Feature: After the Red Hat IPO Ball is Over

Red Hat is now worth serious money. Exactly how much changes hour by hour. Check the Red Hat Wealth Monitor for up-to-date information. This page is by no means anti-Red Hat, and it has a bunch of commentary on it that's well worth reading. We also got some excellent comments about the Red Hat IPO from professional investors Jay Roseman and Frederick Berenstein of The Linux Fund, and a perceptive note from "an anonymous insider" (he'd lose his job if we published his name) that may help put Red Hat's IPO in perspective -- and serve as a cautionary tale for other Linux and/or Open Source-related companies that decide to sell stock to the public. (Lots more below.)

Nothing Succeeds Like Success
by Jay Roseman and Frederick Berenstein

New York, NY - Five years ago, if you asked a Linux hacker if he thought a Linux company would have a market valuation of $5.6 billion by 1999, he probably would have said, "Yeah, right". His pessimistic outlook would not have been because he didn't think Linux had what it took, because everyone within the community knew of Linux's potential value, but because with Linux making money was not the great motivator - lack of money was.

And so, what five years ago might have seemed like an absurdity - here we are. Wall Street, meet the Linux Community - Linux Community, meet Wall Street.

Bob Young and his team have done something that many in the Linux community thought impossible several years ago. And we're not just talking about Red Hat's IPO. There is much more to this story than an IPO.

When any company goes public at $14 and trades within three days over $90 per share, it isn't just Wall Street that notices - everyone does!

IPOs occur every day, so what's so special about Red Hat? Answer: this is a Linux IPO, and it's the only play of its type in the financial markets. So naturally, all arrows point one way. The Linux phenomenon has just begun, and we can expect it to continue.

We should all thank Red Hat for pioneering Wall Street. There was a time when being a pioneer often meant being scalped. On Wall Street being scalped is not taken literarily, although scalpings of a different sort occur daily. Not so with Red Hat, Wall Streets newest sweetheart. As individuals and institutions clamored to own a piece of the first Linux software company to go public, hackers and computer enthusiasts in San Jose acknowledged Red Hat's meteoric rise with a sense of satisfaction. Wall Street has finally discovered what every nerd has known for the past five years: that Linux not only works - it works better!

The fact that Red Hat has shot out of the box quicker than Seattle Slew has been a boon to the Linux community (especially if you are lucky enough to own it), but the real benefit of Red Hat's success is that the entire investment world is saying, "Wow!" What's good about "wow"? Well, on Wall Street "wow' translates to "Holy Cow!" and we all know that "Holy Cow!" means, "Linux is now the worlds domain".

No longer is Linux destined to be the operating system of the knowledgeable few that appear to have this uncanny ability to decipher the secrets of the universe. Or at least it appears that way to middle Americans who only recently unraveled the secrets of programming their VCR. Whether the community likes it or not, Linux has been catapulted into Middle America, and the rest of us will just have to hold our ears as well-meaning Wall Street types pronounce Linux as "linex" and saunter around their offices smirking if it was they who just discovered this "extraordinary new operating system."

The Linux community may not know it, but Linux is now caught in a turbulence that is pulling it into the stratosphere. Whether or not this is a good thing depends on who you talk to. There are those within the community who feel anything that Linux has to do with Wall Street is a parasitic relationship. But it doesn't have to be that way. If we honor the GPL and don't all turn into pigs, it is possible and even advantageous to engage in a symbiotic relationship.

What we have to do is make sure that Linux companies don't take to the skies while the hackers who set the groundwork are left sitting on the sidelines with binoculars in their hands.

When Wall Street grants its blessing, as it has with Red Hat, the entire world notices. In normal business circles Red Hat's performance is cause for celebratory cocktail parties, but somehow cocktail parties and Linux don't seem to mix. Surprisingly, most hackers we have met seem to look at Red Hat and its success with an internal sense of satisfaction, thinking, "I am part of that even if I don't get any monetary benefit from it."

That is what drew us to Linux. It wasn't the prospect of money. When we walked into the San Jose Convention Center last March, which was the first time we attended a Linux conference, it felt like we were meeting an Underdog team that had just won the high-school championship. Missing were the smirks of "I told you so". What we found instead was a community, in the truest sense of the word.

Besides the excitement of the San Jose celebration, we were mesmerized by the $150,000 IBM Beowulf cluster that trounced the performance of a $5.5 million dollar Cray supercomputer using an "off the shelf" Linux distribution. When the challenge was over, and Linux was the victor, the cheers shook the San Jose Convention Center and we got goose bumps watching. At the time, we weren't quite sure what we were watching, but we were swept up in the enthusiasm and found ourselves cheering along with everyone else. What we did know was that this was the cumulation of thousands of programmers making a difference, and proud of it.

We remember the first time we listened to Bob Young saying how he would speak to venture capitalists and explain to them his idea of packaging an operating system that would challenge UNIX and Microsoft and be free to anyone that wanted to download it off the web. We assure you, the venture capitalists may not have laughed in Bob's presence, but that was only out of pity for a man that they thought had gone sorely astray. Who would have thought at that time that Linux would have such an impact?

Some analysts still aren't convinced about Linux's ability to challenge Microsoft. But Red Hat doesn't have to challenge Microsoft; they just have to continue doing what they're doing. (Microsoft, pay attention here!) The Linux community discovered a long time ago that the challenge is with themselves, not Microsoft. Linux doesn't have to knock Microsoft out of the market. It just has to take a larger position in the market. And it has.

This is Linux's honeymoon period with Wall Street. In time, there will be analysts writing Linux's epitaph in their research reports. Linux will be compared to Microsoft in P/E ratios and every other ratio and multiple out there and the truth is that Linux just won't measure up. But analysts haven't yet realized the importance of the "Synergy Ratio." (i.e. one Linux programmer = 50 Microsoft programmers.) They don't realize that there's a community here unlike any they have ever experienced. Imagine the Chairman of Ford putting his arm around the shoulder of the Chairman of General Motors and saying, "great job!" This just doesn't happen in normal business, but it does happen in the Linux community every day.

Wall Street has learned a lot from Red Hat, and it isn't just that Linux may very well be the best operating system going. They've learned that a group of determined hackers could get the world's attention just by doing the right thing. Wake up, Wall Street. Linux has only just begun!

And to the nay-sayers, well, the Linux Community has made it a habit of forcing nay-sayers to eat their hats. Only this time what's getting eaten is Linux's own Red Hat.

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IPOs: More Than Meets the Eye
by an anonymous insider

After the dust has settled and Red Hat emerges from their quiet period they should offer a new training course in Durham: "Linux IPO 101 - A case study."

From what I know of Red Hat and the folks calling the shots, the various blunders and snafus related to the affinity offer and E*Trade were just that, blunders and snafus. These folks have been around the community far too long to allow something like this to transpire if they had any control over matters.

I have a feeling there were a lot of late-night calls trying to make sure that deserving people got a fair shot at shares. I'm also sure that no matter how hard they worked, some folks slipped through the cracks, and that is unfortunate. Let's not lose sight of the fact that they were sincerely trying to do the right thing.

Bob Young collaberated on the first few issues of Linux Journal with Phil Hughes (which partially explains the difficulty in scoring back-issues for #1,2 and 3). Then Marc Ewing hooked up with Bob and they hired a couple of guys fresh out of NC State and started working full-time on a Linux distribution before almost anyone else. There were others at the time (WGS was around, Caldera was coming on the scene, and Pat Volkerding was working on Slackware) but these guys were out there on the bleeding edge. They've always released everything under the GPL or a similar license and provided support to a variety of community projects.

When no one else thought enough to have a Linux-centric conference or show these were the people making sure Linux Expo came together. Donnie Barnes started Linux Expo when he was a student at NC State and Red Hat kept it alive when the NCSU LUG couldn't. Erik Troan was a SunSite maintainer on top of his regular work. These are people who are true believers in the community.

Hopefully other companies who go public can learn from what Red Hat has suffered through. I doubt anyone can get it perfect, there are just too many variables involved. But we can always hope.

For better or worse Linux has made it to Wall Street. Here's hoping it's for the better.

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The Wider Implications
by Robin "roblimo" Miller

I believe we are watching the beginning of a Linux-induced revolution in corporate finance that may be more important than recent Linux-induced changes in the way software is developed and distributed. Why more important? Because this revolution has the potential power to change all business activity, not just businesses directly involved with computers.

Suddenly the phrase "World Domination" takes on a whole new meaning, doesn't it?

Looking a gift horse in the mouth

'less we forget, Red Hat invited open source people in on the ground floor of their IPO as a gift -- a token of appreciation, if you will. Sure E*Trade botched it up, or perhaps several newbie investors were stung by the harsh realitys of IPO trading, but nonetheless Red Hat was not obligated to set aside any shares for anyone and here we see several people whining about the whole IPO process not being user-friendly and now there's even a Red Hat Wealth Meter suggesting that the shares set aside for open source people were unfairly proportioned to shares for Red Hat employees. Gimme a break!

At least Red Hat made the effort of sharing the wealth with OSS developers -- show me another company that would have done the same.

As long as it helps Linux, I don't care

This may sound strange, but I don't care if Red Hat becomes the next Microsoft. As long as they keep Linux moving forward, then I win. If the IPO helps them do this, then the IPO was a good thing.

I know that some people see OSS, Linux, GNU, whatever as a sort of religion. And these people get squirrely when things start moving into the mainstream and getting "corporate-ized". But this is what it will take to get Linux and OSS into position to replace (or at least augment) NT and the like. In a way, it legitimizes Linux in a lot of people's eyes. Like it or not, that's the way it is.

IT managers need to see things like an IPO and articles in the Wall Street Journal about Red Hat -- it gets Linux and OSS on their radar. And they start wondering what this whole Linux thing is about. And they read InfoWorld or Wired and start getting a clue. They start feeling a little better about Linux because they've "heard about it". So when a tech decides to download(!) a freely available OS which comes with zero support (and zero culpability should something go wrong) and use it in mission critical applications, the PHBs won't get the screaming willies. To them, Linux can be taken seriously now because of things like the Red Hat IPO. Red Hat and Linux have now become "real" to the PHBs.

Anyway, I could go on about how Linux was the red-headed stepchild of the corporate OS world, but you get the point. The bottom line is that the IPO goes a long way toward guaranteeing that Linux will become a success. And that means Linux will not just live, but grow. And that means we all get a better Linux.

If the IPO gets just a handful of developers off the MFC tit, then we all come out ahead in the long run -- no matter what philosophical issues we might have about Red Hat making money off OSS. Let them make all the money they can, I say.

-B

Linux=good does not mean Red Hat=good

Before the flamethrowers come out, let me state that I:
1. like linux
2. wish RHAT all the best
3. am happy to see the linux community enjoying success

Now on to some critical commentary.

It's a safe assumption that Linux is good. It brings a lot of value to those who use it, and is definitely benefiting from a lot of investments and attention these days. I still have yet to see, however, how a dedicated linux company (eg. Red Hat) can become the "next Microsoft/Dell/Cisco."

Let's define "next Microsoft/Dell/Cisco." I'm talking about a very succesful public company, with rapid sales growth, a extremely bright current and future prospects.

For a company to be a successful, it must grow its sales, and figure out a way to make decent profits. How does a company grow sales? Sell something. What does Red Hat plan to sell? $99-200 Linux distros, and Linux services. It's difficult for me to see massive year-to-year revenue growth selling something that I can dowload for free, or buy from another vendor for $5.00. That leaves services/consulting.

I work for a consulting firm, so believe me when I say that selling services is hard. There are reasons why public companies that sell consulting services aren't valued as richly as companies that sell software or hardware, for example:
1. Selling consulting services often depends on personal relationships with your client(s).
2. The growth and viability of your consulting practice is directly tied to your employees. If someone from Dell or Microsoft quits, the company is affected in an indirect way. If one of my coworkers quits, that creates an immediate revenue hole of $200,000 (2000 hours*$100/hour). I've seen small consulting/services companies literally die over the course of a few months, as their revenue streams literally disappear in the form of massive employee turnover.

Despite the difficulties of running a consulting/services business, many companies do try, and succeed at it. The whole "ecommerce" thing is creating massive opportunities for the industry, that is only going to get bigger as this whole Y2K thing passes away. It's a good time for a small company to be in the consulting gig; there's not a whole lot of recognized expertise in ecommerce consulting, and a small practice can slip under the radar of the big guys, and grow fairly quickly.

Red Hat, however, is not going to slip under anybody's radar; they have too public of a profile. This assists them with recruiting, but will hurt them if they start making inroads against larger competitors. IBM, for example, is kicking all kinds of booty with its Global Services outfit. I personally don't like competing against them. I have little doubt that the companies that are supporting Red Hat in various ways today will not hesitate to start pulling plugs should Red Hat successes start affecting their meal tickets.

The popularization of Linux can hurt Microsoft, but hurting Microsoft does not automatically create an investment opportunity.

Interesting... or sad... or typical

Anyone find it intersting that the Linuxfund.com website was created and is managed with Microsoft Front Page 2K?

LOL