Red Hat, Inc.
Red Hat, Inc.
Incorporated: 1995 as Red Hat Software, Inc.
Sales: $103.4 million (2001)
Stock Exchanges: NASDAQ
Ticker Symbol: RHAT
NAIC: 511210 Software Publishers
Red Hat, Inc. is a market leader in open source software systems for mainframes, servers, workstations, and embedded devices. Unlike proprietary systems that carefully guard their source codes, Red Hat and other open source software vendors make their source code freely available. The company’s core product is the Red Hat Linux operating system, which is the leading Linux system for servers. More recently the company has expanded its product line to offer open source solutions in such areas as e-commerce, embedded devices, and database solutions.
Developing Its Own Version of Linux: 1995-98
Red Hat Software, Inc. was established in 1995 by entrepreneurs Robert Young and Marc Ewing. Young, a native of Hamilton, Ontario, and a graduate of the University of Toronto, started his first company, Vernon Computer and Sales, in 1984. It was a computer rental and leasing business, which Young sold in 1990 to a Canadian financial services company. In 1993 Young started another computer company, ACC Corp., which was a UNIX reseller business. When his customers began requesting Linux technology, Young found Marc Ewing, a Carnegie Mellon University computer science graduate who had a small Linux development operation. Ewing is credited with developing the Red Hat Package Manager, which made it easier for users to install and manage the various packages that made up Linux. Young and Ewing merged their companies in 1994. In 1995 the newly formed company was named Red Hat Software, after an old lacrosse hat that Ewing’s grandfather owned. Red Hat established its headquarters in Durham, North Carolina, located near the state’s Research Triangle Park.
Red Hat’s mission was to market and develop its own version of the Linux open source operating system to end users. Linux was first developed by Linus Torvalds in 1991. He was a 21-year-old student at the University of Helsinki in Sweden. In August 1991 he made the basic source code for the initial version of Linux (0.02) available to anyone over the Internet. Users could download it for free, change it, and share new versions with other programmers.
Linux 0.02 was a UNIX-based operating system. UNIX was originally developed by AT&T in the mid-1970s. Its source code was kept private until the mid- to late 1980s, when the Free Software Foundation developed and distributed a suite of free cross-UNIX tools, including a compiler and shell. The tools were distributed under a new free licensing scheme called the GNU Public License.
From 1993 to 1995 the number of Linux users increased dramatically from 100,000 to 1.5 million. Linux’s popularity with software programmers was due in part to the fact that its source code was available to everyone for free. While Red Hat made its version available for free downloading, it also sold CD-ROM versions. When the company released Red Hat Linux 5.0 in November 1997 for $49.95, InfoWorld called it “a complete Internet server in a box.” The software package included everything a system administrator needed to get an Internet or corporate intranet server running in one day, including the Apache Web server, a mail server, a news server, a domain name server, a gopher server, and more. It also included development tools and a freeware database engine.
By 1998, when Red Hat released version 5.2 of its Red Hat Linux, there were 12 million Linux users. At the end of 1998 an International Data Corp. (IDC) survey indicated there were 750,000 installed servers with Linux, representing a 212 percent increase from the previous year. That growth rate outpaced Windows NT, NetWare, UNIX, and all other server operating systems. Windows NT Server remained the market share leader with 36 percent of all operating systems shipped, followed by NetWare at 24 percent, and Linux and all other types of Unix systems tied at 17 percent each.
Red Hat became a more established organization in 1998. Matthew Szulik, formerly president of Relativity Software, joined the company as president and chief operating officer (COO). Young remained CEO until November 1999, when Szulik was promoted to CEO. As chairman of Red Hat, Young remained the company’s chief strategist.
In the spring of 1998 Red Hat began pursuing a strategy of building tight partnerships with industry-leading technology companies. The company’s first round of strategic financing was completed in September 1998, when it received financial backing from Intel and Netscape Communications as well as from venture capital firms Benchmark Capital and Greylock Management. As Red Hat built a stronger management team, it completed a second round of financing in March 1999, when computing industry leaders Compaq, IBM, Novell, Oracle, and SAP took minority equity positions in the company, indicating their commitment to the development and adoption of Linux operating systems.
Red Hot Red Hat IPO: 1999
In addition to gaining financial support from computer industry leaders, Red Hat entered into strategic agreements with computer firms IBM and Dell in 1999. IBM, which had been experiencing demand from its UNIX customers for an open source solution, partnered with Red Hat early in 1999. Under the agreement, developers from IBM and Red Hat would team to move Linux onto IBM’s Netfinity servers, PC 300 commercial desktops, IntelliStations, and ThinkPads. Later in the year IBM announced it would preload Red Hat Linux 6.2 on its Netfinity servers, with Red Hat providing technical support.
When Red Hat released its Linux 6.0 in April 1999, Dell Computer Corp. was the first major computer vendor to factory install Red Hat Linux on its servers, workstations, and desktop PCs. Dell also made an equity investment in Red Hat. Version 6.0 allowed users to run on servers with as many as four processors, was easier to install, and had two graphical user interfaces (GUIs) that could be used simultaneously. Version 6.0 was also featured on Red Hat’s e-commerce server, which included encryption capabilities and e-commerce software from Hewlett-Packard; it was introduced in July 1999. Computer manufacturer Gateway became an authorized Red Hat reseller in September 1999, enabling it to factory-install Red Hat Linux on its computers when requested by customers. In December 1999 Dell and Red Hat extended their alliance, with Dell committing to install Red Hat Linux on all of its current and future PowerEdge servers. The two companies also entered into a worldwide service and support agreement.
Red Hat filed for its initial public offering (IPO) in June 1999 and hoped to raise about $96 million. The company had revenue of $10.8 million for its fiscal year ending February 28, 1999, compared to revenue of $5.1 million in fiscal 1998. On August 11, 1999, Red Hat shares began trading at $14 a share. By the end of the day they closed up 227 percent at just over $52 a share. Fueled by growing support for Linux as an alternative operating system to Windows NT for servers, Red Hat’s stock reached an all-time high of $150 a share in December 1999.
Red Hat also began to address the international market for Linux solutions in 1999. Red Hat Europe began operating in July 1999 out of offices in London, England, and Stuttgart, Germany. The new European organization functioned as a wholly owned subsidiary of Red Hat. Later in the year Red Hat expanded into Japan, and in 2000 the company established Red Hat France and Red Hat Italy to deliver software, support, and training services to European enterprise-level business customers.
Acquisitions, Expanding Products and Solutions: 1999-2000
Following its IPO, Red Hat embarked on a series of acquisitions that enabled it to move into the post-PC embedded products market, such as wireless devices, and develop a Linux-based enterprise platform. In November 1999 it acquired Linux pioneer Cygnus Solutions for $674 million in stock. Michael Tiemann, author of the first open source C++ compiler and president of Cygnus, replaced Red Hat cofounder Marc Ewing as Red Hat’s chief technology officer; Ewing continued to direct the Red Hat Center for Open Source, a nonprofit organization. Cygnus’s business included producing compilers and debuggers, developing embedded software for handheld devices and other appliances, and application development tools.
Red Hat is the leader in development, deployment, and management of Linux and open source solutions for Internet infrastructure —ranging from embedded devices to secure Web servers.
Red Hat was founded in 1994 by visionary entrepreneurs Bob Young and Marc Ewing. Open source is the foundation of our business model. It represents a fundamental shift in how software is created. The code that makes up the software is available to anyone. Developers who use the software are free to improve the software. The result: rapid innovation.
Red Hat solutions combine Red Hat Linux, developer and embedded technologies, training, management services, technical support. We deliver this open source innovation to our customers via an Internet platform called Red Hat Network.
In January 2000 Red Hat acquired e-commerce software vendor Hell’s Kitchen Systems Inc. for $91 million in stock. HKS’s payment processing software was a key component for e-commerce operations. The acquisition helped Red Hat position its Linux offerings as a more viable software solution for businesses that wanted to migrate their operations online. Around the same time Red Hat entered into a strategic partnership with electronic security firm RSA Security Inc. that added encryption capabilities to Red Hat’s Linux software.
Red Hat’s next major acquisition involved performance management software vendor Bluecurve for $35 million in stock. The acquisition enabled Red Hat to offer a tool for monitoring Linux systems. Bluecurve software allowed developers to simulate transactions and scale their infrastructures to different levels of service. Around the same time in April 2000 Red Hat introduced redhat.com Marketplace, a portal where vendors could find software, hardware, and support services for open source products.
In June 2000 Red Hat acquired WireSpeed Communications of Huntsville, Alabama, for about $33 million in stock. WireSpeed made embedded software that allowed wireless devices to communicate with the Internet and private networks. Its customers included semiconductor, Internet device, and industrial control companies. In August Red Hat strengthened its web server security software offerings with the acquisition of C2Net Software Inc. for $42.1 million in stock.
In spite of competition from other Linux developers such as VA Linux Systems, TurboLinux Inc., and SuSE Linux AG, Red Hat remained the dominant firm in the Linux marketplace in 2000. According to an IDC survey, Red Hat was the Linux market leader for the second consecutive year with 52.4 percent of all Linux shipments worldwide. A Netcraft Web Server Survey indicated that Red Hat held 70 percent of the worldwide Linux market share. The company’s software offerings were praised in the industry press, winning a “Product of the Year” award from Network Magazine and an “Editor’s Choice” Award from Computer Reseller News. In mid-2000 Dell announced it would pre-install Red Hat Linux as one of three operating systems on its servers, with both companies providing technical support for customers.
In September 2000 Red Hat announced the creation of the Red Hat Network, a new Internet-based subscription service for developers and users. Subscribers would be able to access open source advances, upgrades, and security features. Developers could register information on their hardware and software systems, thus facilitating joint projects. The Red Hat Network also included a number of support services from open source experts, tight integration with the Red Hat Package Manager, and customizable update management services. The Red Hat Network also made it easier for Red Hat to deploy upgrades and security patches over the Internet.
Other significant developments in 2000 included an extension of Red Hat’s alliance with IBM with the announcement that IBM would provide support for Red Hat Linux on the complete IBM eServer product line. Red Hat also partnered with North Carolina State University to establish the first open source-based university course at the school’s College of Engineering.
Toward the end of 2000 Red Hat introduced Red Hat Linux 7 in anticipation of the release of the new Linux 2.4 kernel, which Linus Torvalds released in January 2001. While Red Hat Linux 7 users were able to upgrade to the 2.4 kernel, the company soon released version 7.1 of its server operating system. The new 2.4 kernel enabled Linux to compete as a top-end server system.
Red Hat Achieved First Profitable Quarter in 2001
With its stock trading around $5 a share, Red Hat reported a net loss of $5.98 million on revenue of $84 million for its fiscal year ending February 28, 2001. In February the company acquired Planning Technologies, Inc., an Atlanta-based consulting firm with more than 200 professional engineers and consultants, for $47 million in stock.
In June Red Hat announced its first quarterly profit for the quarter ending May 31, with adjusted net income of $600,000 on sales of $25.6 million. In spite of its depressed stock price, Red Hat was in solid financial condition with about $390 million in cash and investments. For the future Red Hat planned to introduce open source database software and launch an open source consulting practice. Later in the year Red Hat expanded its consulting and services group with the addition of an open source consulting team that had previously worked for VA Linux Systems. The company also announced contracts with Cisco Systems and Nortel Networks, both of which installed workstations with Red Hat Linux in their engineering departments.
Later in the year Red Hat proposed an open source code, eCos, for 2.5 and third generation wireless devices. Plans called for the new source code to be developed by Red Hat in association with 3G Labs. The new operating system would be based on Red Hat’s open source embedded real-time operating system, not Linux.
The company continued to expand its product offerings with the introduction of a new open source e-commerce software suite. The core of Red Hat E-Commerce was Interchange 4.8, a new version of an e-commerce platform that Red Hat acquired from open source software firm Akopia in January 2001. Also included in the package were the newest Red Hat Linux OS, Apache Web-serving software, an open source database, and a subscription service for receiving software updates.
- Red Hat Software, Inc. is founded by Robert F. Young and Mark Ewing.
- Red Hat goes public as Red Hat, Inc.
- Red Hat expands its product offerings through acquisitions.
- Red Hat reports its first quarterly profit.
Red Hat’s stock received a boost in November 2001 when the company announced it would collaborate with IBM to deliver open source software solutions, services, and support for the entire IBM eServer product line. The new extension of Red Hat’s partnership with IBM built on the company’s previous support of the eServer xSeries platform. Under the new agreement, Red Hat would provide support for the IBM eServer zSeries, iSeries, and pSeries platforms. Red Hat would provide a base solution consisting of the Red Hat Linux operating system, product support services, professional services, and an upgrade offering. A wide range of service upgrades would also be offered. Following the announcement, Red Hat’s stock jumped nearly 27 percent from about $6 a share to $7.62 a share.
Red Hat’s expanded partnership with IBM underscored the company’s leadership position in open source software for enterprise servers. The company also provided open source operating systems for workstations and embedded devices. Red Hat also supported open source developers and offered solutions for the database, e-commerce, secure Web server, and high availability server markets. For the future Red Hat was well-positioned to maintain its leadership position in open source solutions.
Caldera International, Inc.; Microsoft Corporation; SuSE Linux AG; Turbolinux Inc.; VA Linux Systems.
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—David P. Bianco