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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