Redhat | Product | Business Model | Analysis


If indeed open source software can replace proprietary software, can the economy of the former succesfully replace that of the latter, as well? A shift towards open source software would drastically change the business model of the average software company, from that of product retail to service retail. No longer would a company be interested in how many copies of a particular software suite it can sell, rather, it would attempt to sell support and other services to its user base. One such company that is doing just that is the Linux-distributor Red Hat.



Red Hat was founded in 1994 by Bob Young and Marc Ewing with the goal of providing products and services based on open source software. Today, Red Hat is the largest and most recognized company in the open source movement with more than 500 employees worldwide.


Selling Free Software

The main product Red Hat sells is Red Hat Linux, a software package based on the Linux operating system. The current version, Red Hat Linux 7, is made up of over 800 individual packages, almost all of which have been developed as open source projects. In the spirit of open source development, the full 540MB Red Hat Linux operating system can be downloaded directly from the Red Hat website. As a more convenient solution, Red Hat also offers the Red Hat Linux 7 Standard Edition, which comes packaged with documentation, an installation guide, and 60 days web-based support for about $30 dollars. Red Hat also sells higher priced versions of the product (the highest is $2500) targeted at specific platforms or uses, such as servers or workstations.

But the product is only half of what Red Hat markets. Because Linux and the systems it runs are so complex, Red Hat can sell the product itself relatively cheaply and then charge the buyers for the technical support and training required to maintain the system. The levels of technical support vary greatly, from the limited telephone or web-based support that comes with (commercial) package, to 24x7 emergency technical support for large corporations. Red Hat also provides courses to train professionals and developers in operating and using Linux to its fullest extent.

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An Unusual Business Model

Thus Red Hat's business model is quite different from that of the usual software company. Instead of developing software itself and selling it for a substantial price (like most software companies), Red Hat gathers together the collective work of thousands of programmers all across the Internet and packages and sells the resulting product with the Red Hat name on it. Because Linux is an open source project, Red Hat cannot claim intellectual property rights on its product. Hence, people can download Red Hat Linux for free, and then modify, copy, and redistribute it completely legally. However, by providing a convenient and polished product, complete with documentation and technical support, Red Hat hopes to attract customers. In Robert Young's (CEO of Red Hat) own words, "if we do a good job of supplying and supporting a consistently high-quality product, we have a great opportunity to establish a brand that Linux OS customers simply prefer."

In addition to selling its product, Red Hat remains committed to the open source community. Red Hat has contributed to the development of a number of open source projects, the most notable being the Red Hat Package Manager (RMP), the de-facto standard for managing installations of new programs on UNIX systems. Red Hat also currently supports 14 software developers that work full-time developing and extending the Linux kernel.

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Does it work?

So does this business model work? Is it possible to sell something that can be had for free and still make a profit? Right now the answer is unclear. A year and a half ago, however, the future looked quite bright for Red Hat. When Red Hat went public on August 11th 1999, with 6,000,000 shares, its stock soared from $14 to $52 on the first day. It reached it's high of about $151 in December of the same year. Some investors believed that Red Hat might overtake Microsoft. Unfortunately, this dream was short lived. As the Internet startup craze ended, Red Hat's stock plummeted along with all the others. By March of 2000 their stock had already dipped below $25, and today it is worth less than $6 per share. Judging by this downturn, Red Hat's future looks bleak.

But looking at the price of a company's stock is not the only measure of success. Red Hat consistently meets its quarterly revenue expectations, and in the third quarter 2001 the company's total revenue exceeded $22 million, up 21% from the previous quarter. The company still has yet to break even-losses for third quarter 2001 totaled almost $27 million-but their earning estimates indicate that they will start making a profit sometime next year. To secure a more stable revenue stream, Red Hat is expanding into new markets, such as embedded-systems and hand held devices. Red Hat has also recently started the Red Hat Network, a secure Internet service that promises to help in the deployment and management of Internet platforms.

Most likely Red Hat will continue to survive, if for no other reason than the fact that it is the star of the open source community and has many devoted supporters. Whether or not it will prosper is another matter - relying on open source software alone has not yet proved to be profitable.

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