RealTime IT News

VA Linux's Andover.net Bet: Turning Free Stuff Into Sales

Roughly two months after going public, Andover.net (ANDN) sold out last Thursday. VA Linux Systems Inc. (LNUX) announced it was buying the Linux content network for $975 million in cash and stock (now valued at a little more than $800 million). Shares of VA Linux fell 8-7/8 on Thursday to 128. Andover jumped 9-1/8, or 25 percent, to 45-1/8.

Does this deal make sense? Reporter@Large likes the marriage between hardware (LNUX) and content (ANDN). VA Linux manufactures and sells Linux compatible workstations and servers. Andover operates a network of Web sites dedicated to Open Source/Linux users and developers. The deal makes sense in a space where hardware delivers low margins and advertising revenue will never support current Internet market valuations. In addition, the core product, Linux software, is readily free.

Readily free!? The proverbial "show me the money (profits)" scares a lot of Internet executives, but it's an especially sensitive topic in the Linux sector. Bob Young (CEO of Red Hat) and Larry Augustin (CEO of VA Linux) have continually said that the money in this sector would come from supporting and servicing both Linux hardware and software. VA's move on Thursday made good on this notion and secured the company as the premier Linux destination for content, commerce, and services. In its S1 filing, VA Linux stated that it would have to sell services and support to supplement sales. In other words, Larry Augustin had to prove to corporate America that not only should they buy his company's machines, but they should also buy his company's services.

Enter Andover.net, a network of Web sites geared to open source developers that delivers more than 50 percent of the Web's total Linux related traffic. Unlike Excite@Home's (ATHM) purchase of Blue Mountain Arts for roughly $1 billion, Andover.net will deliver certain value to VA's existing business. Excite@Home bought Blue Mountain because of its strong user base, hoping that it will be able to monetize the users via advertising and ecommerce transactions. A high price to pay for a fragmented demographic with no proven online purchasing power (Blue Mountain Arts allows users to send and receive free online greeting cards). Andover hosts "smart" traffic that if leveraged correctly, could deliver awesome revenue streams to VA Linux. The user base and knowledge posted throughout the Andover network (mostly at Slashdot.org and Freshmeat.net) will essentially become a source of information and services for corporate Linux clients.

Pre-VA Linux, Andover's goal was to create a critical mass of users, which it has done, and then turn the network into a hub where buyers (corporations) and sellers (vendors and developers) could meet. VA Linux now takes that community and potentially becomes the vendor of choice. Again, we're talking about smart traffic here -- WR Hambrecht + Co reports that 68 percent of Andover's visitors have direct involvement with technology purchase decisions for their employers, a majority of which have a tendency to purchase online.

By combing LNUX's current properties Linux.com and Sourceforge.net with Andover's network, VA Linux will control almost 2/3 of Linux related Web traffic. The move to become the Yahoo! portal for the Linux space will generate revenue through 1) ecommerce sales, 2) corporate services, and 3) advertising. Larry Augustin pointed to the announcement made two weeks ago that Hewlett Packard's Printer Division would utilize VA's Linux related products and services to make a case for the synergies between VA and Andover.

Only a week before the