Rockin' Times for Red Hat--But Who Will Come Knocking?

Red Hat, a titan among Linux software companies, is out with strong quarterly numbers along with some commentary from new chief executive Jim Whitehurst. The New York Times referred to the positive financial performance as a "welcome present" for Whitehurst, but I really see it as proof of the efficacy of Red Hat's open source business model: Deliver strong products and get revenues from support.

Red Hat's quarterly sales rose 27 percent and earnings were above analysts' conencus estimates. The company is forecasting growth of 30 percent for the fiscal year that it just begun. How is the company putting all this together, and can it stay independent?

In addition to a $1 billion cash kitty that it sits on, Red Hat is forecasting that sales will reach $665 to $680 million for the fiscal year ending in March of next year, with earnings per share of 78 cents to 82 cents. In my view, the company's well-executed version of the classic cheap razors and expensive razor blades marketing model is behind all of this.

While Red Hat charges corporate customers annual subscription fees for its Linux distribution, it gets its real gravy from charging for technical support, training and consulting. Technical support, in particular, has always been a major cost center for commercial software companies, and they typically build some of that cost into the price of their software products.

One of the best pieces of evidence that Red Hat is doing an outstanding job of optimizing what it charges for support is that Oracle has been steadily--and unsuccessfully--trying to take business away from Red Hat by offering a similar Linux distribution, but charging more for support than Red Hat does. That's just typical practice at a big software company with heavyweight corporate customers.

Another advantage Red Hat has over many providers of Linux distributions is that it has the might and reach to work with the major hardware vendors to ensure compatibility. Also, more than 4,000 software applications are certified for compatibility.

For all these reasons, I would have to agree with the many prognosticators who foresee Red Hat being acquired by a much larger company. Oracle would be at the top of my list of predicted suitors.

The Times quotes Whitehurst as referring to Red Hat's "Switzerland status"--not being under the wing of a large corporate parent. That status is starting to show every sign of being temporary.

Do you think Red Hat will end up under the wing of a corporate titan?