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When Mark Shuttleworth founded Canonical in 2004, he made a promise to his staff: "You can count on me for two years."


The idea was "to get the team to relax" and focus on the newly created Ubuntu operating system. Shuttleworth wanted to eliminate the pressure of becoming a blockbuster business overnight.

He issued no ultimatums. And although Shuttleworth wanted Canonical to be self-sustaining, he didn't threaten to abandon Ubuntu if it lost money. "When we started, I told the team two years," he recently told Ars Technica. "I didn't say, 'till it's profitable.' I said, 'You can count on me for two years. What I want to really see is evidence of a clear path to success and really interesting disruption.'"

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Now nearly 10 years later, Canonical remains unprofitable.

Shuttleworth is worth an estimated half-billion dollars, having made his fortune by creating a digital certificate authority that he sold to VeriSign for $575 million (£370 million) in 1999. Today, he continues funding Canonical from his own fortune.


The desktop will die without a mobile counterpart

Shuttleworth still isn't issuing any ultimatums over profitability to Canonical employees. In fact, he's increased the amount he invests in the company as it moves beyond its desktop and server businesses into the mobile phone and tablet market with Ubuntu Touch. "I think the desktop on its own will die," Shuttleworth said, explaining that it must be paired with mobile success to embrace the shifting nature of personal computing.

Shuttleworth's original goal of challenging Microsoft's desktop dominance with a Linux-based operating system has come and gone, with Windows still holding nearly 93 percent of the desktop OS market and all Linux distributions combined having just a 1 percent usage share. So it's no surprise that Canonical isn't yet profitable.

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What may surprise some people is that Canonical could be profitable today if Shuttleworth was willing to give up his dream of revolutionising end user computing and focus solely on business customers. Most people who know Ubuntu are familiar with it because of the free desktop operating system, but Canonical also has a respectable business delivering server software and the OpenStack cloud infrastructure platform to data centers. Canonical's clearest path to profitability would be dumping the desktop and mobile businesses altogether and focusing on the data center alone. "We could slice Canonical to something profitable pretty straightforwardly," Shuttleworth said. "We could slice down to the server or we could slice down to just OpenStack, and we'd be much smaller and we'd be profitable."


That, of course, is something Shuttleworth has no intention of doing. While he's known as a true believer in open source software, he has a larger vision of building a single platform that spans everything from phones and tablets to PCs, servers, and the cloud. "In my mind the scope of the opportunity has grown and with it my willingness to invest," he said. "I'm interested in the type of disruption, in the idea that at some future date you could have an app running on your phone, that app could be an Ubuntu app, you could dock that app to a big screen, and it would then be an Ubuntu PC. The data for that could be processed in a cloud running an Ubuntu guest and that cloud could be running on an Ubuntu host.

Now, I don't want to sound megalomanic. But I think that's a real possibility... That's a pretty extraordinary disruption, and to me the sum of the parts is greater than any single one of them."



Canonical is headquartered in the UK and has more than 500 employees in over 30 countries. It's a private firm and we thus don't know how much revenue it makes or how much money it spends. Canonical's revenue did hit almost $30 million (£20 million) in 2009, a sum Shuttleworth at the time said would be self-sustaining. Revenue has surely grown since -- despite the fact that Canonical is an open source company and thus gives most of its software away.

Free software, but plenty of ways to make money

While users can download Ubuntu for free and put it on any PC or server they'd like (something you can't do with Microsoft's Windows or Apple's OS X), Canonical has several ways of making money off the operating system.

Businesses that use Ubuntu desktops internally can pay Canonical for technical support and protection against patent lawsuits "arising from your use of Ubuntu." Moreover, hardware vendors that sell PCs pre-loaded with Ubuntu pay Canonical for that right, and they work closely with the company to make sure the hardware and software work well together. Home users don't typically pay Canonical, but a somewhat controversial deal with Amazon that puts shopping search results in the Ubuntu desktop search tool brings in some cash.

Shuttleworth would not say whether the desktop business on its own is making money. While the desktop is "obviously not super-profitable," there is a "bit of a race" between the desktop and server groups "as to which is more important to our top line," he said. "I think folks in the States don't have a lot of visibility into the amount of diversity in the PC world outside of the US,"

Shuttleworth said. "But if you look across the major vendors, Dell, HP, Lenovo, one of them will ship more than 20 percent of their volume globally with Ubuntu this year. Another one has committed to do the same next year, and the third, we think, will head in the same direction sooner rather than later."

Canonical declined to say which of those is which, per its policy of not giving specific details of commercial partnerships.





Canonical's server and cloud business has multiple revenue streams. The company sells support packages to businesses using Ubuntu Server and OpenStack. It also sells Landscape, a systems management tool for controlling Ubuntu desktop, server, and cloud deployments. Landscape is proprietary -- while Ubuntu itself is open source, Canonical doesn't make the source code for all of its software freely available.

In addition to businesses that provide Ubuntu to their own employees, cloud vendors offer Ubuntu virtual machines over the internet to anyone with a credit card. Canonical makes money each time you use an Ubuntu server in the cloud. "You can download Ubuntu. We are quite happy to give it to you,"

Shuttleworth said. "But for a cloud vendor to turn around and offer Ubuntu because they're making representations on our behalf, essentially, it's a commercial proposition."

With the success of Amazon and other cloud services, that revenue source may not be small. "It is our goal to be the preferred way to deploy stuff on top of any cloud," Shuttleworth said. "And we are the #1 Linux on [Windows] Azure, we are the #1 operating system on Amazon, we're the #1 operating system, as best we can tell, on most of the public clouds that offer Linux."

Those companies offer Ubuntu as a guest operating system, but Ubuntu can also be used as the host, the operating system that allows the cloud to exist in the first place. Infrastructure-as-a-service clouds have been built with Ubuntu and OpenStack by the likes of AT&T, Deutsche Telekom, NTT, China Mobile HP, Ericsson, and Rackspace.

OpenStack, an open source project, was developed by Rackspace and Nasa, not Canonical. But OpenStack was built on Ubuntu, making it the software's default operating system. OpenStack itself is changing the way IT hardware is deployed, Ubuntu Cloud VP Kyle MacDonald told Ars at the Interop IT conference in Las Vegas three months ago. "Scaling is not by server anymore. It's literally by data centre," MacDonald said. (Separately, MacDonald said Ubuntu has about 22 million users worldwide, based on the number of desktop and server installations that get security updates from Canonical systems. The majority of those are desktop users.)

OpenStack is still in the early adoption phase, with first movers often being highly technical institutions like Cern, operator of the Large Hadron Collider. Most OpenStack clouds today are likely prototypes and proofs of concept rather than paid deployments.

Yet "six or seven of the world's biggest telcos currently have Ubuntu OpenStack clouds in operation," Shuttleworth said. Some of them "are on firm commercial terms," and others are "finalising the terms of an engagement." Even better, these are the same types of companies that could partner with Ubuntu to bring mobile phones to market.

Canonical

Please give us $32 million

Canonical's plan to release phones and tablets based on Ubuntu Touch has required " additional investment on the design and engineering fronts" -- work that Shuttleworth is funding himself.

To ease the financial burden, Canonical started a crowdfunding project seeking $32 million to build Ubuntu Edge, a premier phone that doubles as a PC. Certainly, Shuttleworth could front that money himself, but the crowdfund bid isn't so much a charity as it is an elaborate way to drum up enough pre-orders to make production of the phone worth it. Alas, at the moment it appears that the crowdfunding project will fall well short.

Even so, Shuttleworth has numerous reasons for chasing the Ubuntu phone and tablet dream. "I believe we have the capacity to do both [mobile and enterprise]," he said. "I certainly have the means to give both teams their shot at goal."

As noted earlier, Shuttleworth thinks a desktop business with no mobile counterpart is a losing proposition in the long run. That's why he declined to say whether the desktop is profitable by itself -- even if it is, that information would provide little insight into whether the business is sustainable. "I could open the kimono on what that looks like today, but I don't think that's what matters," he said. "What matters if you step back is do you have something which can thrive, which has a future. And I think a desktop story, on its own, is very hard to see how that's super-relevant."

Ubuntu phones and tablets aren't expected to hit the market until early next year, an obstacle given how entrenched iOS and Android are in consumers' minds as the premier mobile operating systems.

While Canonical can't monetise Ubuntu Touch with ads the way Google can with Android, it plans to gain revenue from device makers and carriers paying Canonical for the right to sell Ubuntu phones.

The carriers angling to become Ubuntu phone launch partners are Verizon Wireless, Deutsche Telekom, Everything Everywhere, Telecom Italia, China Unicom, Korea Telecom, LG UPlus, Portugal Telecom, SK Telecom, and Smartfren. Shuttleworth said he's hoping to capture the equivalent of 20 percent of Android's global share, and he hopes to get help from Android application developers, the majority of whom already use Ubuntu to develop for Android, he said.

When Shuttleworth says an Ubuntu phone is an extension of the desktop, he really means it. The Ubuntu phone operating system will literally be the same code as the desktop operating system but with a different user interface. When connected to a monitor, mouse, and keyboard, phones with enough horsepower will switch to the desktop interface and look just like a real Ubuntu desktop -- because, again, that's what it is.

This is the key differentiator for Ubuntu on phones, but it's a work in progress. Shuttleworth -- who didn't even own a smartphone a couple years ago -- is using a Nexus 4 running a prototype version of Ubuntu Touch. "You can use it as a daily driver if you're willing to be a little bit nerdy about it," he said. "Phone calls, SMSs, data all work. The browser is pretty good, the UX is coming along in leaps and bounds. But you need to be a bit of an enthusiast."

We can hardly underestimate the challenges in creating a legitimate competitor to iOS and Android -- one need only look at Microsoft and BlackBerry to see how difficult that is. It's too early to say what Ubuntu's chances are, since devices are a half a year away from reality.

But we do know that cracking into the mobile market is far from Canonical's only challenge. Canonical's promising server and cloud business faces stiff competition from Linux's biggest money-maker.

Ubuntu server revenue small compared to Red Hat

Analyst Al Gillen of IDC, which tracks worldwide server revenue, said the Ubuntu server business is probably just a fraction the size of the billion or so Red Hat makes each year. "We're certainly not talking about hundreds of millions of dollars [for Ubuntu]. We might be talking tens of millions of dollars," Gillen said. Ubuntu server revenue is small enough that IDC doesn't report it separately from overall Linux server revenue. "We don't think their server OS business is too significant,"

Gillen said.

Gillen was surprised by Shuttleworth's quote that Canonical's server and cloud business is profitable on its own. "That seems surprising to me that they would be profitable with that product and business line alone," Gillen said. "He's not really known for making outrageous claims in the industry. If he says that, I don't have a reason to argue that it's not true. It's certainly surprising, knowing how hard it is to be profitable selling support for open source software."

While Ubuntu was the only game in town for OpenStack at first, Canonical now has to contend with Red Hat, an expert at locking businesses into software and support contracts far more lucrative than most Linux vendors are accustomed to.

At Red Hat's annual conference in Boston this June, the company unveiled an OpenStack offering and described how it optimised its flagship Red Hat Enterprise Linux [RHEL] OS for the cloud software.

Gillen acknowledged Canonical's early success in selling OpenStack to service providers but said that "Red Hat has complicated things a little bit" in pursuing most other types of business customers. "Chances are pretty good if [enterprises are] using Red Hat and they're planning to go to any kind of cloud infrastructure... they're not going to replace Red Hat with Ubuntu for that private cloud deployment," Gillen said.

Red Hat has been working on OpenStack since last year, assigning more than 100 employees to work on nothing but OpenStack, CTO Brian Stevens told Ars at the conference. Since OpenStack was optimised for Ubuntu when it started, Red Hat's developers have been contributing updates to the OpenStack code base to make it platform-agnostic, able to run well on any form of Linux.

Even Shuttleworth acknowledged the importance of Red Hat's work in "remov[ing] a lot of the friction" between OpenStack and non-Ubuntu Linux distributions.

Just as importantly to Red Hat's chances, Stevens said his engineering group has overhauled RHEL to make it an ideal operating system for running OpenStack. This makes technologies like virtual switching easier for customers to implement, he said.

Where Red Hat really has an advantage over Canonical is the relationships it has with the kinds of customers that have big Linux deployments and want to pay a tech vendor to fix any problems that might come up.

Getting to know the OpenStack code and being able to support it is one reason Red Hat has so many engineers on the project. "You have to know every line of code and be able to fix and change it just like you're VMware, Oracle, or anyone else," Stevens said. "That's the fundamental difference between us and Ubuntu,"

Stevens continued. "Ubuntu is an awesome platform to shadow IT and seed free technology into the enterprise. What the company hasn't been able to do is they can't wrap services and value around that because they don't have anyone to do that. The software is free.

The package delivery has no value. The value is in the relationship."

"It's game on"

Shuttleworth countered Red Hat's bluster by noting that Ubuntu's OpenStack offering supports multiple hypervisors including VMware, KVM, and Xen, whereas Red Hat steers customers toward KVM alone.

Ubuntu and Red Hat both have support for major virtual networking vendors, including Cisco and VMware's Nicira. Shuttleworth noted that Red Hat has adopted

technology created by Canonical, namely cloud-init, a package that allows virtual machines to run in different clouds without modification.

This is the "first time Red Hat faces real competition from Ubuntu," Shuttleworth said. Ubuntu's OpenStack costs less than Red Hat's, "and I think we have an economic advantage because we don't have the overhead that Red Hat has." By that he means a "traditional enterprise sales force." "We're a much more development- and technology-oriented institution," Shuttleworth said. "We're able to maintain great relationships with the major players, the server manufacturers, the processor manufacturers, and that allows us to deliver a first-class infrastructure."

In pursuing the desktop, enterprise, and mobile businesses, Shuttleworth acknowledges that he "may be chasing a rainbow." But Canonical doesn't need to topple the world's largest vendors to become profitable -- it just needs to carve out its own niche. "We're not going to be Microsoft," Shuttleworth said. "We're not even going to be Red Hat."

Ultimately, he said he's not interested in "pursuing any of these things indefinitely as a charity." (That's despite the fact that he created the Ubuntu Foundation in 2005 and provided $10 million (£6.5 million) to ensure long-term development of Ubuntu no matter what happens to Canonical.) If any one part of Canonical's business looks hopeless, Shuttleworth is willing to give up on it -- eventually. "Over time, if you lose confidence in a particular story, you stop doing that," he said.

But the promise of building a single platform that can be used from mobile devices to big data centers is alluring enough that he's willing to expand his investment in Canonical.


If Ubuntu on phones is a giant flop, Canonical could always pull back and focus more narrowly on the enterprise business. For now, though, Canonical is going all-in on all fronts. "It's going to be a really tough year. It's going to be a really interesting year," Shuttleworth said. "But I feel pretty good about the work we've done over the last couple of years, the foundations we've laid. I feel pretty good about the projects that are in play right now and I feel pretty good about our respective competitive positioning. It's nothing we can be smug about, but I certainly think it's game on."

This story originally appeared on ars technica

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