It was seven years ago, on Oct 28, 2018, that IBM announced its intention to acquire Red Hat, the Linux vendor, for $34 billion. Its Aug 11, 1999 IPO had been the 8th largest first-day gain in the history of Wall Street at the time. The acquisition closed in July 2019.
How Red Hat made money off Linux
In August 1999, Red Hat issued 6 million shares priced at $14 per share in its initial public offering. The price jumped quickly, reaching as high as $50 that day. The company was six years old at the time.
The problem for Red Hat was figuring out how to make money. All of the software that made up the Red Hat distribution was free. It was licensed under the GPL or another similar open source license that made it free to copy or sell or modify.
Competing with its own product
Red Hat extended that to its entire distribution. You could download a Red Hat ISO file and burn your own copy. If you didn’t have a fast enough Internet connection for that, you could go to a software store and buy a licensed big box shrink wrapped copied of Red Hat. Or you could go to an independent software dealer and buy an unofficial Red Hat CD for around $10. I even remember seeing these CDs in some bookstores. They weren’t breaking any laws. But it meant Red Hat was competing with their own product, trying to sell theirs for $35 when anyone with the means to press a CD and print a halfway professional looking jewel case insert could sell it for less.
Selling support more than software
The main thing enterprises needed from Red Hat wasn’t the software. It was the support.
Eventually, Red Hat figured out they weren’t going to be profitable competing with knockoff copies of their own product. The GPL license kept them from using copyright law to stop the knockoffs, but trademark law provided a way. Red Hat had every right to stop people from selling knockoffs and calling them Red Hat Linux.
This led to Fedora and CentOS, which were essentially versions of Red Hat without any Red Hat trademarks that can be distributed freely. A business who wanted carrier grade support and carrier grade reliability would purchase Red Hat Enterprise Linux and a support contract. Those who just wanted a free operating system would run Fedora or CentOS.
By March 2012, Red Hat’s revenues topped $1 billion.
Why IBM acquired Red Hat
IBM famously invested a billion dollars in Linux in 2001, and got themselves sued for doing it. But IBM recognized the value in continuing that work, and they also knew they hadn’t broken any laws.
So in 2018 when IBM bought Red Hat, it didn’t necessarily come out of the blue. IBM was no longer making a big deal about spending a billion dollars on Linux development every year, but everyone knew they were still involved. Buying Red Hat was a way to profit off that investment.
The all-time high Red Hat, Inc. closing stock price was $188.44 on July 1, 2019. That was a week before it was delisted as a result of merging with IBM.
Red Hat no longer exists as an independent company, but it survives as a division of IBM. They didn’t end up becoming the next Microsoft. That was Google. But Red Hat did better for themselves than the majority of the dotcom class of 1999. And they did way better than Netscape too.
Red Hat was one of the survivors of the dotcom era. The era was driven by rapid growth, and that meant needing licensing that was less complicated and more affordable than what you got from Microsoft. Especially once commercial grade virtualization became available, the ability to spin up capacity when needed and remove it when you didn’t need it anymore became possible, and even necessary.
That continued beyond the dotcom era and even accelerated under cloud computing.
The deal worked out well for them. In its first five years under IBM ownership, Red Hat’s revenues doubled, and it took six years for Red Hat’s revenues to reach the $34 billion IBM spent acquiring it. In some quarters, the Red Hat revenue was the difference between IBM turning a profit or turning a loss. So it’s fair to say the Red Hat acquisition went better than IBM’s acquisition of Lotus about a quarter-century earlier.
David Farquhar is a computer security professional, entrepreneur, and author. He has written professionally about computers since 1991, so he was writing about retro computers when they were still new. He has been working in IT professionally since 1994 and has specialized in vulnerability management since 2013. He holds Security+ and CISSP certifications. Today he blogs five times a week, mostly about retro computers and retro gaming covering the time period from 1975 to 2000.