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Hats off to Robert Young.

Entrepreneur makes money by giving away Red Hat Linux.

Robert Young's entrepreneurial spirit was born in the 1980s when computers were still very much in their infancy. Today, 16 years after starting his first company, the visionary Young--chairman and cofounder of Red Hat Inc.--is at the forefront of a worldwide movement that is redefining; computing and challenging the dominance of companies like Microsoft. "We' re reinventing the industry," proclaims the 45-year-old Young.

A few years after his graduation with honors from the University of Toronto--where he studied modern history--Young started his own company in 1984, Vernon Computer and Sales. Young eventually sold Vernon to a Canadian financial services company in 1990.

Young recalls, "The computer rental and leasing business is a capital-intensive business an the banks tightened credit in the early `90's we sold it to a larger financial services business. I went from being an entrepreneurial chief executive to being a middle-level manager in a financial services company."

The entrepreneurial spirit surfaced again in 1993 when he formed ACC Corp. He merged that company in 1994 with a small Linux development operation being run by Marc Ewing. Dubbed Red Hat Software in 1995, to honor Ewing's grandfather's old lacrosse hat--which Ewing constantly wore before it was stolen--the pair later shortened the name to Red Hat Inc.

Since its founding, Red Hat's mission has been to provide end users with its own branded version of the Linux open source operating system. Linux was developed in August 1991 by Linus Torvalds, then a University of Helsinki student, who made the basic source code available on the Internet to anyone who wanted to download it, change it and share the new version with others.

The original Linux was actually a version of the Unix operating system, which was already being used for many Internet-based applications. Because the source code for Linux was available to everyone--and because it was free--its popularity among programmers grew. Before long, companies like Red Hat began popping up to put their own spin on the new operating system, which was now being touted as more flexible and crash-proof than anything Microsoft or Apple had developed to date.


Admitting he has "a low threshold for boredom," Young says it was understood from the start that once Red Hat became successful, someone else would take over as the company's president and CEO. In 1998, Matthew Szulik joined the company as president and chief operating officer, having already proven himself as president of Relativity Software, a fast-growing enterprise software company based in Cary, NC. In November 1999, Szulik also became Red Hat's CEO.

The original strategy of building tight partnerships with the industry-leading technology companies was adopted by Red Hat back in the spring of '98. "It was largely Paul McNamara," Young says, "and I who drove this initially resulting in the first strategic investment round in Red Hat in September `98 that included investments from Intel and Netscape, along with the leading VC's Benchmark and Greylock. We were then able to even stronger management team, and Matthew Szulik as president helped us close the larger partnership round in March `99, that included IBM, Compaq, Dell, Oracle, SAP and Novell. In July `99 we worked with Goldman Sacks to achieve successful IPO on August 12th. In November of `99, Matthew was promoted to CEO, and I focused my attention on expanding the awareness of the benefits of our open source model to larger audiences."

Young has remained its key strategist. "Red Hat's goal has never been to be a big fish in a little pond," he says. "My role is to focus on the size of the pond."

Fortunately, that pond has been growing. In 1995 few people outside of engineers and programmers who regularly used the Internet knew much about Linux. New versions were constantly being made available over the Net. Red Hat was already putting together its own version. "In early 1998, we recognized that we had to build a brand," Young recalls.

Although other start-up companies were trying to do the same, Red Hat's easy-to-use and highly adaptable version of Linux became the most popular. Even though it was--and still is-offered free to those who want to download it from the company's website, Red Hat offers a boxed version, which includes a user manual and 24x7 technical support.

Suddenly, both Linux and Red Hat were garnering praise from industry leaders and the media. When special-effects company Digital Domain used Linux to create the visual effects in the 1997 film "Titanic," the national media began to focus its attention on this new operating system. The spotlight was turned on Red Hat when stories about the company appeared over the next couple of years in most major U.S. newspapers and news magazines.

One such article looked at the real threat Linux presented to Microsoft Windows. Despite speculation about the possibility that Linux could overtake Windows in popularity, Young says that is not part of the company's strategy. "If you' re going to compete with Microsoft, you better change the rules," Young quips. "We can deliver what Microsoft cannot. We give the customer control."

In explaining the benefits of Red Hat Linux over more conventional operating systems, Young notes, "The proprietary binary model is the feudal model. The vendor has control over customer licenses. And MIS directors know they're signing up with Microsoft for a million dollars' worth of licenses. If you fix a bug or make any changes without asking permission first, the vendor can have you arrested. In our model, we ship the source codes and a license to do whatever you want to do.

"The problem with deploying ever larger numbers of sophisticated servers is that there is a growing shortage of qualified system administrators to manage them, he adds. "The Red Hat Network will automate much of the system-administration functions for users of servers based on the Red Hat Linux OS, making existing system administrators dramatically more productive."


Young stresses that Red Hat's core strategy has not changed, despite all the antiMicrosoft sentiment brewing within the Linux community. The company's goal, he says, is still to provide open source solutions for the Internet infrastructure and post-PC environments.

"Microsoft was able to achieve its dominance by taking advantage of a shift in the industry," Young notes. "The PC was designed as a standalone machine. But the old PC model does not lend itself to a networking world. Our goal is not to go after the standalone PC market, but to go after the big shifts in the industry--from standalone computing to network computing and the Internet."

Young does not see the standalone PC market as a viable one in the future because of the demand for Web-based applications. As a result, his company is concentrating on the server' market and Internet-embedded systems, also known as "Internet appliances."

Young also realizes that success comes to those who capitalize on their strengths. "You have to offer a technology that others don't offer," he says. "Our killer apps are all the Internet applications: the FTP servers, the domain-name servers, Apache Web servers. But our biggest opportunity is in the Internet appliance space. Where we won't be successful is on the PC side."

Red Hat's strategy appears to be working, according to the findings of major research organizations.

International Data Corp. (IDC) recently reported that paid Linux shipments grew faster than any other server operating system over the past two years. Preliminary figures for 1999 show Linux shipments hold 24.6% of the server operating system market, up from 15.8% in 1998. IDC also reported that Red Hat holds 50.2% of Linux vendor market share, and that Red Hat Linux is by far the most popular "distribution" (a bundled set of system-specific features), preferred by 68.7 % of all Linux users in the U.S.

Research firm Netcraft Inc. also reported that as of May 2000, 30% of all public websites run on Linux-based operating systems. In addition, IDC reported that 40% of all spending on Linux servers is for Internet-related applications.

Finally, IDC predicts that by the year 2002 there will be more than 55 million handheld and notebook-style information appliance devices, and that--by 2005--shipments of these Internet appliances will exceed shipments of PCs.

The growing popularity of Linux is also reflected in Red Hat's revenue growth. Fiscal 1999 revenues hit $42.4 million, and first and second quarter 2000 figures show continued growth. In June, the company reported revenues of $16.0 million for the first quarter ended May 31, 2000, a 95% increase over revenues of $8.2 million for the first quarter last year, and 22% higher than fourth quarter 1999 revenues of $13.1 million.

In September, Red Hat reported revenues of $18.5 million for the second quarter ended Aug. 31,2000, a 76% increase over revenues of $10.5 million for the second quarter last year. Red Hat's stock, however, has taken a beating since the company went public in August 1999. Buoyed by last year's tidal wave of interest in tech stocks, Red Hat (Nasdaq: RHAT) hit an all-time high of $150 a share in December. It is currently trading at about $20 a share.

Young remains optimistic. "Our stock is now trading at three times the price we set at the IPO," he says. "We did a two-for-one stock split in December; and our market cap is now $3.5 billion."


Young's optimism is well-founded. While the tides on Wall Street may ebb and flow, support from leading software and hardware manufacturers has never wavered.

Red Hat's strategy has been to go after commercially built applications Young says this led first to alliances with Netscape and Intel, and then with Dell, Compaq, Computer Associates, Hewlett-Packard, IBM, Novell, Oracle and SAP. According to Young, not only were these companies able to port their applications to Red Hat Linux, but it allowed Red Hat to expand its own Internet server offerings.

The fact that Intel, Netscape, IBM, Novell and Oracle were among the initial investors in Red Hat does alter the rules of competition, admits Young. "On an engineering side, it's cooperation. On the market side, it's competition. But all of these firms want to see Linux be successful," he says.

Young points to Red Hat's partnering with IBM as an example. Earlier this year, IBM announced it will be preloading Red Hat Linux 6.2 on its Netfinity servers for which Red Hat will provide level-three support. In addition, Red Hat will bundle all of IBM's Linux-based software into e-business solutions, which means that Red Hat and IBM will jointly market, distribute and support bundled IBM Lotus, Tivoli and Red Hat software offerings.

"IBM was getting demand from their customers for Linux-based products," Young says. "But it was a long way from developing these products."

This year saw Red Hat expand its relationships with other partners. It expanded its partnership with Dell by collaborating on the development of the Dell PowerApp.web appliance server, powered by the Red Hat Linux 6.2 operating system. Red Hat also expanded its relationship with Compaq to provide bundled and preloaded Red Hat Linux 6.2 on Compaq server, AlphaStations and select Deskpro PC models.

In addition, Red Hat forged a new alliance with Ericsson to jointly develop a new range of consumer products and services for home communications; the first product from the partnership is the Ericsson Cordless Screen Phone.

Red Hat also entered into an engineering collaboration agreement with Motorola, resulting from Motorola's development of a high-availability product based on Red Hat Linux.

Red Hat's commitment to Internet appliances also was demonstrated in September when the company announced a partnership with Waltham, MA-based NetSilicon Inc., to deliver open source products and services that accelerate time-to-market for manufacturers of Ethernet and Internet-attached devices.


While forming alliances has been a major business strategy, Red Hat also has entered into a buying mode, acquiring five companies already this year. Acquisition of Wirespeed Communications Corp., a developer of network and telecommunications components for embedded systems software, for about $30.5 million, extended Red Hat's reach into the field of embedded, networked and handheld devices that connect to one another over the Internet.

It also acquired Bluecurve, whose performance management solutions allow organizations to simulate and measure user activity and demands placed on the Internet infrastructure and applications.

Hell's Kitchen Systems Inc. (HKS), a provider of e-commerce payment-processing software critical for companies trying to conduct business on the Web, also was purchased by Red Hat. Next was Cygnus Solutions, a top provider of software, tools, services and developer support for servers, real-time operating systems and embedded, post-PC platforms.

Last, in September, Red Hat completed the $42.7 million acquisition of privately held, Oakland, CA-based C2Net Software Inc., the developer of the popular Apache-based Stronghold secure Web server. C2Net's Stronghold is the most popular commercial SSL Web server on the Internet, with more than 30% of the secure Web server market, according to Young.

Red Hat's partnerships and acquisitions mean it is now able to offer a wider range of Linux-based applications and solutions. As a server, Red Hat Linux can be used as a Web server, e-mail, DNS server or news server, and can be configured for multiple sites and virtual hosting. This flexibility allows companies to set up both small intranet servers or large virtual-hosted servers for hundreds of clients.

The availability of these Linux-based solutions has definitely caught the eye of a number of enterprises. Medical Center of Boston International Inc. (MOBI), for example, announced in June that it will use Red Hat Linux as the operating system backbone for the first Internet-based global telemedicine infrastructure on the Linux platform.

MCBI plans to initially open 39 central locations throughout the Middle East, India and the Far East that will be serviced by more than 240 top U.S. physicians. Representatives from Red Hat won't be too far away, either. In its global expansion efforts, Red Hat opened offices in Japan and Australia, as well as a European headquarters in the U.K. The company also has two offices in California.

"Trying to get experienced senior executives in the world's largest technology companies to understand that we could build a business by giving away all the software we wrote every Friday afternoon on public FTP sites was challenging, to say the least. It has all been wild and crazy," Young says in retrospect, "and also great fun and highly motivating at the same time."

Young knows that Red Hat's continued success depends on staying ahead of the curve. "Computers are increasingly being Web connected," he says. "That's where the future of the industry is going. That's where Red Hat is going."
Name: Robert Young
Company: Red Hat Inc.
Title: Chairman
Born: Ontario
Education: Paris and London from ages 10 to 15, then boarding
 General arts degree with honors from University of
Family: Wife Nancy and three daughters, ages 12, 13 and 15
Career: Strategist
Hobbies: Flyishing, rollerblading, tennis with his "girls,"
Quotation: "I've always enjoyed building businesses, and
 them my primary hobby."
COPYRIGHT 2000 Nelson Publishing
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2000 Gale, Cengage Learning. All rights reserved.

Article Details
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Title Annotation:Company Operations
Comment:Robert Young, founder of Red Hat Inc. has redefined the computer software industry.
Author:Rogoski, Richard R.
Publication:Communications News
Geographic Code:1USA
Date:Nov 1, 2000
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