Post of the Day
March 9, 2000

Board Name:
RedHat Software

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Subject:  Think Ketchup
Author:  ShockMeFool

At the outset, let me state that I use RHAT Linux on my server, but I use Win98 on the desktop. Why? Necessity. Currently, most of the applications which are necessary to my profession are only available for Windows. But, as is often the case with open source development, this is changing on an almost daily basis. The only thing missing is a reliable case/calendar/contact package, and there are plenty of available options currently being developed. I anticipate running Linux on the desktop by the year end.

If you're investing in RHAT, you're definitely L-O-N-G. Check out their current financials if you doubt this. But future estimates can change quickly, so IMO, now is not a good time to be focusing solely on the financials. As Robert Young has consistently stated, RHAT is looking to develop a brand name. I think his analogy with Heinz Ketchup is a great example. No one owns the rights to ketchup and any of us could make our own. But we don't. We buy it at the grocery store. And if you ask any person which companies sell ketchup, Heinz is almost ALWAYS mentioned. Building a brand name takes time. Years. Thus, L-O-N-G. Which ain't so bad. As Warren Buffet has said, he makes his money by purchasing stocks and putting them under his mattress for 5 years.

Now, why RHAT? Again, their current financials don't tell the story. (0.05) for Feb2000, (0.15) FY Feb2000 and (0.13) FY Feb20001. Who wants a piece of this?

I do.

RHAT is a smart company. At the outset, they concentrated on bringing in the big players, and many of these big players actually sought out RHAT. Intel (INTC) bought in early. Intel, for crying out loud. Why? Because INTC, being the giant that they are, knowing that their future depends upon their ability to see the trends before others do, knew that Linux was making great inroads. Greylock and Benchmark, arguably two of the greatest venture capital firms in America, saw it too. Dell and Netscape were not far behind. With IBM, AOL, Compaq, Corel, Fujitsu, NEC, Novell, Oracle, and Real Networks, just to name a few, throwing their weight behind Linux, combined with the fact that Linux runs on Intel, Alpha and Macs, RHAT stands to gain greatly. They are poised to become synonymous with Linux. And that's where the payoff begins.

It is axiomatic that hardware evolves faster than software. INTC's reasoning for throwing in behind RHAT probably best exemplifies the common thinking. As stated in Under The Radar, "Executives at the highest levels at [Intel] had long recognized that proprietary operating system manufacturers were not moving their operating systems foward as quickly as Intel was advancing microprocessor technology. That is, Intel was being held hostage by those that controlled the operating system. If it had a new technology available at the processor level that would allow computer users to do new things, it had to wait until the operating system supplier decided it was willing to build support for these features into the systems." (Under The Radar, p. 6). Stated more simply, proprietary software does not foster hardware growth. INTC realized that, by having access to the operating system source code, they could innovate and evolve far more quickly. And by participating in the open source community, they were effectively ensuring a dependable user base.

While cost is rarely the sole consideration, it is nonetheless a consideration. The estimated cost of MS Win2k (as projected by Microsoft around December 1999) compared with RHAT is astounding. See http://www.virtual-attorney.com/linux/cost.html for a quick comparison. I've worked for Fortune 500 companies, and let me tell you, these types of comparisons speak volumes.

So, why would a company choose to invest so much when they could have RHAT for so little? The main reason often touted is lack of support. From a historical perspective, it is important to remember that much of the FUD (Fear, Uncertainty and Doubt) spread regarding Linux is it's lack of support. It's not something you hear very often anymore, but less than a year ago, it was a quite common complaint. This, IMO, is one of the main reasons RHAT touts its service model so highly. I am convinced that RHAT's successful IPO brought an end to much of the FUD being spread concerning Linux. RHAT does intend to bring in revenue by offering service and support, but I'm not entirely convinced that, over the long haul, RHAT intends support to be its cornerstone of revenue. When LinuxCare goes public, it would not surprise me to see RHAT begin to downplay support as a main source of revenue, and rather seek to more closely align itself with LinuxCare.

Another reason given by companies is the cost of end user training. However, I believe as applications continue to be developed for the desktop, these concerns will fade. End users point and click, and with the continued evolution of X-Windows and associated windows managers (KDE, Gnome, etc.) and applications, training will eventually become a non-issue. Many of the free applications currently available have a very comfortable and familiar look and feel, which foster productivity and make the transition quite more appealing.

Hardware vendors such as Dell and Intel's "white box" dealers are going to continue to find Linux more and more appealing. When a vendor can sell a computer for $2,000, paying MSFT's licensing fee for Windows isn't really a painful proposition. However, hardware prices continue to fall. It's much more difficult to pay that license fee when the selling price of the system is $600 - $800. Linux (think RHAT) is a much more profitable alternative.

RHAT continues to develop and participate in the open source community. Applications are currently underway, which is a Good Thing, because the lack of applications is currently Linux's greatest shortcoming. However, it is important to remember that Linux is less than 10 years old. Development has progressed logically. First, the core system was developed, then with the rise of the Internet, communications and 'net-related functionality was added. X-Windows came along, and with it came the beginnings of the desktop environment. Today, more and more applications are being developed for the desktop. Linux is only now entering the Application Era. The stability and reliability is in place, and the focus is moving from server functionality to the desktop. (This is not to say that development has ceased on the server side, only that the focus is migrating. That's one of the great things about open source - development rarely ceases.) Plug-n-play, enhanced 3D video, PCMCIA support, etc. It's all there and being improved daily.

Now, what good is R&D when you end up giving the end result away? From an open source standpoint, it's a badge of honor. But this doesn't translate to financial gain. Or does it? RHAT sells its version of Linux, along with several add-on applications. While it is true that anyone can download Linux for free, it has been my experience that most people prefer to purchase it. I'm completely capable of downloading and installing/upgrading Linux, and I have done it before. However, I have found it to be much more convenient to purchase RHAT version X on CDROM and perform the upgrade. And with each version I purchase, RHAT adds more and more applications. And I know people who will not upgrade until RHAT releases the commercial version. While they could simply borrow my CDROM and perform the upgrade (without violating any license), they don't. For reasons which only they can conceive, they want to purchase their own copy.

A great number of Linux users are still very young. 18 - 25 is the age range I often see, but I know of many extremely capable Linux users and developers who are younger than 16. They use it because, on their limited income, they can afford it. For either a free download or $50.00, they gain access to some of the most powerful development tools available. I haven't conducted a poll, but I'm currently unaware of any junior high or high school students who, as a hobby, develop under Visual Basic or any of MSFT's tools. They simply can't afford it. It is true that MSFT offers Visual Basic, C++, etc. development tools for under $100.00, but these versions have been stripped of much of the functionality which interests young developers or require additional purchases (such as MS Access). The tools available for Linux are fully functional and ready to rock.

Time marches forward. Some day these young people will run the world. Server-side, Linux usage is already commonplace and increasing, and the desktop is undergoing rapid and steady development. Twenty years from now, when these young Linux users are running the world, how commonplace will Linux be? RHAT is positioning itself now to be the brand name then.

Frankly, RHAT's greatest competition may come from MSFT, but rather than a Windows vs. Linux scenario, it could conceivably be Linux vs. Linux (http://www.cnn.com/2000/TECH/computing/03/06/ms.linux.idg/index.html). As Linux continues to grow (and it will), MSFT will continue to feel the pressure. For every desktop shipped with Linux and for every person who replaces MS Windows, MSFT takes 2+ hits. First, it's the loss of the operating system sale. Second, it's the loss of application sales (however many this might be). In some cases, this translates as revenue to RHAT and in other cases it doesn't (right now). RHAT's challenge is to position itself such that it is THE Linux choice, and they have made great inroads toward this.

How does all of this translate to earnings? Think ketchup. You can borrow my ketchup and I can borrow yours with no concern regarding a license violation. But sooner or later, you're probably going to purchase your own ketchup (think initial installation). And when that bottle is empty, you'll purchase another (think upgrade). The only question is what brand of ketchup you will purchase (think RHAT).

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