Red Hat

= Linux company

Case Study

Mike Chege:

"Red Hat is the proverbial garage startup. In 1994, Marc Ewing, who had recently graduated from Carnegie Mellon University, created his own version of Linux working out of his spare bedroom. He named his version Red Hat Linux. Marc’s release of his initial beta of Red Hat, the “Halloween” edition, earned him instant fame in Linux newsgroups. Shortly afterwards, Bob Young, owner of the ACC Corporation, a small catalog business that sold Linux and UNIX products, called Ewing up because he wanted to add Red Hat to his catalog of Linux products. A few months later, Young and Ewing agreed to merge Marc’s Linux business with Ewing’s ACC corporation, and Red Hat Software Ltd. was born.

Of course, Red Hat was not the only distribution available at the time. There were already other distributions such as SLS, Yggdrasil, and Slackware. But Red Hat’s selling point was that it developed a software program to aid in the complicated package installation and upgrade process. That program was the Red Hat Package Manager or RPM in short. Thanks to RPM, coupled with efforts to make the system easier to install and configure, Red Hat’s popularity soared.

From the outset, however, it must have been clear that selling software as a product was not going to be an easy way to build a sustainable business. This was because while the GNU General Public License or GPL — the copyright license that gives legal expression to the Four Freedoms and under which the Linux kernel and much of the software in the GNU/Linux system is licensed — has no requirements about how much you can charge for distributing a copy of free software, it also allows, even encourages, users to copy and distribute the software. People could thus redistribute copies of Red Hat without a penny coming to Red Hat. Furthermore, because competitors had access to the same freely available source code as Red Hat, there were limits to what Red Hat could charge for its product. As Bob Young (Martin, 2007) put it (brackets appear in original quote): “You couldn’t make any money selling [the Linux] operating system...because all this stuff was free, and if you started to charge money for it, someone else would come in and price it lower.”

Given the difficulty of surviving on software product sales alone, Red Hat had to search for a new business model. Despite the growing popularity of the GNU/Linux system, one of the biggest obstacles to GNU/Linux adoption in the corporate environment was a lack of support services. Seeing this as an opportunity, Red Hat begun to look into providing post–sales support to corporate clients. This marked the switch to what may be described as the “sell religion, not bibles” strategy with Red Hat moving up the software value chain from a business based largely on software sales (bibles) to one that was based largely on the sale of ancillary services related to its software (religion).

As shown in Figure 2, we have divided the software value chain into two sections: software packaging and software services. Software packaging refers to the traditional model of selling software as a product. Since we are talking about GNU/Linux distributions, software packaging would involve the aggregation, integration, and optimization of the Linux kernel and the numerous additional files that together form the GNU/Linux operating system, to create a distribution which may be accompanied by a manual and probably some post–sales support.

Software services, on the other hand, refer to the provision of support, maintenance, training, integration, customization, and consulting services. Since GNU/Linux distributors have already built up technical competence from packaging and optimising the GNU/Linux system, the presumption is that they can capitalise on this know–how to provide support, consulting, and other services.

In 2003, as part of its new business strategy, Red Hat discontinued its retail edition of Red Hat and introduced Red Hat Enterprise Linux. Red Hat Enterprise Linux was to be sold on a subscription basis. A subscription entitled the user to a copy or copies of Red Hat Enterprise Linux, support services including installation and other technical assistance, and access to patches and updates through the Red Hat Network service.

So, to put Red Hat’s experience within the framework of the software dialectic, the exclusion principle did not work well with software sales because free and open source licenses in general circumscribe the opportunities for earning money through license fees, the source code is freely available to competitors, and people are allowed to share and redistribute the software virtually as a right. With the services approach on the other hand, only those who buy a subscription are eligible to receive support from Red Hat, and even though adaptations of Red Hat Enterprise Linux such as CentOS can be downloaded for free off the Internet, access to support and maintenance services as well as updates to official Red Hat packages via the Red Hat Network are only available to subscribers.

The evidence suggests that this approach has paid off handsomely for Red Hat. In the fiscal year 2007–2008, Red Hat achieved revenues of US$523 million and a net income of US$76.7 million (Red Hat, 2008). Total cash, cash equivalents, and investments as of 29 February 2008 were US$1.3 billion, and at the time of writing, the company had a market capitalization hovering around US$4 billion.

At the same time, Red Hat has always made an effort to remain on good terms with the free software community by making all of its source code available to the community and by supporting various free software projects. Red Hat is also a founding member of the Open Invention Network which is a company that acts as a “patent pool” whose members have agreed not to assert their patents against GNU/Linux or GNU/Linux–related applications.

Though Red Hat’s behaviour may ultimately be guided by the less noble need of turning a profit and keeping its shareholders happy, it has attempted to do so while remaining scrupulously faithful to the letter, if not the spirit, of the GPL." (http://www.uic.edu/htbin/cgiwrap/bin/ojs/index.php/fm/article/view/2186/2062)

More Information

Case Study: Giving It Away: How Red Hat Software Stumbled Across a New Economic Model and Helped Improve an Industry. By Robert Young, 1999. From the book Open Sources