Red Hat

Introduction

By 1999, Linux was the world’s fastest growing open source server operating system in the world. In addition to its acceptance by main stream corporate America, an increasing number of companies were choosing it over Microsoft NT. In parallel, Red Hat was growing and gaining more market share in the open-source software market. Red Hat primarily packaged and distributed the Linux operating system, significantly simplifying the installation and upgrade process for firms choosing to use the Linux system. Red Hat’s growth and success to date made them an attractive candidate for an initial public offering (IPO) of stock to become a publicly owned and traded company. On August 11, 1999, Red Hat stock opened at $14 per share and within two days had increased drastically to $82.25 per share.

Problem Statement

Red Hat, a $5 billion dollar company, would now answer to shareholders and the general market. Red Hat’s new shareholders expect continued growth in return for their investment. Based upon their valuation of the company at almost six times its opening price, they also expected substantial returns on their investment.

Red Hat’s internal situation was that of a $5 billion company that was barely profitable and had yet to determine its long term strategy. Moreover, Red Hat had not yet addressed its most critical strategic issue: Should Red Hat begin to develop application software for Linux , and if so, should it produce the software using an open-source or proprietary approach?

Analysis

1. Linux operating system’s product characteristics, production process, and its users/customers.

Linux, like Microsoft Windows, is a computer operating system. An operating system is defined in the case glossary as, “the software that interacts directly with the computer’s hardware, providing an environment for applications to run. Application programmers can take advantage of the services provided by the operating system to perform common system functions like printing, file management, and network communication.” Linux is unique because it was developed and continues to evolve, through open-source development. This involves widespread access to the code base of the evolving product, allowing programmers from around the world to contribute new features, test new versions, and write patches to fix errors that are discovered. In addition to the programmers, the users (companies and organizations) can understand how the program operates and make any changes they desire to customize it for their needs. In contrast, Microsoft Windows is developed, protected, and licensed by Microsoft. Users do not have access to Microsoft Window’s base code, nor can they modify or customize it.

Linux is the culmination of an effort that has persisted for nearly twenty years to develop an open-source operating system. None of the contributors “own” the product. A core group of developers maintain design responsibility. Below them, the product is divided into several modules, each with its own maintainer. Users continually submit patches and new features which are incorporated into the newest version of the program. The new versions are frequently updated on the web-site, sometimes daily. This continual updating is balanced with occasional code freezes (every six to twelve months) resulting in a stable version that remains available while new changes and updates get incorporated into another version. The aspects of Linux that appeal to users (flexibility, adaptability, and sharing through open-source) also complicate things for its users: it is a very robust operating system, complicated to install, and difficult to maintain patches and updates. For example, it requires 36 hours to download a new version of Linux .

Users of Linux include corporations, small businesses, organizations, universities, and a growing number of individual computer users. These users select Linux for its flexibility and adaptability, but many lack the time and resources to install and update new versions. This created a niche market for Red Hat: adapting the core operating system to the massive amount of data submitted by over 10,000 programmers.

2. Use the input-transformation-output model to describe Red Hat’s business model as a Linux distributor. What are the inputs and outputs of this “production” system? Which transformation functions does Red Hat perform? What values does Red Hat add?

In the input-transformation-output model, the input is the over 600 different software packages and 573 mega-bytes of open-source that makes up the Linux operating system. The continuous evolution of this