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Red Hat Expands Internationally, Plots Strategy >By Timothy Prickett Morgan

Red Hat CEO Bob Young is one of the most upbeat people in the computer business, and the fact that his company booked a loss during its first quarter as a public company (CI No 3,753) has not taken any of the spring out of his step or that of his upper management and his partners. The reason Young can continue to be optimistic, besides being made rich by Red Hat's IPO in August, is that his company is clearly in the driver's seat in the commercial Linux distribution and services business, and unless his competitors pick up the pace, they are not likely to catch Red Hat any time soon. That said, it is very early in the race and anything is possible.

Red Hat reported a net loss of $3.1m for the second quarter, compared to a net profit of $132,146 last year. Revenue was up 95% to $4.4m. Software and related revenues were up 50% compared to last year's second quarter to $3.3m and were up 68% compared to the first quarter's $1.9m. These numbers are skewed somewhat by Red Hat's shift in how it books software license sales now that it is using a subscription model rather than a straight licensing model common in the computer business. On the services front, Red Hat says that it doubled the number of enterprise support customers it has from 17 to 34 in the quarter, and booked services revenues of $1m, up 1331% from last year's second quarter and up 29% from this year's first quarter services revenues of $781,351.

Red Hat's Young says that his company is building the OS platform of the 21st century, which essentially means an Internet-capable server that is more reliable than NT and cheaper than Unix or proprietary server operating systems and their underlying hardware. "We plan to build our rapidly expanding market share," says Young. "We have the first mover advantage of a strong brand." Central to this expansion will be a move into Europe and Asia, strongholds of Linux competitors SuSE and TurboLinux. Red Hat says that it now has 40 people in Europe, most of them coming from its recent acquisition of delix GmbH, a small German Linux distributor that used to sell its own Linux called DLD Linux. Red Hat says that by mid-October, it will be able to offer the full range of services now available in the US to European customers. On September 1, Red Hat opened its Japanese offices, and is interviewing for managing directors in China, India, Australia and Korea, among other Asia/Pacific regions where it will start pushing hard next. The company says that it is also in the process of building a direct enterprise sales team to push Red Hat into global Fortune 2000 accounts even as it is working with IBM Corp, Compaq Computer Corp and others to peddle software and services into their installed bases.

As usual, Red Hat wants to downplay the whole Linux versus NT debate. The company insists it is not trying to directly market Linux against NT, or any other environment for that matter, but is rather trying to build a Linux environment that will be appealing to commercial customers for new workloads. "It is a very tough business to convince a company to unplug a working server and install another different one, whether it is Red Hat Linux or something else." Linux already has a great position as a Web server environment, with about 31% of public domains installed on the Internet running on Linux according to International Data Corp. Paul McNamara, in charge of business development at Red Hat, says that there's no question that Linux is taking away business from NT, NetWare and low-end Unix. This happens either directly when customers move jobs from these environments to Linux or indirectly when they add new applications and just go straight to Linux. But the company says that it is not focusing on unplugging NT servers.

What Red Hat wants Linux enthusiasts and analysts and prospects to focus on is the application hosting side of the business now that SAP and Oracle have agreed to get their applications running on Linux and most of the major data base vendors - minu s Microsoft, of course - have long since ported their data bases and some of their toolsets to Linux. By just abouteverybody's reckoning, 2000 will be the year that Linux becomes known as an application server, much as 1998 and 1999 saw it make great gains as a print, file and Web server platform. "Our market share in application serving is very small," says Young. "but the opportunity going forward is enormous." One of Linux's strong points in this area is remote management, an area where Windows NT is correspondingly weak.

More generally, Red Hat's McNamara expects that 1999 will also be the year that Linux overtakes Unix as the dominant server operating system. Last year, IDC estimated that Linux server installs grew by 212% over 1997 to 750,000 units, which comprised a 17.2% market share of new server OS installs. The collective Unix vendors got about 17.4% of the market. This year, Red Hat expects that server installs will grow between 20% and 23%, which is a far cry from the triple digit growth it had last year but since that growth rate is higher than the server OS market at large or the Unix server market in particular, Linux will overtake Unix. McNamara says that over time Red Hat expects there to be a shift from Office-centric to browser-centric computing on the corporate desktop, although no one is quite sure how this will play out except that the consensus is that office applications will soon be deployed over the Internet from ASPs.

On the workstation front, Red Hat says that Linux is getting 25% to 30% penetration in the software development sector of the workstation market and that scientific processing and data collection are also popular on Linux. And now that Linux has taken off, the CAD/CAM/EDA software vendors and their customers are starting to show interest in Linux for much the same reason that commercial server customers and ISPs have long since: better than NT, cheaper than Unix. Of course, for Linux to work in the mechanical CAD and EDA markets, OpenGL is necessary, and the open source community is working with SGI to get the latest OpenGL standards up on Linux.

As for the new Profusion servers, McNamara says that Red Hat is only recommending that customers buy only four-way machines at this point with the Linux 2.3 kernel. The Linux 2.3 kernel due soon will be essentially a developer release, and the 2.4 kernel due in 6 to 8 months will have full eight-way support for the Intel Profusion chipset. McNamara expects the open source community to have patches to Linux 2.2 available to get up to eight-way SMP long before Linux 2.4 ships, however, and reminds customers that even though both Linux and NT have been demonstrated on eight-way Profusion boxes, the efficiency on both platforms leaves something to be desired at this point. It would seem that Compaq and other vendors pushing great Profusion benchmarks have done a fair amount of application tuning to get their results.