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Is the Penguin Losing a Step?

By Jay Greene One of the powerful forces propelling the rapid growth of Linux has been the rate at which new customers have been adopting the open-source operating system. But a new report suggests that growth rate could be about to slow.

Investment banking firm SG Cowen & Co. notes that for the first time since it began tracking Linux in its annual survey, the number of companies planning to become first-time users of the software has fallen -- by half. The report, released June 1, asked approximately 500 corporate tech buyers in North America about their spending plans for the next 12 months. Only 7% of outfits with no Linux servers plan to add some over the next year.

That number represented a drop on the three previous Cowen surveys, dating back to September, 2003, which had found that from 12% to 17% of non-Linux-using companies planning to embrace the system. "In terms of penetrating organizations," says Cowen analyst Drew Brosseau "Linux seems to be hitting a limit."

DUBIOUS SAVINGS. That doesn't mean overall Linux use is slowing. The survey only shows that a smaller number of companies not using Linux plan to try the software than in previous surveys. Most analysts expect Linux use to grow at the companies that have already rolled it out -- and do so at a healthy rate. And analysts say Linux is picking up steam outside North America, which the Cowen survey doesn't cover.

Brosseau thinks Linux won't find as many new customers as in the past in large part because it has already tapped the market that includes its most likely buyers: Unix users. Linux adoption has been strongest at companies that use the Unix operating system because creating programs for both systems is so similar. By now, though, most companies than run Unix also have some Linux systems.

What's more, some companies that experimented with Linux hoping for big cost savings found that the open-source software wasn't what they expected. "Some of the bloom is coming off," says Brosseau.

BACK TO MICROSOFT. Take Independence Air, a low-cost Washington (D.C.) carrier that had been running the reservation system on its Web site with Linux. The company, which uses Microsoft's Windows operating systems in most other pieces of its business, needed to hire consultants who could write code for Linux, since its Windows developers couldn't.

"That cost was killing me," says Stephen Shaffer, Independence's director of software systems. After eight months, he replaced the system with Windows and a batch of other Microsoft applications, which he believes will cut his costs by 70% a year.

Naturally, Microsoft sees the Cowen survey as proof that Linux is finding resistance. "This data completely validates what I've seen," says Martin Taylor, Microsoft's general manager for platform strategy. Not only is Linux maxing out on Unix users but it's not finding new customers among stalwart Windows users, he says.

GLOBAL FRONTIER. But few others are ready to say Linux use is on the wane. Indeed, analysts expect it to expand at the companies that are already using the operating system. Siemens (SI), for example, has Linux servers handling some of its firewall and communication applications. Now, it's pushing Linux into its data center, heavy-duty computing that hasn't been the open-source operating system's forte. "We're seeking out opportunities to use it," says Jan Dressel, Siemens (SI) USA's chief information officer. "We need to drive down our costs."

That's one reason why Linux sales continue to grow worldwide. Market researcher IDC found that revenue from Linux server sales grew 35.2% in the first quarter of 2005, the 11th consecutive quarter of double-digit growth. Plus, it expects customers to expand Linux use into a broader array of applications.

It may get harder to find potential customers that haven't yet tried out the Linux operating system. But has Linux hit a wall? Don't bet on it. With Steve Hamm in New York

Greene is Seattle bureau chief for BusinessWeek

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