Why Red Hat could become the next Microsoft

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Why Red Hat could become the next Microsoft

Dan Farber
Editor in Chief, ZDNet
Tuesday, June 25, 2002

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Could Red Hat become the next Microsoft--that is, could it become the dominant (not necessarily domineering) operating systems provider? What a ridiculous proposition, you might say. How could a little company that provides Linux open-source software hope to topple Microsoft?

In fact, given that the Linux world is built on a collaborative approach based on the GNU GPL (General Public License), it's hard to imagine how any single open-source distributor could totally dominate. Everyone has access to the bounty of source code generated by the huge community of developers evolving the Linux platform.

I ASKED RED HAT CEO Matthew Szulik in an interview last week if he wanted to be the next Microsoft. He demurred that his goal was not to be the next Microsoft, but to execute like it, and produce quality products like other great technology companies.

If being like Microsoft means trying to crush competitors using unfair business practices, I understand his point. But it would be naīve to think that Red Hat doesn't want to crush its competitors and isn't thinking about how to extend its market leadership, especially as the Linux wave continues to rise in enterprise environments.

We are in the early stages of the market, but Red Hat has already distanced itself from other open-source players, including those in the new UnitedLinux effort to standardize Linux distributions, as well as other Linux vendors such as Mandrake and Debian.

LEVERAGING ITS FIRST-MOVER STATUS, Red Hat Linux has achieved a 52-percent market share among Linux operating systems, according to Deutsche Bank Alex. Brown estimates and IDC. The company has a war chest of $290 million in the bank, the benefits of an IPO when dot-coms were still booming. Advantage: Red Hat.

Red Hat has inked major deals and garnered endorsements from key players, including Oracle, Dell, IBM, and HP. In addition, Red Hat is gaining support for essential applications from companies such as SAP, BMC, Computer Associates, and Veritas. Advantage: Red Hat.

The company is beginning to get traction with large corporate IT buyers, as evidenced by contracts with Amazon.com, Morgan Stanley, AOL Time Warner, Credit Suisse First Boston, Dell Computer, Lawrence Livermore National Laboratory, Nortel Networks, and DreamWorks SKG. Advantage: Red Hat.

Red Hat has even raised the ire of the open source community by filing for patents involving embedded objects and atomic file lookup. Advantage: Red Hat.

Szulik says Red Hat is standing tall on the shoulders of the open source community. That may be true for now, but he is taking no chances. Just like Bill Gates, who has attributed much of Microsoft's success to hiring the best and brightest, Szulik has assembled a team with a good pedigree. The company's staff of 300 engineers includes six of the top 10 Linux kernel developers and seven of the top 10 open-source development tools engineers, according to Szulik. Advantage: Red Hat.

WHEN I ADD UP all the indicators above, it's clear that Red Hat is adroitly positioning itself for the long haul. Now, imagine this scenario playing out over the next several years. Red Hat continues to deliver a best-of-breed Linux distribution and grow the base of Red Hat-compliant applications. The UnitedLinux group and other Linux distributors like Mandrake become even more marginalized.

Red Hat does the best job integrating Mozilla and OpenOffice or StarOffice, and gets universal third-party support for its Red Hat Package Manager (RPM), making it the most obvious alternative for IT managers who are fed up with Microsoft's licensing schemes or security problems. Red Hat fortifies the server side with higher-end server products, grid support, tightly integrated Web services middleware, and development tools.

Current core partners like IBM and HP increasingly rely on Red Hat to provision and support their fast-growing Linux installations. Microsoft's worst nightmare about Linux eating its lunch is coming true. IBM, HP, and the other major vendors figure out too late that their customers have transferred much of their allegiance--as well as capital spending on software infrastructure--to Red Hat. Enterprise application developers make Red Hat Linux their primary operating system to support.

I AM NOT SAYING that this scenario will play out exactly as I describe it. For now, Red Hat is a tiny company with about $80 million in annual revenues and lots of competitors--barely a blip on the screen. Microsoft and Sun are not going to stand still while Red Hat or anyone else gains mindshare and a blue-chip customer list.

If Red Hat starts eating into the support and services revenue of IBM and HP, they may not look so favorably upon the open source king. Nor do those established companies want to get into a situation in which there is a single source for Linux--that is, of course, unless one of the industry behemoths decides to buy Red Hat.

If you go back about 20 years, IBM was not worried about a little company in Redmond, Wash., that had about $1 million in revenue. Who knows? Maybe Red Hat, or some other company that executes well and has some lucky breaks, might be able to repeat history.

What do you think? Could Red Hat dominate the OS market? TalkBack to me!

Read more by Dan Farber at ZDNet's Tech Update.

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