July 25, 2000

Two Linux companies, two very different plans

Author: JT Smith

- by Jack Bryar -
Open Source Business -

This week, like so many other weeks over the last
year, the business message from the business side of the Linux
community has been decidedly mixed. Now admittedly, if you were working for Lucent, Ericsson
or Nortel, a mix of good and bad news would seem like a nice break from recent
trends, but the Linux community continues to be stuck in a pattern of rapidly
expanding growth and continually disappointing revenues. Two European Linux shops
are taking rather different approaches. One is slashing costs and
pushing its CEO off to the side. The other is decided to put financial logic
aside and appeal to the public for cash.
Both Germany's SuSE
Linux and France's MandrakeSoft
have done as much as any companies in the world to promote Linux, to
extend it well beyond its Intel roots, and to localize it to the needs of
users around the globe. In both cases, the marketplace hasn't been very kind.
Both firms trail Red Hat in terms of cash, visibility and users. Both
have had their share of fiscal disappointments. But this week they've begun
to take very different paths to deal with their difficulties.

SuSE Linux is slashing costs and executives. The company celebrated
the first week of its release of SuSE
IA 64
, the company's port-over of SuSE 7.2 to the Intel
Itanium platform, by canning its CEO, Roland Dyroff. Dyroff can
console himself; he's been made an official "guiding
force
" on the company's board of directors. That's a better
fate than 10% of his employees. They got pink slips. The onslaught of bad
news ought to ensure that Dirk Hohndel, who runs U.S. operations, will be
completely off message when the company struts its stuff at the Software
Technology Alliances Symposium
in New Orleans this week.
Reportedly, the company is dumping few engineers, and more
marketing and sales staff. Based on the timing of the layoffs, you could argue
that perhaps they didn't eliminate all the PR professionals that they
should have.

The company is trying hard to hold onto its engineering staff.
SuSE claims to have "the world's largest development team for Open Source
solutions." That team has worked hard to extend Linux to operate on a variety of
platforms, including clustered systems, midrange hardware and mainframes.
For example, the Venezuelan financial services company Banco Mercantil
recently replaced 30 existing NT servers with a single IBM mainframe running
SuSE Linux. In the United States, the housewares manufacturer, Newell Rubbermaid, has been running much of its network administration system using SuSE Linux for
nearly a year. The company reportedly operates its multi-router traffic
grapher system on a mainframe and a copy of Linux. The mainframe cost
the company a small fortune. The copy of SuSE Linux set back Rubbermaid a
cool $100. There's certainly nothing wrong with the breadth or quality of
SuSE's products. In fact, quite the opposite is true. How the company plans to generate
enough cash to pay all these hundreds of engineers is the issue.

If the company plans to make money providing services for its
mainframe and higher end distros, it may want to re-examine the validity of
those plans. SuSE's corporate "friends" may force that re-examination. This
week SuSE partner IBM is announcing that it will include "Linux support" for
its mid-sized iSeries servers. IBM expects that a significant
proportion of the Linux installed on iSeries equipment will be SuSE. Customers
will still have to shell out a few dollars for the actual platform software
by contacting SuSE directly. That may generate a little money, but
IBM's better positioned to rake in the big end-user cash by providing
equipment and "support." No matter how much cost cutting the SuSE undertakes,
there's no substitute for income -- or a viable plan for generating some.

One country away from SuSE's headquarters, MandrakeSoft is trying a
slightly different tactic. Having already dumped a CEO and cut costs,
the company is trying to raise money in the most forgiving of European
stock markets. MandrakeSoft hopes to sell nearly 700,000 shares of its
stock this week. The company is offering shares at a "fixed rate" price of
$5.41 per share, and hopes to sell raise about $3.7 million in exchange for
roughly 20% of the company. Interested buyers can buy stock on the Euronext Marche Libre, an unregulated market for new companies managed by
the Paris stock market. The
offering
will extend through the end of the week. Belgian bank KBC
Securities is underwriter.

Mandrake's offering doesn't quite match my half-serious
suggestion
that the firm dispense with all pretense that it has
much hope of making any real money soon, if ever. The company says it
envisages a healthy profit margin by 2002. It also presumes a massive uptick in
sales. Maybe. But the Marche
Libre
is as close to a bare bones "buyer beware" setting as can be
found anywhere in the Western world, and for a reason. This is a market
of very speculative offerings. It's an environment that tends to scare
off traditional investors but it does draw enthusiasts, much in the
same way that the Regulation A market works in the U.S. Rather
illogically, Mandrake is reserving 60% of this offering for "institutional
investors." If this market doesn't scare off institutions, the company's
French-language
prospectus
just might
. It honestly but painfully details the company's quite
distressing financial history and makes it clear just how difficult the road to
profitability might be. Unspoken is the fact that the offer doesn't involve very much
money. If all shares are sold, Mandrake soft will have a market cap of
$18 million, or a just over a third more than its accumulated net
losses
of the last two years. No matter how much cash Mandrake
raises, there's no substitute for income -- or a viable plan for generating
some.

Mandrake, like SuSE, has an enormous challenge ahead. Both put out
good products. Both do important work. Both are still searching for a
business path that makes financial sense. It's going to be tough.

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