Red Hat - How An Open Source Software Company Became 34 Billion Dollars Company

In a historic milestone, Red Hat, the company that triumphed with Linux and open source has been acquired by IBM for 34,000 million dollars, the largest transaction in history for a software company.

In its 25 years of history, Red Hat has been in charge of demonstrating that betting on open source is not only profitable, but it can generate millionaire profits and that believing in Linux and its philosophy of collaboration can be the basis of a business of gigantic figures. But how did Red Hat get here?

A sewing room and a bachelor floor

Today Red Hat has a market capitalization of 20,500 million dollars, its revenues in 2017 were more than 2,400 million dollars and it is expected that this year will exceed those figures by far. But in 1994 they were just two guys selling CDs from a Linux distro. Marc Ewing had created his own distribution, Red Hat Linux, and sold the CDs from his bachelor apartment in North Carolina. Bob Young had a small catalog sales business that he brought from his home in his wife’s sewing room.

At that time he detected that there was some interest in Linux and bought some of Marc’s CDs. Bob sold so many of those CDs that he and Marc joined forces, and in 1995 Red Hat Software was born with Bob as its CEO.

Two guys selling CDs worth 34,000 million dollars

​Instead of working in isolation, protecting trade secrets and registering proprietary product patents, Red Hat opted for Linux, a constantly evolving operating system developed openly by a community.

​To this day, Bob thanks others such as Stallman and Linus Torvalds and the rest of the free software and open source community for their contributions. No one could have done what they are currently doing without the help of others.

The David for the Goliath of Microsoft

On its own history page, Red Hat presents itself as the company that was the David for the Goliath of Microsoft. At the end of the 90s, Microsoft was facing its problems with the justice of the United States for monopolistic practices, and it was during that time that Red Hat emerged as an open-source leader. One of Bob Young’s favorite phrases when it comes to explaining his product, the benefits of open source and Linux was “You would not buy a car with the hood closed permanently”.

In 1999 Red Hat went public with a record IPO for a technology company. Two years later Microsoft said that “Linux was its worst threat” A Microsoft very different from the one that now gives patents to protect Linux and also invests in its own open-source acquisitions.

For years Red Hat Linux was a product that was sold in boxes next to Microsoft’s Windows. They made money waiting for people to buy the new version of the CD that usually came out every six months, and also selling things like shirts and stickers.

​Although they were an open-source company, the distribution system they had was quite conventional. But in 2001 everything changed. Red Hat Linux, the company’s main source of revenue, would run out and instead start selling Red Hat Enterprise Linux under a subscription model.

Software as a service

Red Hat is not the only company that has taken advantage of the benefits of open source to make money, but they were the first to demonstrate that it could be done on a large scale. In fact, they were the first company in that field to achieve profits of 1,000 million dollars.

How do they do it? Mainly selling premium support for their products. Red Hat not only offers its operating system but also virtualization services, cloud solution management, storage technologies and more.

The White House, DreamWorks, Amazon, the New York stock exchange, and even Microsoft use Red Hat solution

Red Hat products are used by more than 90% of Fortune 500 companies. They are responsible for Linux being present in commercial airlines, telecommunications companies, banks, government institutions and more. The White House is a Red Hat customer. In 2002, DreamWorks made the first movie completely created using Linux, Red Hat Linux. In 2009, Red Hat Enterprise Linux became the only operating system for Amazon EC2. In 2010 the New York Stock Exchange chose the Red Hat platform to use as its financial platform.

And in 2015, even Microsoft partnered with Red Hat to offer solutions in Azure. Let the irony not escape.

The road to IBM

Red Hat had already worked with IBM, the company is one of its partners for 20 years. After the acquisition, Red Hat will become a unit of IBM’s Hybrid Cloud division, which would make them an even bigger giant in the hybrid cloud business..At least for now, IBM says it will maintain the open-source legacy of Red Hat and even promise to “enhance its extended community of developers.” Recall that Red Hat is the second-largest corporate contributor to the Linux kernel. In addition, there are projects like Fedora, independent but benefiting from the Red Hat sponsorship, which at the same time benefits from the collaboration with the community.

​Jim Whitehurst, the current CEO of Red Hat, who has been with the company since 2007, will become part of the IBM management team, and will only be below IBM CEO, Ginni Rometty. Whitehurst believes that IBM will offer them the necessary resources to accelerate the impact of open source and bring Red Hat even to a larger audience.

IBM will remain committed to Red Hat’s open government, open source contributions, participation in the open source community and the development model, and the promotion of its broad ecosystem of developers. In addition, IBM and Red Hat will remain committed to the continued freedom of open source, through efforts such as Patent Promise, GPL Cooperation Commitment, the Open Invention Network and the LOT Network.