Red Hat's billion dollar milestone

by Thorsten Leemhuis

Red Hat has become the first open source company to achieve an annual turnover of more than $1 billion – precisely because the company fully focuses on free software.

At Red Hat's corporate headquarters in Raleigh, North Carolina, people are probably in a festive mood: in its latest 2012 fiscal year that ended in February, the company not only achieved a solid profit as it has done for many years, it has for the first time also actualised an annual turnover of more than one billion US dollars. No company with a focus on open source software has managed to reach this milestone before – less than ten years ago, many still doubted that free software could be a solid business foundation at all.

Back then, the company's current business model was established: to provide support and updates for its custom corporate Linux distribution on a subscription basis. Initially, Red Hat's distribution was called "Advanced Server", but its name quickly changed to "Red Hat Enterprise Linux", a distribution that is often abbreviated to "RHEL" and exclusively consists of open source software.

Founded as AAC in 1993, the company earned its money with the Red Hat Linux (RHL) distribution in the late nineties. This distribution was sold as a red box containing CDs and manuals in bookshops. However, it was always available to download for free on the internet; optional telephone support was available at a charge. In the business year of 2000, the company achieved a turnover of $42 million with such products.

At that time, Red Hat was just finalising Red Hat Linux 6.2, aka "Zoot". However, version 9 ("Shrike") was the last version of RHL: when shifting its focus towards corporate customers, Red Hat abandoned the end user distribution in 2003. Instead, the Fedora community project was initiated by Red Hat to continue to develop the Linux distribution as a technological foundation for RHEL. However, things got off to a bad start because Red Hat's rein on the project was too tight. Fedora could probably only be called a community project once it started to merge Fedora Core and Extras three years later; however, even now the project is strongly influenced by Red Hat's interests, and a company employee has veto power.

The Fedora project's early days were by no means the only time that Red Hat's clumsy or careless approach made the company unpopular in the open source community. There were also repeated warnings that Red Hat could begin to dominate the Linux world – perhaps rightfully so, because otherwise it might actually have happened. Ultimately, however, the open source community owes Red Hat a great deal: Red Hat and its employees probably contribute more than any other company to the ongoing development of open source components such as the Linux kernel, X.org, KVM, Libvirt, GNOME, Gtk and Glibc that form the backbone of the PC Linux distributions.

Red Hat releases all of its software under open source licences. The code for the web-based Red Hat Network system management tool was long treated as an exception. This was changed a few years ago, and the code is now also being used in the management platform of SUSE Linux. Red Hat eventually also releases as open source any software from companies it acquires, although this can sometimes take a while. For example, the management software for virtualised environments that Red Hat acquired when purchasing Qumranet in 2008 ultimately produced the software for the oVirt project, whose contributors also include Canonical, IBM, Intel, SUSE and various other companies.

The acquisition of Qumranet is an example of how Red Hat is looking to add further mainstays to its own distribution by making purchases. At the same time, the company hasn't forgotten its roots, promoting the open source idea in areas where free software isn't as widely used as it is in the operating system market. With Red Hat Enterprise Virtualization (RHEV), for example, which is based on oVirt and on parts of RHEL, Red Hat is trying to win market share from virtualisation top dog VMware, a company that is considerably bigger than Red Hat and achieved a turnover of $3.77 billion last year. Red Hat is also trying to participate in the cloud market with OpenShift, a project that makes it possible to offer Platform-as-a-Service (PaaS) and Infrastructure-as-a Service (IaaS) products; the relevant code was acquired with the take-over of Makara and is planned to be released as open source in the near future. In the middleware market, Red Hat has been established for quite a while after purchasing JBoss in 2006.

When it comes to competing with Microsoft Windows for end users, however, Red Hat hasn't displayed any impetus for years. Still, the company hasn't taken both eyes off this segment because, in addition to working on features that matter for corporate desktops, Red Hat employees do also improve software that is mainly intended for home users. The company also contributes to projects such as OLPC (One Laptop per Child).

Despite the corporate focus, there is nothing to stop customers from using RHEL at home – the cheapest variant costs $50 per year and, combined with various extensions such as those that are required on distributions like Fedora, RHEL offers everything that is available in other Linux distributions. Furthermore, projects such as CentOS and Scientific Linux offer free RHEL clones that are suitable for everyday use. These clones are now maintained for seven to ten years and offer a stable basis for users who don't want to update their operating system every few months. The Red Hat executives don't appear to mind the existence of the RHEL clones; in fact, they have repeatedly discussed in conversation how the company is very aware of how much these clones have contributed to the success of RHEL.

It'll be interesting to see how the company develops over the next few years. Oracle is increasingly trying to snatch customers from Red Hat with its custom RHEL clone; recently, the company even started making the updates for Oracle Linux available free of charge. This is bound to cost Red Hat some customers – but it may also further increase the market significance of RHEL and its derivatives, which could ultimately even benefit Red Hat.

There have been repeated rumours about plans to take over Red Hat, a company that went public at the height of the dot-com era and got a lot of money rolling in the process. However, these rumours have never been substantiated. A prospective buyer that isn't similarly amenable to the open source idea would need to reckon with the possibility that some of the best developers could leave the company – because Red Hat employs a whole range of idealists, as is shown in articles that are worth reading at Ars Technica and in the New York Times. Such employees would soon look for other opportunities should the wind at Red Hat no longer blow from a direction that is as favourable for open source software as it is at present.

See also: