February 2, 2001 3:30 AM PST

Red Hat chairman details Linux services push

NEW YORK--The Red Hat Network is more than a subscription system for keeping Linux computers updated--it's also a potential tool for enabling computer makers such as IBM to resell Red Hat's services.

Bob Young, Red Hat's chairman and former CEO declined to say whether a deal to let IBM or other companies sell the service is in the works, but said it's the kind of opportunity the company sees with the Red Hat Network.

"The Red Hat Network is a technology that has incredible value because of our understanding of the technology and where it's going," Young said. That value transfers not only to IBM Linux customers but to IBM as well, he said.

The Red Hat Network has numerous competitors, including comparable services from Caldera Systems and Linuxcare. But in pushing its service, Red Hat has the advantage of the largest Linux market share.

Deals with computer makers such as Compaq Computer, IBM, Hewlett-Packard or Dell Computer would enable Red Hat to piggyback more easily into corporate accounts, the company's primary target. That, in turn, would help Red Hat in its years-long transition from being a company that sells boxed software to one that sells services.

In a wide-ranging interview, Young also discussed the new, more skeptical environment in which Linux companies find themselves. "We may be trading at a 25 or 20 percent premium compared to the IPO price, down substantially compared to the enthusiastic valuation of a year ago," but today's valuation is more realistic, he said.

"No one cares about vision," he said. A year ago, investors "valued us where we would be 10 years from now. Now the stock market values us at where we'll be in the next year or two."

The change in Wall Street's climate hasn't meant changes for Red Hat, Young insisted. The company still is focusing on selling the Linux operating system, services for it--and, increasingly, higher-level software accompanying it.

Good riddance to the portal play
But there have been some changes since the go-go technology days of 1999, when Red Hat went public. The company's IPO prospectus spoke extensively of Red Hat's Web traffic, advertising revenue, and plans to be a major Linux Web destination.

Now most of that has passed by the wayside. Good riddance, Young said.

"Page views...was a metric that the investors were watching very closely. It wasn't a metric we cared about," he said. "We were under constant pressure to invest in things that have a lot of page views. But management couldn't figure out where the money was."

Financial analysts pushed the Web site plans, and Red Hat accordingly adjusted its S-1--the document filed to describe the company's plans before the IPO. "If your S-1 is designed to sell your stock to Janus and Fidelity, you give Janus and Fidelity what they want to know," he said.

Young's job since he CNET's Linux Centerhanded over the reins to current CEO Matthew Szulik--a move Young says was his most beneficial management decision--has been to convert those who haven't come around to Red Hat's way of thinking about the benefits of Linux and open-source software in general.

Young believes that the days are numbered for the philosophy that customers may not scrutinize the underlying programming instructions of their software. This proprietary model, put into practice most successfully by Microsoft, will lose out to the open-source model because customers will naturally gravitate to software over which they have more power.

Proprietary licensing is like buying a car with the hood locked and the salesman keeping the keys, said Young, who has been called "chief analogy officer" for his tendency to do things such as compare software licensing policies to geopolitics.

Proprietary partners
But bad-mouthing proprietary software can be a dicey business for Red Hat. One of its biggest partners, and one of its investors, is Oracle. Oracle is the dominant database seller, the second-largest software company, and a company whose core products are closed source.

Young argues that financially, open-source software works best for "infrastructure"--the foundations of computing--instead of the higher-level applications. But several companies are making a go at the open-source database business, and there are gray areas between high-level and low-level software.

For example, it's arguable that Apache Web server software, along with Linux one of the biggest successes of the open-source movement, is at about as high a level as database software.

Young defends his company's decision to sign the Oracle deal, arguing that it furthered the prospects of Linux.

But farther in the future, Red Hat's methods ultimately could bring it into competition. The company is working on expanding its software more broadly beyond just the operating system, adding e-commerce, Web servers and other higher-level software. That expansion is headed directly toward the likes of Oracle.

 

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