Red Hat Tips Cap to New Payment Model

SAN JOSE, CALIFORNIA (08/28/2000) - At the recent LinuxWorld show here, Red Hat Inc. revealed a wide-ranging software-bundling deal with IBM Corp., joined other major vendors in supporting the Gnome Foundation's free desktop environment and announced the acquisition of Oakland, Calif.-based secure Web-server developer C2Net Software Inc.

At the show, Computerworld spoke with Red Hat's founder and chairman, Bob Young, about the Research Triangle Park, N.C.-based company's financial wherewithal to back those initiatives.

CW: Red Hat, like some other Linux-related companies, has seen a pretty steep fall in its stock price since the spring, after hitting some very high valuations. Do you think Linux companies - and Red Hat in particular - were overvalued? And are they more fairly valued now?

Young: The stock market looks at IPOs based on where they are trading compared to the price that the company set at its IPO. Our only opportunity to communicate to the market where we thought the company is a good value was when we set the price. After that, the market decides for itself, and we have no control. We set a price of US$7 on a split-adjusted basis on Aug. 11 [last year, when Red Hat had its initial public offering]. Today, we're trading in the $20 range. By anyone's IPO standard, it was a very successful IPO. VA Linux [is also] doing reasonably well.

We subscribe to the Warren Buffett view of investing: He buys stock and puts it in a sock, and at the end of five years, if the company really was delivering value to the marketplace, that value will be reflected in the stock. So five years from now, I will take some responsibility for the Red Hat stock price. I don't even understand the short-term swings in stock prices, whether it's Red Hat's or Amazon's.

CW: Where will Red Hat's revenue come from?

Young: When we IPO'd, we were at a run rate of about $20 million in revenue a year. Today, we're at a run rate of about $80 million, so clearly we're making substantial progress. [Growth] is going to be in delivering value to the customers.

Sometimes we use terms like "support" and "services," but it's not the traditional [method of] putting a man in a van and sending him to customers.

It's by building very sophisticated service capabilities on the Internet - building it once and selling it many, many times on a highly leveraged basis.

We expect that we will be able to deliver all the value that traditional software companies [offer]. In other words, we're changing the payment model - we're not changing the value proposition for the customer. You're buying subscription services to the latest version of Red Hat, you're buying technical support services, you're buying engineering services. When you come to think of it, Microsoft provides a lot of these kinds of services, only they charge you for it in the form of a per-machine royalty. Our model is more pay-as-you-go.

CW: So, is your model so different from the model that Microsoft is trying to achieve, with its increasing emphasis on Web services and software subscriptions?

Young: Where they are trying to get to is very much where we already are. And good luck to them - they have got to re-engineer their company. They've got, as I've put it, this heroin addiction to selling per-machine licenses, and they're promising to move from that to a services-based model. We have a much easier job. We [were able] to build our services and [be a] subscription-based company from the ground up.

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