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The Red Hat trick

Red Hat has transformed its business model more than once before. In the beginning Red Hat owed much to Bob Young, and the building of a brand that couldn't be rivalled. The logo and the image were part of the trick. The man in the shadows in a red fedora looked like he had stepped out of a forties film noir and brought with him a hint of intrigue and mystery. But Red Hat was more than just a marketing trick.

It is easy to forget that Linux and free software weren't taken seriously until the end of the nineties. Linux flourished against the odds in the now-classic scenario where the techies led management into conceding that Linux might be an acceptable alternative. When management said 'OK. We'll switch the web servers over to Linux. How long will it take?' the IT guys would walk away and make up a number because they had already been running Linux for months.

Bob Young - former Red Hat CEO Red Hat's IPO in August 1999 changed the game. As Bob Young tells it, "to start a business in your wife's sewing closet and to have it be valued by the international financial market at over $3 billion 10 years later, you kind of go, 'No.' That's one of those size of success, quantity of success that you simply can't second guess."

Red Hat's valuation at upwards of $3 billion was a heavy responsibility for a loss making company that was seen as the flagship not only for Linux, but also for free and open source software. The company had a turnover of $10 million, and had suffered a loss of $130,000 in the previous year. The onus was on Red Hat to prove the credibility of free and open source software as a business model. Among the more unlikely risk factors Red Hat was obliged to list as part of its S-1 filing with the SEC prior to the IPO was the "fear that the open-source community might stop supporting Red Hat if the company becomes too overtly commercial," which may have been part of the reason why Red Hat offered a chance to participate in the sale of shares to the developers who had contributed to its success.

Red Hat succeeded, with the help of the dotcom boom, gaining unlikely allies in the shape of IBM, HP and Intel, and through acquiring Cygnus Solutions, the one company that had dared to make a substantial business out of selling free software and knew how the market worked. Red Hat ditched the box sets, t-shirts and CDs from which it had previously sourced its revenues, and remodelled itself as a support company, generating revenue by selling software subscriptions, installation, training, support, upgrades and maintenance, which has been its model ever since.

Next: The road goes on forever

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