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Red Hat Makes Money With the GPL. How Could That Happen?
Thursday, December 18 2003 @ 05:46 PM EST

The world according to SCO says that you can't make any money from Linux. That pesky GPL stands in the way of profits, they allege. I'd say their "unconstitutional" argument just took a hit, because Red Hat is making money.

The Street's Ronna Abramson reports that Red Hat just announced its third-quarter earnings and it seems their subscription model is doing just fine, thanks. They beat analysts' expectations:

"Red Hat reported third-quarter earnings in line with Wall Street estimates Thursday, but the Linux software vendor's revenue swelled 36% from a year ago, beating analyst expectations. . . .

"Red Hat also announced that it has agreed to acquire privately held storage infrastructure software company Sistina Software for $31 million in stock. The acquisition is expected to be completed in early January."

We'll find out Monday at 11 AM how SCO is doing.

Meanwhile, Red Hat filed this press release with the SEC in the latest 8K on the Sistina acquisition:

"'The acquisition of the Sistina technology and world class development team, in close collaboration with the open source community, will greatly accelerate the availability and advancement of open source storage solutions for the enterprise,' said Paul Cormier, Executive vice president of Engineering at Red Hat.

"Sistina's engineering team, consisting of industry experts in clustering and virtualization, will augment Red Hat's development efforts. The integrated team will work to make all of Sistina's technologies open source and available as a part of a subscription in the first half of 2004."

Red Hat is now oriented to enterprise users, so this acquisition is part of that emphasis. Let's let Red Hat describe their good news about their finances themselves, from another press release just filed with the SEC:

"Red Hat Delivers Record Revenue, Cash Flows from Operations, and Operating Income in Third Quarter

"RALEIGH, N.C.--(BUSINESS WIRE)--Dec. 18, 2003--

"Growth in Enterprise Subscription Volumes Accelerates to 33,000 New Subscriptions, Drives 40% Sequential Growth in Deferred Revenue

"Red Hat, Inc. (NASDAQ: RHAT), the world's premier open source and Linux provider, today reported financial results for its third quarter of fiscal year 2004.

"In the third quarter of fiscal 2004, Red Hat reported revenue of $33.1 million, a sequential increase of 15% compared to $28.8 million in the second quarter of fiscal 2004, and a year-over-year increase of 36%. . . .

"Highlights for the third quarter include:

"Third quarter sales of annual subscriptions for the Red Hat Enterprise Linux family of technologies increased sequentially by 7,000 subscriptions, or 27%, to approximately 33,000 subscriptions. Renewal rates for Red Hat Enterprise Linux approximated 90% for the second consecutive quarter. Deferred revenue increased 40% sequentially, to $42.3 million. Gross margins remained strong, with blended gross margins at 72%, and gross margins of Enterprise subscriptions remaining constant at 88%.'Our revenue growth accelerated in the third quarter, which translated to increased operating income and cash flows from operations,' said Kevin Thompson, Red Hat Executive Vice President and Chief Financial Officer. 'The subscription revenue model has developed sufficient maturity to enable us to drive consistent sequential increases in quarterly revenue.'"

This all reminded me of Groklaw's Open Letter to SCO last September, and something we quoted from economist and analyst Amy Wohl, from her article, The Open Source Community Has a Business Model:

"As an economist, let me assure you that Open Source has a business model. It simply isn't one that a traditional company like SCO, which expects to be paid for source code, can figure out. There are still lots of companies that can charge for source code, but only when the source code they are offering is valued by customers because it is unique or convenient or offers other recognized value. Other companies (IBM is a good example) charge for their Linux-compatible middleware source code, but honor the Open Source community by supporting it with technical and financial assistance and by strongly supporting the open standards that permit customers to choose to use Open Source code when they prefer it and purchased source code when they find it, for whatever reason, more valuable. Then, as many posters have noted, IBM extends its business model into the future by providing services to help customers plan, design, implement, and customize whatever combinations of hardware, open source, and proprietary code the customer prefers.

"That is the new business model and it seems to be a very successful one."

Wohl has an interesting article on her blog today, called "Can Analysts Belong to the Open Source Community?" They can if they want to, as far as I'm concerned.

Ms. Wohl writes that she uses Groklaw as a resource. She would like the community to know that not all analysts are sewn from the same cloth. Her article begins, "I just finished reading my way through an article by analyst Rob Enderle on Linux World, arguing for vendor indemnification for Linux, and hundreds of posted comments. . . . . " Do take a look. For one thing, you will discern the value in writing polite comments, which I know Grokkers always try to do. In fact, I hazard to say they are more polite and fair than some journalists, who think nothing of defaming and demeaning the Linux community and then cynically brag about all the page hits their vitriol generates.

The question I have for her, and anyone else who might know, is: why is it that when the media writes articles about Linux and its proponents, the analysts that usually show up are rabidly pro-SCO? Is that the plan going in? Or is it because you don't know anyone else to interview? In some cases, it's obviously deliberate, but in most cases, I think it's more likely the latter. When was the last SCO story you saw that quoted Ms. Wohl, for example? Yet, looking at the Red Hat news today, ask yourself: was she right?

Journalists: this is a hint. If you would like to cover the story more fairly, would it not make sense to speak to someone who understands open source and doesn't view it like a nasty bug or a passing fancy?


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