How FSF Is Preventing Dell from Doing Linux on the Desktop

Rob Enderle

I keep reading posts that suggest the reason Dell is not being more aggressive with desktop Linux is either because of Microsoft pressure or because it is being tricked by a Microsoft "Get the Facts" report. I think this goes to the fact that few Linux advocates get the economics of desktop PCs and clearly think that because they can do Linux on their machines it must be easy to do it on a Dell box.

 

This isn't unusual; Apple advocates (and Apple is vastly better on the desktop) wonder why there isn't more Apple penetration in business and also seem to blame Microsoft. Both groups fundamentally don't understand the economics of the desktop, which affect both groups differently to create the same result. Because the Apple issues are so different, we'll deal with them in a future post. For now, let's focus on Dell's problem.

 

Desktop Economics

 

Unlike servers, which sell in comparatively low numbers and are often highly customized, desktops are cookie-cutter products that sell in the millions. One dollar of additional cost is multiplied by those millions and flows to the bottom line. In short, for every extra dollar Linux costs, that is a dollar out of Dell's profit.

 

But, you say, Linux has a lower TCO. While the jury is clearly out on that, even if it were the case, TCO is a metric that talks about buyer cost, not seller cost, and that lower estimated TCO largely comes out of the OEM's (the company that brands the PCs but often no longer actually makes them) pocket.


 

Currently, Windows is a pass-through cost. In other words, the market is willing to pay (granted, with lots of whining) the same price or more than the OEM pays for Windows.  At worst, they pay the same amount. Microsoft then kicks back money and resources for support, development, tools and special resources for integration and drivers. It also kicks back marketing dollars to help sell what results, and that amount is far from trivial.

 

So, for example, Dell gets about $20 extra for every copy of Windows sold direct and probably another $15 or $20 for all of the other stuff. It incurs most of the cost regardless and this increases its profitability -- Dell doesn't make a lot of profit on hardware and that extra $40 or so is much-needed profit.

 

Linux Desktop Economics

 

Thanks largely to the Free Software Foundation (FSF), folks think Linux should be free. That means whatever Linux costs Dell at least partially comes out of Dell's pocket and there are none of the extra perks. On paper, assuming my rough $40 estimate is right, Dell makes more than $40 less on every Linux box sold. Why more?

 

Because Linux has extra support costs associated with it. These costs have to do with the fact that most experienced Linux users tend to roll their own hardware and don't buy from Dell, so you get a lot of Linux novices who may be trained on Windows but have never actually administered or managed Linux. This drives up support costs. Plus, drivers on new hardware are incredibly hard to come by with Linux, which means Dell has to either develop them itself or, rather than buying the best valued hardware, it has to specifically favor the hardware that has Linux drivers.

 

Finally, Linux buyers are not premium buyers. They think software should be free so they don't buy Microsoft Office, virus checkers, or any of the other products Dell markets to increase its profitability. They don't even buy high-end hardware and tend to buy Dell's cheapest products -- the ones that already have the slimmest of margins.

 

This is why Dell is struggling. If it could just offer one distro, it could lower its support costs dramatically and maybe shift a lot of them to Novell or Red Hat, but the market is too fragmented and, on the desktop, few seem to want either company's products.

 

The Case for Premium Linux

 

Now, normally, in a market dominated by one vendor, if you wanted to put something like UNIX on desktop PCs, you could do it on higher-end PCs and charge a premium for it, at least initially, until volumes allowed you to get the economies of scale needed to drop support costs so that you could more aggressively price the products.

 

Or, there would be a large, well-funded software vendor behind the effort that was initially willing to subsidize the lower prices for competitive reasons. OpenOffice and Star Office both were partially subsidized by Sun, for example. But, even here, Sun is a primary Dell competitor and the two companies don't like each other much. Plus, getting someone to pay extra for OpenOffice could be a problem.

 

But what if Dell could create a premium product that ran Linux? Let's say it contracted with Corel for productivity and photography products. (Corel is viewed as a strong provider in this segment and is well penetrated in government and legal verticals). This would give it a stronger, from a revenue and profit standpoint, product set. Then it could take the top Linux desktop distribution, which I believe is Ubuntu now, and contract to have it made even more user friendly or work with Novell to do the same. But, rather than targeting Microsoft, let's say it targeted Apple in terms of hardware quality, design and user experience. The result might be a premium offering, particularly if the hardware was uniquely attractive. That could pull an audience and pull a profit.

 

We come back, however, to FSF and the fact that it would probably do whatever it could to ensure this wouldn't work because it would view the move as blasphemous.

 

Why the OEMs Want to Do Linux

 

The reason the OEMs, and Dell is far from the only one, want to do Linux is because they are upset with Microsoft and fixed a similar problem with Intel by partnering with AMD.   In the Intel case, Intel wasn't listening to them and was doing things like playing around in the consumer electronics market with products that competed with their own offerings. Without AMD, they had to grit their teeth and take it, but as soon as they brought AMD into the picture, Intel exited consumer electronics and started to listen to them (and when it didn't, the OEMs went farther with AMD).

 

While this wouldn't have been possible had AMD not been executing well, it was largely Intel that got them to where they are today and the OEMs like what AMD is doing to help them. They want another AMD but one to position against Microsoft because Microsoft isn't listening and is increasingly positioning the Xbox against their own PC products. In addition, the Xbox is closer to what they have been asking Microsoft to give them in the Media Center and Origami, so it is almost as if Microsoft is only applying their requests to products that they have to compete with now. That is understandably upsetting them.

 

But standing against their efforts is the FSF and both the focus on "Free" for Linux and GPL 3.0 which, to the OEMs appears anti-them. So, if you want to see Linux on a Dell machine, somehow the risk has to be less and the profit has to be more than it is today, and it isn't Microsoft that is standing in the way. On the contrary, Microsoft is the biggest driver for the effort right now, albeit unintentionally.

 

So, would you be willing to pay as much for Linux that was fully supported by Dell as you would for Windows? Or, put another way -- is Linux worth more or less to you than Windows? If it is really worth less, maybe that is the problem that needs to be addressed before you complain about OEMs not putting Linux on PCs.



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Mar 19, 2007 2:26 AM Ken Hardin Ken Hardin  says:
Hi, Rob. Ken Hardin from IT Business Edge here. A few questions for you:1) Wouldn't most Linux "advocates," as you call them, consider the marketing support Microsoft provides OEMS on Windows systems as "pressure"?2) Let's say Red Hat, for example, cuts a deal with Dell and Corel to polish a distro/desktop package that would appeal to businesses looking to maybe extend their client system cycle by a year. If Red Hat is willing to pay Dell a marketing stipend large enough to establish the distro as a pass-through cost, in exchange for a rev-share on support contracts, isn't that about as much revenue as a OEM can expect off a commodity client sale, anyway? And if they can pull back on the hardware a bit, margins could be attractive. Certainly, personal Linux users tend to want to pick and choose components, but for a business that's looking for uniformity, wouldn't the promise of a simplified patch cycle be pretty compelling? Commodity clients aren't a rich area for upsell, aside from Office, correct?3) On what grounds could the FSF impede a deal, such as the one above, that hinged only on the exchange of marketing dollars and support fees?Thanks, Ken Reply
Mar 19, 2007 2:38 AM Rob Enderle Rob Enderle  says:
1) On pressure, perhaps but only if they didnt understand how an ingredient brand typically markets. This same process is used by virtually anyone who has an ingredient brand to some extent or other the stickers on the PC actually have money associated with them for instance.2) Commodity PCs are actually where up-sell is often strongest, if we approach it from the product side. These get you into the bidding process and Dell is expert in selling up once the bid is let. There are always those that buy at the bottom of the price barrel and dont move but they are generally customers the OEMs almost wish they lost to their competitors because of the negative impact this class has on average margins. Customers who buy higher up, which fortunately for the OEMs is still more common, are the more attractive segment. Spending a lot of time on customers youd almost rather not have is counter strategic. So, Commodity clients, as you describe them, are those the OEMs would rather not get in the first place. If Linux means more of them, then Linux wont be very popular with the OEMs unless they can find a way to improve profitability. 3) FSF wouldnt for a commodity client but, as I say, that kind of client isnt attractive to a company like Dell in the first place because it hurts average margins. Reply
Mar 19, 2007 3:18 AM pgfresno pgfresno  says:
>In the article you don't explain what the FSF has to do with Dell offering Linux. Assuming that Dell would comply with the various software licenses, how or why would the FSF be involved? Reply
Mar 19, 2007 5:51 AM Rob Enderle Rob Enderle  says:
While the Free in Free Software Foundation is supposed to be "Free" as in Freedom, they have been rather outspoken against those that want to make money off of Linux suggesting that it also means "Free" as in free beer. Dell needs to generate cash off this deal, if they can't raise the value, and price, for their Linux offering they can't justify the effort finanically. In addition, concerns over GPL 3.0 have have a lot of folks in business worried about Linux risk. That's all coming from FSF. Most vendors (I'm not aware of one that is in favor) don't like 3.0 at all and while Linus is saying he will not move, others are outspoken that he doesn't have a choice. This is FUD big time and well founded FUD largely being generated inside the Linux community and all sourced to FSF. Does that help? (I was primarily focused on the money though). Reply
Mar 22, 2007 1:01 AM Vinnie Vinnie  says:
Few points about consumer market:when dell sells its PCs or laptops, it does not sell windows license separately. When I buy a PC with 17" monitor, P4 processor, WinXP + Office suit it costs 400. Thats bottom line. Dell does not tell me how much I am paying for WinXP & office suit. Similarly whatever Dell saves in license fees it can invest back into support & hardware development. Suppose it costs 90 per WinXP license in market and dell can get OEM copy in 50 per license. So they make 40 profit here. On other hand dell can get hold of Linux copy + openOffice suit + other applications+ support of one year from RedHat at 50. Make 40 profit here.A customer who is paying 400 for a Windows PC in above case will be willing to pay same amount on Linux PC. A customer does not care about FSF at all. He is interested into value for money that's bottom line. I don't buy author's argument about FSF here.Investment of Dell in Linux supporting hardware will pay off in nearer future. It can leverage on its expertise into Linux systems support. Reply
Mar 22, 2007 1:20 AM Rob Enderle Rob Enderle  says:
The core of this is if they can get the same price for the PC with Linux as they do with Windows, which is exactly what they can't do right now. Currently Linux based PCs sell down in the price basement yet the costs for support are higher. So Dell's revenue is lower and their costs higher. Not a good mix. Just like they did with AMD, if they could make money doing this they would do it quickly, problem is (and recall they did try this before) the way the market is working Linux is a money loser on the desktop and that has to be fixed. FSF helps set this artificially low price for Linux, unless the price can be brought up, there is no margin and no business plan that will meet Dell's, or anyone else's objectives (except as a loss leader). While this wasn't intended for a consumer audiance, the consumer market is even worse because consumers don't have IT folks that can help them out and the OEM takes on much more risk as a result. Reply
Mar 26, 2007 10:29 AM CadorBolin CadorBolin  says:
Quite an interesting article. I always assumed that Microsoft used JD Rockefeller strong-arm tactics to keep it's market dominance, so it's good to hear other possible reasons why Microsoft products sell well.I am setting up Fedora Core 6 on my Dell Dimension 2400--I'm keeping a dual boot option with XP for now until I have adopted most of the functionality of XP on Linux.Linux is not easy, not by a longshot. I could imagine tech support would be a nightmare for a Dell Linux system. But my love of computers and my willingness to learn new things will keep me going in this new direction. I also want to extend the life cycle of my 2.2 GHz machine, and although it might officially meet Vista's minimum requirements, word from my co-workers is that it is a huge resource hog on even the current and most up-to-date generation of PCs. Reply

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