Busting Windows
Barron's Online
Red Hat looks to do that with Linux
By Jack Willoughby
Consider a world free of Windows and Microsoft's bone-crushing dominance. Slowly, ever so slowly, such a world is emerging in operating systems, which run the software applications for desktop computers.
The possibility exists thanks to Linus Thorvald, who in 1991 invented Linux, a new operating system to compete with the likes of Windows NT, Unix and OS/2. What's revolutionary about Linux is that it's distributed free on the Internet.
Like Gillette giving away the razor blades to sell the razors, Linux' inventors give away the operating system -- codes and all -- to gain very widespread use. "It's really more like Gillette giving you the handle, the blades and offering to sell you the sink and the mirror," says Daniel Kusnetzky, program director-operating environments for International Data Corp., based in Framingham, Massachusetts.
While publicly dismissing Linux, Microsoft privately regards it as a threat. According to an internal Microsoft memo posted on the Web "Linux... due to its open source code has long term credibility which exceeds many other competitive operating systems."
Linux has attracted mainly computer cognoscenti willing to devote the time and effort to install it. They like Linux because of its ability to run on virtually any PC (a 386 with 16 megs of RAM will do) and its resistance to crashes. Some also are drawn to Linux by their refusal to add to Bill Gates' billions.
Businesses, however, require support. Enter Red Hat of Durham, North Carolina, the world's No. 1 seller of Linux, with an initial public offering that aims to raise $93.6 million in coming months. Goldman Sachs & Co., Thomas Weisel Partners, and E*Trade form the syndicate.
Red Hat has impressive sponsors, who plan to hold on to their stock. Venture capitalists backing the deal include the Greylock IX Limited Partnership (14.5%) and Benchmark Capital (9.7%), which backed eBay. Companies such as Intel and Netscape (now part of America Online) hold insider positions.
For an Internet offering, there is a relative paucity of red ink. Loss for the fiscal year ended February 28, 1999, was $130,000 on revenues of $10,790,000, compared with a profit of $8,000 on revenues of $5,156,000 for the similar year-earlier period.
"Judging by the buzz that's already out there, this issue's going to go well," says Kenneth Fleming, an analyst for Renaissance Capital Group based in Greenwich, Connecticut. "As for the business plan, consider Java's popularity," referring to the programming language given away by Sun Microsystems. "There are a lot of companies out there that would just love to reduce their dependence upon Microsoft."
Reasonable projections based upon the IPO filings to date, indicate that Red Hat could wind up with a capitalization of at least $600 million, according to one analyst. "It's not hard to imagine a company like Red Hat in such a talked-about technology space as Linux enjoying an explosive IPO," says Lucas Graves, analyst for Jupiter Communications based in New York. "Red Hat's performance will depend on whether they are perceived as a 'Net stock or technology stock. In order to succeed as a real business, Red Hat will have to gradually develop a serious service organization."
This means Red Hat has a tough road ahead. Its work force ballooned to 127 employees, but must increase even more if the company hopes to develop its support and consulting network enough to attract commercial business.
The task amounts to a complete reconfiguring of the revenue mix. To date, Red Hat has derived more than 90% of its sales from software. The company's two largest distributors accounted for more than half its fiscal 1999 revenues.
The best indication of Linux's success lies in the server market, according to International Data. Of the 4.3 million copies of new server software sold last year, Linux accounted for 704,000 copies, giving it a 16% market share. Of all operating systems, Linux alone gained share in 1998, although Microsoft's NT with its 36% share still outsold Linux by two-to-one.
Yet small businesses have hardly heard of the system. Linux's relative newness shows up with its slim share of the overall shipment of licenses on new clients. According to Kusnetzky, Linux accounted for only a 2.5% of the 87 million new licenses shipped in 1998. Through various brands, Microsoft held a commanding 88% share of the shipments. Linux still needs a broader array of business applications to make inroads. Kusnetzky says that such software still needs to be written. Eventually, Linux might offer compelling savings in certain limited server-centric applications, such as e-mail, Web services and print and database services. Adds Kusnetzky: "Linux will change the economics of software for medium and large companies, who normally pay licensing fees on each computer."
But Red Hat will have a tough job trying to match Microsoft's appeal in both the consumer and commercial sectors. How long can Linux's cooperative style of open architecture exist before it collapses into a fight for personal gain? Jupiter's Graves notes that the Unix started out as a cohesive operating system but its guaranteed compatibility was lost when companies "flavorized" it, in an attempt to offer exclusive benefits and lock in customers. |
