Replies

That isn't true. Even for a pure software play like Red Hat, there is no 'cap' on the revenues they might earn by selling services and support. Red Hat itself is still struggling, but the world is full of service and support companies, from IBM's Global Services Division to Accenture, and many of them are highly profitable and quite large.

Service-related companies don't have the potential for profitability that software companies do. They are highly labor-intensive; whereas, once software is developed, it continues to generate profits. VA Linux failed miserably to exploit a service-based revenue model. And the only reason that IBM continues to trudge along is that it sees services as an adjunct to selling hardware -- services aren't an end unto themselves.

However... the venture capitalists did buy in, and the company did enjoy a brief period of success, during which time it went public and a bunch of people got rich...

Which proves at least one thing: That there are some extraordinarily stupid human beings on this planet.

It is still possible to gain competitive advantage by building nifty things around it. If IBM can slough off a big part of its operating system development expense on some willing volunteers, this leaves it more resources to build things like silicon-on-copper processors, and figuring out how to make little tiny transistors out of carbon nanotubes.

True. And that's precisely what Sun is trying to do now. They want free labor to replace Solaris on cheap boxes. But I doubt that it will work because they don't have nearly the economy of scale that Intel and AMD provide.

That is not an argument against open source. That is an argument in favor of every hardware vendor having their own proprietary operating system.

Yes. And as long as that high-end box combined with that proprietary advantage provide enough value (and reasonable compatibility), people will continue to buy it.

I forgot to add one point. Let's say that HP comes up with some optimization -- let's say a kernel or a device driver or a clustering change -- it isn't in HP's interests to release that optimization to the rest of the world. For one thing, it may be patentable and (therefore) valuable intellectual property. Secondly, the optimization is what sets HP's product apart. Once that advantage is gone, the only thing which separates one OEM from another is hardware and drivers. That's it. And that's not enough to keep some of these companies in business.

Service-related companies don't have the potential for profitability that software companies do. They are highly labor-intensive; whereas, once software is developed, it continues to generate profits.

That's a canned noise that we hear a lot, but it isn't really true in either direction.

Software development is also labor-intensive. When a new software product is released, one of two things happens: it either falls on its butt, in which case the company is lucky to even recover its development expense, or it takes off, in which case the company jumps on a labor-intensive treadmill called "getting out the next release" which -- if things go well -- goes on forever. Any company that develops a hot software product and then just sits there milking the first release, will quickly find that they lose their franchise to a competitor.

On the services side, a similar thing happens, although the consulting companies would like us to pretend that it does not. Let's say Accenture -- to pick a name -- gets hired to assist Yoyodyne with entering the credit card processing field. They will do a bunch of labor-intensive stuff, in the course of which they will get smart on the subject of credit card processing. They will have a Rolodex when they are done, and a fat report in the drawer. They'll take that same stuff and sell it twenty more times... not exactly the same stuff, but close enough that something like "economies of scale" start to appear. Internally at least, it starts to look more like a product than a service, although they'd never admit that.

And as long as that high-end box combined with that proprietary advantage provide enough value (and reasonable compatibility), people will continue to buy it.

I think you missed the point there. He was arguing that a hardware vendor could gain competitive advantage by offering an operating system that other people did not have, in other words, their own proprietary OS. That issue was settled by the market... the appearance of multi-vendor operating systems like UNIX and DOS put all the proprietary machines out of business. The only one left with any significant usage today is OS/390. VMS, AOS, Aegis, PrimOS... all those things are dead, and so are the machines they ran on. I think VMS even got ported to the Intel architecture, but no one cared.

When the PC first came out, Digital offered a desktop machine running RSTS/E. I thought that thing would be a big success -- there was a huge installed base of RSTS users -- but the customers stayed away in droves. They saw the handwriting on the wall for all proprietary operating systems.

[Concerning Sun:] I doubt that it will work because they don't have nearly the economy of scale that Intel and AMD provide.

I think you are right that reality is about to catch up with them. The original idea behind SPARC was that they could use the simplicity of RISC to keep the design-side costs competitive with Intel, even though they had much lower volume. And they used big Japanese fabs to manufacture the chips, so they slid by on the operations side as well. But I think that game is coming to an end. You can only squeeze so much performance out of RISC by increasing the clock rate, and they've pretty well maxed that out. There's nowhere else for them to hide.

I can't see Sun going with Intel and playing head-to-head with the likes of Dell. It's not their game. Here's my bet: they switch to IBM's chip, and within six months after doing so, merge with, acquire, or sell out to, Apple. A combined Apple and Sun, both running UNIX flavors on Power PC chips, makes a lot of sense.