The Linux computer operating system is coming of age. Nurtured since the early 1990s by software hobbyists and adopted more recently by giant computer companies led by International Business Machines, it is on the verge of becoming a mainstream technology in the corporate world. Its maturation has potentially far-reaching implications for the software industry.

A so-called "open-source" system, Linux is owned by no one. The software foundation on which it is based, known as the source code, is freely available and a wide group of developers suggests changes and additions. That egalitarian approach stands in contrast to the way traditional software products are developed by big companies. It is also free.

Europe's open-source option
Alarm bells rang at Microsoft headquarters when executives got wind that the IT department of the West Yorkshire Police Department in northern England was investigating the feasibility of replacing Windows with Linux. Read

In the short term, Linux is mainly a threat to companies that make computers based on variations of the Unix operating system, the dominant system driving corporate mainframes and servers. But the company that could eventually find itself in the line of fire is Microsoft, whose position in the computing industry rests heavily on its Windows family of operating systems. "We see Linux going over the moon," says Larry Ellison, chairman and chief executive officer of Oracle. "We have never seen anything with this much of an uptake in 25 years in the industry."

To judge from a shift in its strategy in recent weeks, Microsoft is already preparing for the battle ahead. "It's a very bold move by IBM to change the rules of the game in the software industry," says Peter Houston, who is heading Microsoft's response to Linux.

The transformation of Linux from a software experiment by a group of part-time volunteers into a crucial weapon in Big Blue's business strategy has happened remarkably quickly. The idea for the software program was hatched not by Linus Torvalds, the Finnish computing student whose name it carries, but by Richard Stallman, an American programmer who believes that all software should be free. Stallman's open-source project, known as GNU, supplied much of the framework of the operating system but it was Torvalds who added the kernel - the central core that holds the various elements of the operating system together. Mr Torvalds still has the final say about any changes.

Linux's burgeoning strength stems from the big savings it is bringing in corporate information technology systems. But those savings come mainly from reducing the cost of hardware, not software. Linux runs on machines powered by cheaper standard Intel microprocessors, unlike the proprietary chips that run the variations of Unix. As in the personal computer market, the combination of standardised chips and operating system has made it possible for more computer makers to sell their own systems, bringing down prices.

Microsoft's inroads into the server market rest on a similar calculation. Intel-based machines that run Windows account for about a quarter of server sales. As a result, Linux and Windows are both eating into a market dominated by Unix, rather than competing head on, though that will change as the market matures.

Helped by standardised technology, companies such as Dell Computer have been able to move out of the PC market into more expensive systems. Dell, which spends just 1.3 per cent of annual revenue on research and development, can now compete in some areas with Sun Microsystems, which spends about 15 per cent of revenue on R&D to maintain its own technology.

The savings from Intel-based machines can be huge. Charles Schwab, the retail stockbroker, began the shift to Linux after an internal study that showed that switching from its Unix-based machines would cut the cost of hardware purchases eightfold, says Geoff Penney, chief information officer. "Intel hardware is low-cost and very fast," says Mr Ellison. "The economic implications . . . are huge."

For now, computers that run Linux remain a relatively small part of the $200bn server business. According to IDC, the research group, annual global sales of Linux-powered servers stand at about $8bn. Recent annual growth of 6 per cent, compared with a decline of 2 per cent for Unix systems, hardly suggests that Linux is about to take off.

But sales figures understate Linux's likely significance. Until now, Linux has been used widely in the web servers and other computers that sit on the edge of the internet, dishing up web pages and handling traffic, rather than in the corporate data centres where most data is stored and high-powered processing takes place. But information technology managers are a cautious bunch. Many, including those at Schwab, have been treading carefully, testing the system and laying out plans to adopt the technology. They have only just begun to use the software. "We're not going to bite off more than we can chew," says Mr Penney at Schwab. "But in the end, I think we will have bitten off quite a lot."

Behind this commercial acceptance lies a big shift in the mainstream technology industry's stance on Linux. Companies such as IBM and Hewlett-Packard have allied themselves with the amateur hobbyists, lending their own technical development and support to the continuing effort to develop and extend the software. "It's no longer guys with tie-dyed T-shirts and mad scientists in their basements," says John Sarsgard, head of Linux sales at IBM. Of the 1,000-odd developers actively working on Linux, more than half are now direct employees of big tech companies, says Dan Frye, who runs Big Blue's Linux development team.

This informal alliance of big technology companies points to one potential threat to the sustainability of the Linux system: that the interests of the partners will eventually diverge. That is the fate that befell the Unix operating system, on which Linux is itself based. Developed by AT&T at the end of the 1960s, Unix was eventually carved into several different versions as tech companies sought to gain advantage from making their own modifications to the system. This fragmentation eventually left the big Unix companies - IBM, HP and Sun - vulnerable to attack, says Al Gillen, head of operating systems at research firm IDC. "They ended up with great products but they lost the bigger battle - they opened the door to Microsoft," he says.

Keeping the big companies in line this time round - other than an increased mutual respect for Microsoft - is a licensing system that gives them little incentive to try to commandeer Linux for their own purposes. Developed by Stallman, the so-called general public licence attached to Linux forces anyone who modifies the system to make the modification freely available to others. "The licence doesn't guarantee there won't be fragmentation but it makes it very difficult to support a business model" if a company wants to develop a proprietary Linux, says Mr Frye at IBM.

The big makers of Unix, led by HP, IBM and Sun, are already suffering from a downturn in demand for their high-priced machines and will not all find it easy to switch to the new world of Intel-based machines.

The old business model worked well for Sun. With its proprietary Solaris operating system and Sparc chips, its gross profit margins reached 52 per cent in the late 1990s. That is well above the 18 per cent margins of Dell Computer. Price competition has already forced Sun's margins below 40 per cent. HP, with a third of the global Unix market, and IBM with a fifth also face pressure, though both are less dependent on Unix than Sun. HP and IBM have also already created big Linux businesses of their own.

To some extent, this attack on high-priced computing is nothing new. "The shift to low-cost has pretty much been consistent since the computing industry was invented," says John Fowler, a Sun executive. The falling price of chips has made price deflation a familiar pressure.

This time, though, a different business model may be emerging. With hardware and operating systems becoming more standardised, computer makers will have to turn to other areas - the software applications that run on computers and the services and support needed to build complex systems - to generate a profit. While HP leads in the Linux business, claiming the free software drove sales of computer systems worth $2bn last year, IBM is probably the best-placed to benefit from this trend - hence its enthusiastic embrace of Linux. With the world's biggest IT services arm and a software business based on middleware - programs that sit between an operating system and the different software applications - Big Blue has ample incentive to reshape the corporate computing business in its own image.

That model of software development is diametrically opposed to the Microsoft approach and points to the battle to come. By building more features into its operating system directly, Microsoft claims its customers will need to spend less on middleware and integration services to build their corporate networks.

But the challenge is obvious. Free software has powerful attractions - which Microsoft exploited when it bundled a free internet browser into its operating system to challenge Netscape. In a direct attack on Microsoft's stronghold, rivals such as Sun are already enthusiastically promoting Linux as an operating system for PCs, though this is still a tiny market.

Any threat to the Windows operating system represents a huge challenge to Microsoft's dominance. Together, the Windows PC and server divisions produce more than half of Microsoft's revenues and nearly three-quarters of its earnings, producing much of the cash that has fuelled its push into everything from computer gaming to internet access.

The head-on conflict between Microsoft and the Linux companies is still some way off. There is also a chance that Linux will stumble. The Linux operating system is renowned for its security. But some Microsoft executives point out that Linux has yet to face the army of hackers, bent on finding weaknesses, that has assailed its own software and exposed security flaws that have dented Microsoft's reputation for reliability.

Microsoft is already changing tactics, industry observers say. "You'll see a shift from Microsoft to preaching the benefits [of its software], not the theological arguments," says Mr Houston. The software group is also starting to borrow ideas from Linux. These include selling modified or stripped-down versions of its server operating system to carry out particular roles, which it says will begin with the release of the next version of the software due this spring.

In addition, Microsoft last week said it would let government customers examine the source code of its Windows operating system, a move intended to overcome perceptions of the systems's security weaknesses.

These are all signs that the fight is beginning to heat up. A head-on clash between rival visions of the software industry, with Microsoft pitched against big rivals, may not be far off. Additional reporting by Paul Abrahams

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Cheap and secure: Europe's open-source option
By Stephanie Kirchgaessner and Ben Hunt

Alarm bells rang at Microsoft headquarters when executives got wind that the information technology department of the West Yorkshire Police Department in northern England was considering replacing Windows with Linux.

Microsoft even placed a concerned call to its UK office to ask about the software preferences of the 7,500-strong police force.

The software group cannot deny that a threat is looming in Europe and Asia. The European Commission is encouraging government agencies to consider adopting open-source environments and Linux is increasingly being touted as the more secure and less costly alternative.

Adopting Linux could also stimulate the growth of a new era of local software groups - keeping the billions of euros and pounds that are spent on technology every year by European governments and companies inside the region, instead of in the pocket of an American monopoly.

Even worse for Microsoft, Europe's fledgling interest in Linux does not compare to the fervour for open-source software in India and China, the fastest-growing markets in the world. Could India's software developers succeed where the US government failed, in denting Microsoft's armour?

Apparently, Bill Gates thinks so. Mr Gates went on a tour of India last year and donated $400m to Indian education and software development projects that will probably support Microsoft's online services. The visit and investment, however, are not likely to be enough to damp Indian techies' enthusiasm for open-source software.

China, too, is betting on Linux to raise its prominence. The country has sharply increased its use of open-source-based servers and desktops over the past two years.

Although Linux has been slower to catch on in Europe, the drive to end dependence on the US for technology is a common but seldom admitted justification in every country exploring the technology. Graham Taylor, programme director for Open Forum Europe, a non-profit business that aims to accelerate the adoption of open-source, says the software will make it easier for small companies to set up with few constraints.

"Germany is promoting open-source proactively and there has been legislation to support it. [It sees it as] the chance to move the European technology industry forward. This is not about protectionism but extending choice and adopting open-source enhances companies' ability to operate across national boundaries," he said.

Indeed, Germany is the most active advocate and user of open-source software in Europe, with about 50 city councils across the country using Linux in parts of their infrastructure. The small southern German town of Schwabisch Hall, for instance, opted for Linux over Windows for its infrastructure. Hermann-Josef Pelgrim, Schwabisch Hall's mayor, says Linux is not only cheaper but also more secure than the alternatives. He adds: "the choice of open standards ensures interoperability among different technical offerings."

The UK, one of the slowest countries to adopt open-source - partly because of close ties with Microsoft - last year published a paper offering guidance to government departments considering switching to open-source software. And the Office for Government Commerce, which had previously persuaded department heads to buy software from Microsoft in an initiative that saved taxpayers £100m ($150m), has become an active open-source advocate.

The OGC says it changed its policy because it recognised that open-source is cheaper. "OGC is now constantly saying [to departments]: you have to look at what's best for you . . . and of course it's easier to develop open-source," says the OGC.

For many users the software question simply comes down to money. To Paul Friday, head of IT for the West Yorkshire Police, using Linux is not a statement against Microsoft but a way to save money. "No one has ever worked out what it really costs [to run Windows]. There was never a real alternative; you just did it."