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It's impossible to discuss RHAT without recognizing one fundamental principle: The rules of software creation are being rewritten. Well, actually, they've been rewritten. The reality of this is only just now being recognized by the world. In many ways, although the comparison seems self-evident, comparing RHAT to MSFT is like comparing apples to oranges. MFST deals in the realm of proprietary software (programs which sometimes work and sometimes don't, but we don't know why) and RHAT deals in the realm of open source software (programs which sometimes work and sometimes don't, but we can figure out why because we have the source code). However, because the core product of both companies is the operating system, comparisons are possible and necessary.

As a prelude to this evaluation, I think it only fair to confess that I am an open source advocate, however, I do not fault those who choose the proprietary model. I believe that proprietary software will be with us until the end of time, and we're going have to get used to it. Corel has its own version of Linux, which is open source, but it also offers WordPerfect for Linux, which is proprietary. To each his/her/its own.

Is RHAT's business model workable? I got to thinking about this question this afternoon as I was writing post #3133. While I believe Linux to be the inevitable future of operating systems (and open source to be the inevitable future of software development), is RHAT's business model workable?

Foolishness dictates that four questions should be addressed when evaluating a company's business model:

1. Customer Selection: Who is the customer?
2. Value Capture: How does the business turn those customers into profits?
3. Strategic Control: How can the business protect those profits?
4. Scope: How much bigger, and in what ways, can the business grow?

I thought it'd be an interesting intellectual exercise to run RHAT through these questions and see how it shakes down. Forgive me if some of my thoughts seem disjointed or incomplete. I'm thinking this through as I type it.

Before addressing these four questions, a little background might be helpful. It's important to remember that when we're talking about RHAT, we're talking about a fundamental change in the known environment. A shift, if you will. It's a model unknown to modern society (and yet modern society owes it so much).

The following points are not original. I'm drawing heavily from The Magic Cauldron by Eric S. Raymond. There, Mr. Raymond identifies 7 models which can be used to generate profit from open source. These seven models and a brief summary of each follow:

1. Loss-Leader/Market Positioner: using open source software to create or maintain a market position for proprietary software that generates a direct revenue stream. Basically, this is taking a proprietary package and releasing the source to the program community at large. Netscape's release of Mozilla is a prime example. This model is currently inapplicable to RHAT, and will remain inapplicable as long as RHAT keeps open-sourcing its innovations.

2. Widget Frosting: This model is primarily restricted to hardware manufacturers and is therefore inapplicable to RHAT.

3. Give Away The Recipe, Open A Restaurant: Open-sourcing software to create a market position for services. According to Mr. Raymond, this is where RHAT and other Linux distributors fall. It was used by Cygnus Solutions quite successfully back in 1989. According to The Magic Cauldron, "[i]n accordance with the GPL, [Cygnus] permitted customers to freely use, distribute, and modify the software [Cygnus] distributed, but the service contract could be terminated (or a higher fee had to be paid) if there were more users at the site using the support services than were accounted for in the contract."

4. Accessorizing: T-shirts, mugs, hats and documentation. RHAT currently falls here as well, but can this model be successfully used? How many hats would RHAT need to sell to maintain a current selling price of $60+ per share? I mean, the new black hats are cool, but they're not /that/ cool.

5. Free The Future, Sell The Present: This model involves releasing both binaries (machine-executable code, i.e., you compile the source code to create binary code, which is what the computer actually executes) and the source code under a closed license. However, the closed license is time sensitive in that it will eventually expire. An example presented by Mr. Raymond is that a company could write a license permitting free redistribution, forbidding commercial use without the payment of a fee, and guarantees that the software comes under the GPL within a year of release or sooner if the company ceases to exist. This offers the customer a two-fold benefit. First, the system can be customized to meet the customer's needs because the customer has the source. It also ensures that the product will be turned over to the open source community if the company goes belly up. I believe RHAT could put this model to use. They could keep the Linux source under the GPL and release RHAT improvements under a limited, time-restricted license. This would protect RHAT's investment in R&D in the short term while ensuring that the entire Linux and open source communities eventually benefit. Frankly, I don't think RHAT will ever do this. RHAT has so closely aligned itself with the open source community (and rightfully so, IMO) that the uproar from such a move would probably be counter-productive.

6. Free The Software, Sell The Brand: Mr. Raymond states this is a speculative model, in that there are no companies which currently fit under this model. From The Magic Cauldron: "You open-source a software technology, retain a test suite or set of compatibility criteria, then sell users a brand certifying that their implementation of the technology is compatible with all others wearing the brand." Mr. Raymond goes on to state this this is how Sun Microsystems should be dealing with Java and Jini. For the record, I think he's correct.

7. Free The Software, Sell The Content: Yet another speculative model. In this model, the true value is not in the software or the server, but rather is in the content you provide. Basically, you free the software and sell the content. Mr. Raymond scores big points in my book by noting that this is how AOL should handle its client software.

As I was reading through the above, one question continued to spring to mind, and it needs to be immediately clarified. What the heck is RHAT's product? What are they selling? Sure, Linux is included in the package, but that's not a complete answer. If Linux is THE product, then those who pay good money for it are small-f fools. For $2.00 you can purchase a CDROM containing several different versions of Linux, including RHAT, or for $50+ you can purchase RHAT only. What gives?

Perhaps a quick tale of my foray into the wonderful world of Linux will shed some light on this issue. I initally shelled out the $2.00 for the multi-version edition of Linux. For $2.00, I received 5 CDROMs. One CD was RHAT, one was Caldera, one was Debian and the other two were Slackware (or maybe two were Debian and one was Slackware, I can't remember). I had spent a not inconsiderable amount of time researching Linux prior to plunking down my $2.00, and I was favoring Caldera over the others. So, I fired up Caldera first. After a few hours of clunking and tweaking, the computer refused to boot up. The Caldera CD went into the "didn't work" pile. Next, I tried Slackware with the same result. The Slackware offering joined the Caldera CD. Then I tried the RHAT version.

(I'll bet you can see where I'm heading with this.)

It worked.

There on my bedroom floor, where once was an unusable (according to MFST standards) x486 Packard Bell computer, now sat a working Linux machine. Operating only from the command line, I was able to dial in to the Internet. And I was sold. Within a few days (for reasons which are irrelevant to this discussion), I purchased RedHat 5.1 from my local Best Buy. (As a side note, I did eventually give the Debian offering a try, and it too joined the Caldera and Slackware CDs.)

So what happened here? I had 4 different flavors of Linux All four contained the same product, i.e., the Linux operating system with all of the bells and whistles that go along with it. And yet only one ended up with my money: RHAT. Why? It worked. RHAT immediately sold me on its dependability and reliability. On something as archaic and (if you know anything about Packard Bell circa 1990), well, weird, as my computer, RHAT installed correctly and worked. Future offerings have proved to be just as reliable, dependable and easy-to-use.

Where does all of this leave us? (I do have a point, and I'm ready to prove it.) RHAT may distribute the Linux operating system, but they're selling CHARACTERISTICS. Dependability, reliability, consistency and ease-of-use. The Linux operating system is free, but those characteristics will cost you $50.00. This is entirely unplanned, but this finding ties in quite nicely with the ketchup analogy referenced by Robert Young and my post #3133.

So, now that we've identified RHAT's product, how does their business model sync? Following is a recap of Fooldom and my comments:

1. Customer Selection: Who is the customer? Potentially every person/organization who uses a computer.

2. Value Capture: How does the business turn those customers into profits? (1) Sale of RedHat Version X; (2) After-sale Support; (3) Customization of the Linux system for specific-business needs; (4) Sale of RedHat Linux accessories (hats, mugs, t-shirts, etc. - God help us if this becomes our primary source of revenue <bg>). Underlying all of this is the premise that the customer turns to RHAT on the basis of RHAT's track record for dependability, reliability, consistency and ease-of-use.

3. Strategic Control: How can the business protect these profits? By continuing to focus on its core characteristics to establish RHAT as a brand name such that RHAT becomes synonymous with Linux. One of RedHat's greatest advantages is that it is the first Linux distributor to go public, thus gaining the much needed consumer recognition. Additionally, RHAT Linux outsells its closest competitor (Caldera) by almost 10 to 1.

4. Scope: How much bigger, and in what ways, can the business grow? Look at the field. By conservative estimates, Linux owns 20% of the server market and considerably less on the desktop. By focusing on its core business values and characteristics, RHAT could conceivably take it all. There is tremendous room for growth. At this point, RHAT's greatest challenge should be to outperform MSFT in service and support. The reliability of the operating system is already in place and there is no way that MSFT can compete with the developmental pace of any open source project. RHAT could (if they chose) freeze R&D and focus solely on service and support. After all, compared to MSFT, RHAT has the entire world coding "their" operating system, so RHAT could bump the service/support game up several notches. MSFT simply cannot afford to continue innovating AND matching top level service/support at the same time. Something has to give, and when it does, RHAT is properly positioned to reap the benefits.

Given this, I'd say RHAT has a solid business model. Will they crank out millions of dollars every quarter? Probably not, but that's the subject for another post on another day.

Whew! This baby is l-o-n-g (as you had better be if you're investing in RHAT)! I apologize for hogging the board, but these are things which I believe need to be clarified. From my research and thinking, RHAT seems to be a solid company heading toward eventual (inevitable? maybe) domination. I hope some of you find this helpful, and I look forward to reading your thoughts and responses.
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