinux has also made significant advances in the market. It recently announced its Linux server OS has been deployed, along with a cluster of IBM Netfinity 5000 Servers, to power one of Japan's largest consumer e-commerce Web sites run by Deodeo, a consumer electronics, software and music retailer. "Working with Deodeo, IBM and our local systems integrator, we
were successful in providing a mission-critical solution against a competing
proprietary UNIX solution that would have cost the customer four times as
much money," said Turbolinux CEO Cliff Miller.

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