Hacking an Industry

In September I suggested that the real Linux "threat" — the true course of World Domination — was not a epic battle between Linux and Windows, but the quiet transformation of the whole software industry from one known mostly for its vendors to one known mostly for its builders.

Since then usage for the verb "build" and the noun "builder" have shot up. True, Web work has always hat its construction and real estate metaphors: we "build" or "develop" a "site" with an "address" or a "location." But, to borrow another real estate metaphor, the ground is beginning to swell. In fact, it feels like there might be a volcano under here.

One harbinger is Borland (known less well these days as Inprise, or Borland/Inprise, or something like that). The company already had Builder-branded tools (J Builder, C++ Builder) when it detected the obvious fact that the server side of the Web was being built out by a huge and growing number of Linux hackers. So the Borland folks thought they'd do a little research. Would Linux developers like some Borland tools for Linux? they asked (on a half-dozen popular Linux-related Web sites). The answer was a word balloon big enough to fill the sky. Twenty-four thousand programmers spoke with one voice. "Yes!" they said. Significantly, most of those speaking called Windows their current development platform. (Read more about it in this month's UpFront section.)

Even CNET's Builder.com site and Builder.com.live! trade show, for all their Windows defaults (they still ghetto Linux discussions into a "Project Heresy" section) can't ignore developments that are manifest in their own discussion groups: there are more than a thousand posts, just talking about the two most recent Red Hat versions.

But here's the real magma in this volcano: demand. "The whole business world is moving to the Net," says Inprise/Borland CEO Dale Fuller. "The new skyline of business is being built on the Web. And constructing it will take an enormous amount of work. Lots of builders will need lots of tools and construction materials, not to mention architectural blueprints. That's our business, and we think it's a good one to be in."

Look at the numbers. According to International Data Corp., businesses bought $80.4 billion worth of goods and services over the Web in 1999, and consumers spent another $31 billion. IDC expects those numbers to reach $1.1 trillion and $177.7 billion by 2003 — increases of a 1,418% and 574%, respectively. That's in cash money. For real stuff. (Remember how the big revenue model for the Web was going to be advertising? Well, that will explode too, but to "just" $33 billion in 2003, IDC says.)

Now think about the infrastructure involved here. "Huge" doesn't cover it. Those numbers are just for e-commerce. What's it going to take to build out the infrastructure behind all that? We know it'll take two things for sure: Linux and Apache — two well-proven kinds of building material. Of course, Windows 2000 will be involved too. There are just too many people already constructing this new skyline with Microsoft tools and building materials. The difference is that the builders themselves help improve Linux, Apache and other open source products. They can't do the same for Microsoft.

One developer put it to me this way: "When I'm building a skyscraper, I want to know there's rebar in the concrete. With Linux, I know. With Microsoft, I don't. In fact, NT's memory leaks prove to me there isn't rebar in there. Since I have to work with NT for political reasons, I just cope with it. But I know if we could see the source, we could probably fix the problem pretty fast."

It's a subtle thing, but I feel the center of gravity in the software industry start to shift from platforms and applications to tools and building materials. Or, as Eric Raymond likes to put it, from sale value to use value. The irony is, use value helps make a bigger overall industry.

So the next question is: If the software industry is going to turn into another construction industry, what becomes of Microsoft? To help find that answer, let's ask: Who is the Microsoft of the construction industry?

Is it Home Depot? With more than $8 billion in 1999 sales, Home Depot is the "big box" store for the do -it-yourself (DIY) business, and a "category killer" for hardware stores. But technically it's a retail business.

The biggest home builder in the U.S. is Centex, with more than $5 billion in 1998 sales. Behind Centex are Pulte and Kauffman and Broad, both in the $2.5 billion range. But none of those companies are household names. Equally unfamiliar is Japan's Shimizu, which outweighs all three American leaders. Even less memorable (and pronounceable) is ABB Asea Brown Boveri of Switzerland, which had nearly $31 billion in 1998 sales. That's not only bigger than all those other construction companies, but far ahead of Microsoft, which had less than $20 billion in the same year.

The big difference, of course, is that Microsoft's earnings — its profits — approached $8 billion while ABB Asea Brown Boveri barely passed $1.3 billion. At almost 97%, Microsoft's gross profit margin was well ahead of the industry average of 82%, and more than double the average for the eight thousand members of the New York Stock Exchange. Its net profit margin (39.4%) also more than doubled its own industry (15.8%) and was more than seven times larger than the average for all of Wall Street (5.8%).

As I write this, Mircosoft has a market value of around one-half trillion dollars. Compare that to General Motors, which is #1 in the Fortune 500 on 1998 sales of more than $161 billion, but which earned less than $3 billion in the same year and currently has a market value of less than $50 billion. Microsoft is simply the largest, most profitable and most durable member of the world's most profitable major industry.

But let's put this in perspective. The total worldwide packaged software market — Microsoft's category — was $135 billion in 1998, and growing at a 13.6% rate. But the worldwide outsourcing services market was nearly as big: $100 billion in 1998 and growing at about the same rate. The computer services industry was $90 billion in 1997. And we're not even touching a raft of other hefty categories: enterprise resource planning, security, database management, transaction systems and so on.

Meanwhile the construction industry in the U.S. alone is $619 billion.

Yet the leading builder, Centex, accounts for less than 1% of the whole industry. That's because most of the industry is local. "Compared to the globalization driving much of the construction industry, the localized nature of home building seems almost quaint. Small local contractors still account for four-fifths of all domestic residential construction," writes Hoovers (www.hoovers.com). And that's just counting the current job-holders. The do-it -yourself business is also huge, as Home Depot shows.

And that brings us back to what's really going on.

Linux and other open source products — along with constantly improving commercial tools from the likes of Borland/Inprise — are equipping software architects, developers and solution builders to take over the qhole software business. If it follows the lead of the construction business, the result will be a much bigger pie for everybody to split, including Microsoft.

I think we'll see the software industry start to explode on the same curve, and on the same scale as the last "free" development everybody but the hackers ignored: the Internet.