There’s no telling exactly when an obscure technology will burst into prime time.
By Marianne Sullivan
August 2002
Institutional Investor Magazine
There’s no telling exactly when an obscure technology will burst into prime time. The Internet existed in virtual anonymity for a quarter century as a government-funded data communications utility before suddenly emerging as a wildly popular business and consumer medium in the 1990s. Now the Linux computer operating system may be beating an even faster, more improbable path to the limelight; it’s certainly getting a lot of interesting auditions.
It is now only 11 years since Linus Torvalds, then a 21-year-old student at Helsinki University, began working on his Linux software code. And for large corporations it has been a viable option for only about three years. Yet Linux is mounting a vigorous challenge to the long-entrenched Windows and Unix operating systems -- the software that controls the most basic functions on computers and that enables them to handle the panoply of application programs on which individuals and businesses have come to depend.
As recently as a year ago, many corporate technology chiefs viewed Linux as an intriguing curiosity at best. Unlike Windows, the ubiquitous Microsoft Corp. product for personal computers and server networks, and Unix, a Bell Laboratories invention that runs high-powered scientific and financial-market workstations, Linux was a grassroots, noncommercial phenomenon. Torvalds bequeathed his fundamental code, or “kernel,” to the open-source software movement, a loosely organized online community of hobbyists and hackers with pronounced antiestablishment leanings.
In the spirit of open source, and with the ease of Internet access, programmers could work on Linux for free, rather than having to pay Microsoft or other vendors for operating-system licenses. Linux users -- today estimated at 18 million worldwide -- merely had to agree to openly share their applications and upgrades with others. Eventually all that activity had the cumulative effect of preparing Linux for the big time. In part because Torvalds’s kernel closely resembles that of Unix, which runs many financial and trading networks, Linux is getting favorable reviews from Wall Streeters who are facing extreme cost-cutting pressures.
“I’m a big fan,” declares Merrill Lynch & Co. chief technology officer John McKinley. And for good reason: McKinley has identified savings of up to 44 percent on projects employing Linux. In a June speech to a Securities Industry Association conference in New York, McKinley listed Linux as one of a handful of emerging technologies meriting significant investment. (Others included instant messaging, voice-over-Internet communications and wireless applications.)
“We are in Chapter 1 of the Linux story,” McKinley tells Institutional Investor, noting that the vast majority of the bank’s workload still runs on IBM Corp. mainframe computers, Sun Microsystems Unix-based servers or Microsoft-based technology.
Merrill’s interest isn’t unique. Morgan Stanley already has 15 percent of its systems running on Linux and plans to push that to 50 percent by next year. Credit Suisse First Boston has opted for Linux in a major upgrade of its global trading system -- the firm was swayed not just by lower development costs but by a reported 20 percent improvement in performance.
If the system required any further endorsement, Linux got it in May when Reuters Group announced that its Market Data System would be available on Linux. Reuters followed that up in June by forming a strategic alliance with Intel Corp. to help bring joint clients like Morgan Stanley up on Linux by early next year.
As important as these breakthroughs are, Linux will still be playing a supporting role as financial institutions continue to depend on the other operating systems. Alan Paris, a New Yorkbased partner of international capital markets consulting firm Capco, says that despite the rapid pace of adoption by a few leaders like Morgan Stanley, most investment firms have migrated a mere 1 percent of their systems to Linux. “Linux may not be the path, but it is a major path, and they are going to explore it,” says Paris.
That’s why some executives are quick to qualify their enthusiasm, even as they jump on the bandwagon. “We’re definitely looking at Linux, but I wouldn’t say it’s a groundswell,” says Prudential Financial chief information officer William Friel. “The open-system approach does look like it’s here to stay. It could lower our information technology costs, and it is proving robust enough for some applications.”
“Will Linux take over the universe? No,” adds Cristóbal Conde, the New Yorkbased president and chief operating officer of SunGard Data Systems, a leading technology supplier to the financial industry. “There are limits to the number of applications that Linux will port to today. But it doesn’t have to conquer 100 percent of the market to be successful. Even if it only captures 10 to 20 percent of a data center, that will be enough to put people in a good mood, and then they can move on to tackle larger problems.”
Even a partial embrace by some of the world’s most demanding IT users underscores Linux’s remarkable rise. When Torvalds, after three years on his own, offered the first license in 1994, it appealed primarily to freelancers and early Internet adopters who found Windows too inaccessible or expensive -- or who just plain disliked Microsoft. By the late 1990s corporate programmers, many of whom had tinkered with Linux as students or at home, were taking it to work. And software houses like Raleigh, North Carolinabased Red Hat and Nuremberg, Germany’s SuSE sprang up to build higher-grade versions of Linux that could meet large enterprises’ requirements for security and reliability -- features that didn’t concern hard-core open-sourcers.
By 2001 financial companies started getting serious. “I can’t tell you how many questions we’ve gotten over the past 12 months about Linux from places like Merrill Lynch, CSFB and Lehman Brothers,” says Dushyant Shahrawat, senior securities and investment industry analyst with TowerGroup, a Needham, Massachusettsbased research company. “Traditionally, they have spent their money on software that is restricted to a given platform; it’s a tremendous advantage to be working on an open system.”
Morgan Stanley arrived at that conclusion after it began investigating Linux in April 2001, hoping to “change the slope of its computing expense curve,” recalls Jeffrey Birnbaum, managing director of the firm’s institutional securities technology group. “In our business, we always need more performance; now we were asking how could we get more performance and maintain a flat cost.”
The answer lay in what Birnbaum terms “a commodity pricing curve.” That means systems based on open standards and able to run on a variety of hardware, rather than higher-cost proprietary programs that must run on specified machines and that also require annual licensing fees for upgrades and extensions.
The investment bank was aware of the rap against open source -- that it couldn’t stand up to the strain of heavy transaction volumes. Indeed, until last year, Linux was deployed, if at all, on peripheral Web-based applications or on corporate intranets that were considered less “mission-critical” than, say, electronic trading or market analytics.
But Morgan Stanley found that recent Linux upgrades had overcome those limitations, and today the firm is in the latter stages of converting its North American equity-market-data distribution platform to Linux.
“That is about as mission-critical to our equity business as you can get,” says Birnbaum, who adds that Linux is delivering a 13-fold improvement in price-performance. Next the bank plans to bring Linux into the derivatives-products area of its fixed-income department.
Merrill’s McKinley says that Linux has found a “sweet spot” -- it is maturing just as IT departments are chafing under budget constraints. He notes that recently released Linux packages, notably the Red Hat 7.1 version, enable firms like Merrill to take full advantage of the processing horsepower in the latest generation of Intel-based computers.
Commitments by established players like Hewlett-Packard Co. and IBM have added momentum. Even Microsoft and Sun Microsystems, whose platforms are vulnerable to Linux, seem to be preparing for the inevitable. Sun expects to lend its support “if Linux becomes ready for prime time,” says David Littlewood, director of sales for Sun’s worldwide financial services group. And while Microsoft devotes several pages on its Web site to debunking claims that Linux can outperform Windows, Jason Matusow, program manager of Microsoft’s shared source initiative, conceded in a June forum sponsored by CIO Insight magazine that “open source is going to continue to be an important part of the software ecosystem.”
Asserts Merrill’s McKinley: “Banks can start seriously considering Linux for a higher-volume workload. The value proposition that Linux represents and the vendor-neutrality it affords us are incredibly attractive.”
By embracing Linux, the banks have become strange bedfellows with the free-spirited open-sourcers as they attack the economics of proprietary software licensing. “There is a certain flexing of muscles to create freedom of choice,” says George Weiss, director of enterprise systems and storage research at Stamford, Connecticut based consulting firm Gartner.
McKinley views his advocacy as “missionary work,” aimed at encouraging software companies to develop competitive Linux programs. “We are trying to act as a magnet to legitimize its use in corporate applications,” says McKinley. Spoken like a true software rebel.
