RealTime IT News

Open Source Code Champion Throws Hat In IPO Ring

Bill Gates reportedly has said the competitor that keeps him awake nights isn't one of other high-tech giants doing battle with Microsoft, but rather the garage start-up he hasn't yet heard of.

Back in 1993, Red Hat Inc., then known as ACC Corp., was one of those companies.

Last Friday the leading seller of Linux operating software filed registration papers for an initial public offering intended to raise nearly $100 million. Red Hat, based in Durham, N.C., plans to trade on the Nasdaq exchange under the symbol RHAT. Underwriters for the IPO are Goldman Sachs, Thomas Weisel Partners and online broker E*TRADE.

Red Hat didn't create Linux - that was done collaboratively across the Internet by hundreds of programmers based on the initial efforts of Finnish student Linus Torvalds in the early '90s.

But International Data Corp. estimates the company's share of the market for the server operating system was about 56% in 1998, which translates into $10.8 million in revenue for fiscal year 1999, which ended on Feb. 28.

Further, Red Hat arguably is the main catalyst of the open source code movement, which many predict - and indeed, many hope - will end Microsoft's stranglehold on computer operating systems. There are an estimated 10 million users worldwide of Linux, which has quietly made inroads into major corporate networks.

That a company hopes to prosper by selling software which can easily be obtained for free on the Web seems like a dubious proposition, but Red Hat offers support and technical manuals as part of its $80 per license package that has enabled the company to double revenues in each of the past two years.

Red Hat also has gone from slight profitability ($33,000 in '97 and $8,000 in '98) to a slight loss of $91,000 in the recently ended fiscal year.

While Red Hat's main revenue stream comes from software sales, its S-1 filing states that "enhancing the REDHAT.COM Web site is critical to our ability to increase our revenue."

The site, which features information and news geared toward the open source community, drew 2.5 million page views in March, the company's filing claims. Red Hat hopes to use this traffic to increase advertising revenue and attract e-commerce partners.

There are several risks involved in Red Hat's strategy, which the company cites in its S-1 document. Chief among them are its reliance on the further development and increased popularity of Linux.

Another hazard, the company said, is a backlash against the IPO in the open source community. Many members of that community already have criticized Red Hat for trying to cash in on and dominate the free software movement. Compared to the upside of taking a chunk of Microsoft's 85%-plus share of the operating system market, this is a risk worth incurring.

Red Hat has positioned itself well, emerging as the top brand among Linux vendors while growing beyond $10 million in revenue with minimal losses. It also has attracted the financial backing of industry powerhouses such as Intel, IBM, Oracle and SAP.

Its challenge will be to maintain that lead in sales and brand-awareness in a market that has low barriers to entry and Microsoft's full attention.

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