Red Hat

= Linux Distro 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)

Discussion

Ruth Suehle:

"Q.What is the secret of Red Hat's success?

A. In 1993, Red Hat Linux was one of the first Linux distributions, along with Debian and Slackware. That was still five years before the term "open source" was coined. Linux and open source software were not widely known for many more years, much less trusted by large companies or recognized by future competitors. As late as 1999, while promoting his book, Bill Gates remarked about Linux, “Certainly we think of it as a competitor in the student and hobbyist market. But I really don't think in the commercial market, we'll see it in any significant way." He criticized open source for its lack of central control. Fast-forward to 2011, when the Microsoft Openness blog quoted CEO Steve Ballmer: “Our goal is to promote greater interoperability, opportunity and choice for customers and developers throughout the industry by making our products more open and by sharing even more information about our technologies”. The world is changing.

Today open source software is not a hobby or a threat, it is simply reality for the technology industry. It is also no longer just about developing code. The Red Hat company used open source to create a business model that brings the company nearly a billion dollars in annual revenue. CEO Jim Whitehurst has called that model "the most powerful thing about what we've accomplished." The company is listed on the New York Stock Exchange and the S&P 500 and has grown a long list of offerings beyond Linux, from middleware to virtualization, training, and consulting.

All of this has been built on the belief that open source is more than a way to develop software. It is a way to run a business and the best way to participate as a part of the global community. Red Hat has grown through the power of collaboration, not just on source code, but on everything it does.

Red Hat sees the opportunity for the principles that have made open source successful as a business model to change the world, and the company intends to help make it happen through promoting principles like transparency, collaboration, diversity, and rapid prototyping, collectively something it calls “the open source way.” These characteristics can – and will – change everything about our world in the same way the open source model has changed how software is created, based on a few key openness concepts:

1. An open exchange. A free exchange of ideas is critical to creating an environment where people are allowed to learn and use existing information toward creating new ideas.

2. The power of participation. When we are free to collaborate, we create more. We can solve problems that no one person may be able to solve on their own, and we can create solutions that will be applied in ways we did not imagine.

3. Rapid prototyping. Rapid prototypes can lead to rapid failures, but that leads to better solutions found faster. When you are free to experiment, you can look at problems in new ways and look for answers in new places. You can learn by doing.

4. Meritocracy. In a meritocracy, the best ideas win, and the best features make it into the end product. In a meritocracy, everyone has access to the same information. Successful work determines which projects rise and gather effort from the community.

5. Community. Communities are formed around a common purpose. Together, a global, open community can create beyond the capabilities of any one individual. It multiplies effort and shares the work.

But how does all that apply to Red Hat’s success? It starts with the subscription." (http://timreview.ca/article/513)

The Red Hat Subscription Model

"Although "open source" is now clearly about more than the code, to understand how it created Red Hat’s success, we have to start where it began: with the code.

All software has source code. As we know, not all software creators choose to share that code. But when they do, it means freedom and choice for the user. Industries can no longer operate in silos – neither the companies within a single industry, nor industries apart from one another. The world is becoming only more connected. What one company needs today, another company needs tomorrow. And what that company needs tomorrow might change the world in an entirely unrelated field. We have seen it over and over again when one person or organization creates a piece of code for its own needs, shares it, and another organization is able to reuse it in unforeseeable ways. That is the value of open source, and it happens every day.

Red Hat believes that because of that value, open source is inevitable, because it puts the choice and control in the hands of the customer, and Red Hat accomplishes the combination of open source value with business profit through its subscription model – the enterprise complement to the rapid innovation of open source development.

Open source empowers impressive innovation and rapid change. But if you are running a production environment, innovation and rapid change are frightening words. So Red Hat takes thousands of packages, freezes the code, and creates an enterprise-ready edition of that software, working with chip designers, hardware vendors, and independent software vendors to certify and tune the hardware and software that Red Hat products will work with. Then we back it with a promise of support for seven years, bringing the strength of open source to a level of security that is right for the stability production environments need – enough stability for many of the world's stock exchanges to run on Red Hat Enterprise Linux. So while traditionally licensed software loses its value as it ages, subscription software continues to support an infrastructure with updated features, security enhancements, and increased hardware and software support, not to mention predictable costs." (http://timreview.ca/article/513)

More Information

1. 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
2. Another Linux Distro: Debian

• Q&A. What Is the Secret of Red Hat's Success? Ruth Suehle. TIM Review, January 2012 [1]

Case study by Mike Chege:

1. Red Hat, 2008. “Red Hat reports fiscal fourth quarter and fiscal year 2008 results” (27 March), at http://www.redhat.com/about/news/prarchive/2008/fourthquarter.html, attached 13 December 2008.
2. Red Hat, 2007a. “Form 10K Red Hat Inc.,” at http://media.corporate-ir.net/media_files/IROL/67/67156/REDHAT10K07.pdf, attached 13 December 2008.
3. Red Hat, 2007b. “Red Hat Summit 2007,” at http://www.redhat.com/videos/summit2007/, minute 00:27, attached 13 December 2008.
4. Red Hat–a, “Open source development list,” at http://www.redhat.com/truthhappens/leadership/osdevelopment/, attached 13 December 2008.
5. Red Hat–b, “Investor relations,” at http://investors.redhat.com/, attached 13 December 2008.
6. Red Hat–c, “Red Hat videos,” at http://www.redhat.com/videos/ourfilms.html, attached 13 December 2008.