The week in review: Linux ever upward

The startling buyout of a Linux media site that went public only two months ago and IBM's decision to incorporate the open-source software in one of its mainframe systems topped a busy week at the LinuxWorld Conference and Expo. The gathering has grown rapidly in tandem with the widespread adoption of Linux, a clone of the Unix operating system and a competitor to Microsoft's Windows NT.

Big deal
Surprising everyone, VA Linux, which sells computers and services, acquired news and information site Andover.Net for more than $800 million, bolstering its efforts to lure corporate customers. VA hopes developers visiting Andover.Net for information will be steered toward buying VA's products.

The agreement was negotiated within the space of a few weeks, according to VA's chief executive. But the speed at which Andover.Net moved from IPO to takeover target amazed even industry veterans. "This is unprecedented," one financial analyst said. "That deal went public a couple months ago and already they're tossing in the towel."

In another landmark development, IBM previewed a multi-million dollar system running nominally free software. As part of its S/390 mainframe, Linux could be utilized by companies as big as Salomon Smith Barney or Schwab to speed up and better secure business processes ordinarily handled by smaller servers, Big Blue contends.

Separately, a coalition called the Trillian project--including IBM, SGI and such leading commercial developers as Red Hat--released a version of Linux that works on Intel's next-generation microprocessors. The upstart operating system has much to gain from the 64-bit Itanium; however, Linux is new to the high-end market and Itanium isn't expected until the second half of the year, so it's not clear whether this will expand Linux's stronghold on 32-bit Intel chips.

Meanwhile, Compaq announced new efforts to support Linux on its 64-bit Alpha chip platform.

A bit lower on the food chain, "skinny" servers stacked up by the dozen are rapidly becoming the preferred way for PC companies to squeeze profits out of the popularity of Linux. Relatively low cost, high reliability and network-friendliness make the software a good choice for businesses that need lots of servers to handle tasks such as delivering Web pages or funneling requests to a back-end database. SGI, IBM, Penguin Computing and Network Engines, among others, announced new products that fit the mold.

At last
Vodafone AirTouch agreed to buy Mannesmann in a stock swap valued at $190.5 billion. The agreement ends Vodafone's three-month campaign for control of Germany's largest cellular company and makes it Europe's biggest phone business. If it goes through, the biggest takeover in history, surpassing America Online's pending $154.8 billion acquisition of Time Warner, would create a company with more than 42 million cellular customers. With about 10 percent of the world's mobile phone customers, the group could also dominate mobile Internet services.

Qualcomm agreed to license its wireless voice and data transmission technology to China Unicom, the country's second-largest government-owned communications company, clearing the way for its CDMA standard to break into a lucrative market. The pact marks a significant win for CDMA, which has gained among North American carriers drawn to its efficient use of wireless spectrum and ability to carry data and Internet traffic at high speeds, but badly trailed the rival GSM standard in China, much of the rest of Asia, and Europe.

Microsoft is negotiating distribution deals with Sprint PCS, AirTouch and others to boost its technology in the rapidly expanding market for wireless devices. The telecommunications companies would deliver a new version of Microsoft's Internet content service, dubbed MSN Mobile 2.0. Mobile MSN, launched last summer, pushes Net content such as news and sports scores to pagers and cell phones.

Intel landed a deal to sell as much as $1.5 billion in flash memory chips to cellular phone maker Ericsson over the next three years, and the companies will co-develop flash products capable of storing code and data such as Web pages, email, voice and music. Both companies are looking to be part of future network services offering voice and Internet capabilities in wireless handheld devices.

Expansion
Gateway will expand its foreign marketing and sales efforts in the coming year, beginning by moving into Canada this month. A launch into Mexico will come later in 2000, according to executives. The move complements Gateway's transformation from PC manufacturing to providing more-complete technology packages incorporating software, training courses, ISP services and even networking equipment. PC makers in general are trying to counter the decline of computer prices.

Flextronics, which manufactures PCs, servers and consumer devices for name-brand companies, bought Palo Alto Products, a design firm that helped create such popular products as 3Com's PalmPilot and some of the small, "designer" PCs that have recently emerged. Should the merger prove successful--and the "contract manufacturing" business continue to grow as it has--the PC market could be encouraged to divide into two camps: unknown companies such as Flextronics that actually make products and well-known firms such as Dell and Hewlett-Packard that focus on marketing and sales.

Free-PC, which offered free computers and Net access to customers willing to accept on-screen advertising, wrapped up business after giving away some 25,000 systems. The company recently merged with low-cost leader Emachines, both of them having been at the forefront of the price war which transformed the consumer PC market. Customers who signed up for the deal and received a PC get to keep it, no strings attached, although the free Net service will end.

The next step
Traditional business software makers and emerging applications service providers are squaring off in the market for hosted software services. Oracle, SAP and PeopleSoft--expected to launch its own ASP next month--are building quickly for the same reason that telecommunications giants such as AT&T are investing in hosting centers that will house rented business applications: to nab new profits by providing customers with new Net-based services.

KPMG incorporated its consulting unit, the first step toward a public offering. Such a move could serve as a litmus test for rivals Deloitte & Touche, Andersen Consulting, Pricewaterhouse Coopers and Ernst & Young. All of the "Big 5" accounting/auditing firms operate consulting practices that are struggling to find their place in the new Net economy, having lost executives to Internet start-ups offering lucrative option packages. An IPO could also build the company's image as a firm that can transform a Fortune 500 company's business into a Net play.

Time Warner may be facing an early exodus of top executives who instantly became eligible to cash in all their stock options under an unusual but long-standing provision that took effect upon last month's takeover announcement by America Online. Employees with previously unvested options won't have to wait for the merger to officially close before exercising them. They can do so now.

Amazon.com posted a wider-than-expected loss for the latest quarter but said its U.S. book business made money. Analysts had been watching to see whether the retail leader could turn a profit in its flagship segment, as it promised last year. But Amazon said it will continue expanding, and expects the current quarter's sales to be down from its fourth-quarter revenues because of the seasonal nature of Amazon's toys and consumer electronics businesses. Should that happen, it would mark the first time Amazon's sales have slumped on a sequential basis.

Unhappiness
A consumer advocacy group organized a protest against DoubleClick, encouraging the public to email complaints about the online marketing giant's privacy policies to the company and 60 leading clients. The Center for Democracy and Technology objects to plans to create a database of consumer profiles that would include each user's name and address; retail, catalog and online purchase history; and demographic data. In an email response, the company said it does not profile "health information, detailed financial information, information of a sexual nature and information on children" and will not link "personally identifiable information about a user to online behavior without first giving that user notice and the choice not to participate."

Bulk email advertising--spam--is undergoing a quiet transformation as direct marketers implement more sophisticated techniques for better targeting messages to people who may actually want to see them. Advertisers have sought to gain permission from consumers before sending pitches, which has allowed them to tailor advertisements to an individual's preferences with impressive results. The industry has a long, long way to go in gaining the trust of email users, however.

Students on university campuses that have banned Napster gained hope for circumventing blocked network access. After riling the software maker by posting instructions on how the controversial digital-music download system works, a Stanford University student published a tutorial for getting around school roadblocks. The music industry dislikes Napster because it says it fosters a black market; schools say it hogs bandwidth.

Again bowing to pressure, eBay said it will ban new auctions of items that promote such groups as the Ku Klux Klan and Aryan Nation. Current listings will remain, however, and the online auctioneer will continue to allow items of "legitimate collectible" value, which must be at least 50 years old. Last year, eBay came under scrutiny for Nazi items.

A trade group sued Sony Music Entertainment, alleging that the company is strong-arming retailers to point their customers toward its online shops. Brick-and-mortar chains are forced to stock CDs that contain Web links and include promotional material for Sony's e-commerce sites, according to the complaint. Giant Sony is a content company, CD distributor and e-tailer.

Also of note
Palm Computing cut prices in preparation for the release of new models, including its first color handheld...The Justice Department closed its antitrust investigation of Network Solutions without taking any action against the dominant domain registrar...Separately, the DOJ queried eBay about its efforts to block third-party auction search engines from accessing items listed for sale...A $2 billion White House plan to protect telecommunications, energy and other key systems from attack relies too much on detecting intrusions and not enough on improving security, said the General Accounting Office, Congress' investigative arm...USA Networks and the National Basketball Association unveiled a cross-marketing relationship to sell and market NBA merchandise through USA Networks' e-commerce, television and customer service properties.