Linux vendors consolidating, cutting back

Consolidation and cutback moves by Linux vendors accelerated last week, highlighted by VA Linux Systems Inc.'s disclosure of increased losses, a 25 percent workforce reduction and key management changes.

The cutbacks at VA Linux were followed a day later by an announcement that rival TurboLinux Inc, has agreed to acquire Linuxcare, a San Francisco-based company that offers Linux-related consulting services. Both TurboLinux and Linuxcare went through layoffs and management changes of their own last spring.

VA Linux reported a pro forma loss of US$13.4 million for its second fiscal quarter ended Jan. 27, more than double the $6.3 million deficit in the same period a year ago.

As part of the financial results announcement, VA Linux said it's laying off about 140 of its approximately 560 workers. The company also named Ali Jenab its new president and chief operating officer. Jenab, who joined VA Linux as head of its systems division last August, will take over day-to-day operating responsibilities from CEO Larry Augustin.

In an interview last week, Augustin said financial analysts and VA Linux itself had expected better results in the second quarter but the company couldn't overcome the economic slowdown in the US.

"We've had very strong revenue growth, but ... the market was looking for more," Augustin said, describing the retrenchments taking place at Linux vendors as "a normal phase in any new market."

Tony Iams, an analyst at D.H. Brown Associates said Linux vendors have had to rethink their business strategies in recent months as numerous dot-com companies have shut down or moved to sharply reduce their spending.

Market Repercussions

E-commerce ventures had been big Linux users because of the fast deployment and low cost associated with the open-source operating system, Iams said. And VA Linux was especially vulnerable because its user base was heavily weighted toward the dot-com world, he added. VA Linux is "going to have to struggle through this," he said.

TurboLinux's acquisition of Linuxcare had been expected for several months. The combined company will keep the TurboLinux name and will be run by TurboLinux CEO T. Paul Thomas, with Linuxcare CEO Arthur Tyde III becoming chief technology officer. The financial terms of the deal weren't disclosed.

Al Gillen, an analyst at IDC, said the acquisition is a sign of things to come in the Linux market.

"We've expected some degree of consolidation," Gillen said. "The Linux market is very fragmented." More than 100 companies or groups are currently offering their own versions of the operating system, he added.