August 12, 1999

Share Price More Than Triples in Red Hat's Public Offering

By MATT RICHTEL

AN JOSE, Calif. -- Wednesday's initial public offering by Red Hat Inc., the leading distributor of the free Linux computer operating system, saw the new shares more than triple in price by the close of trading on the Nasdaq.

It also touched off excitement and some soul searching among the 12,000 Linux devotees assembled here for the LinuxWorld Expo.

Industry analysts said the market's eager embrace of Red Hat indicated a belief in the potential for a free operating system to be a commercial competitor to the Microsoft Corporation's Windows NT or traditional commercial versions of Unix.

Businesses are also finding that proposition credible. William Peterson, an analyst for IDC, a market research firm, said that in 1998, 17 percent of servers used the Linux system, up from 6 percent the year before.

Mighty hefty profits from the free Linux operation system.

Linux, a type of Unix operating system, was created eight years ago by Linus Torvalds, then a 21-year-old student at the University of Helsinki. Mr. Torvalds made the source code freely available and invited other programmers to add to the system and find and correct defects.

In effect, it has been invented, line by line, by an army of volunteer programmers -- a fact that gave conference-goers here pause as they watched Red Hat's owners become instant multi-millionaires.

Linux is the best-known product of the open-source software movement, a grass roots effort to create free, peer-reviewed operating systems and applications programs to compete with Microsoft, and many Expo attendees saw Red Hat's success in the stock market as the ultimate institutional endorsement.

"It's going to be great for Linux," said Anne Eagle, a San Jose Web site developer who sported a Styrofoam version of the Linux mascot, a gray penguin, atop her head. "It's going to put it into the business arena."

While the Red Hat offering coincided with a better than 3 percent rise in the Nasdaq today, it also came on the heels of a brutal correction in Internet stocks in the last two weeks. Red Hat opened at $14 and jumped as high as $56.75 before closing at $52.0625.

Analysts characterized the market reaction as an endorsement of the notion that marketing a free operating system can be profitable.

Related Articles Linux Software Vendor Red Hat Says It Will Go Public (June 7, 1999) I.B.M. to Offer Linux With Netfinity Computers (February 18, 1999) Self-Proclaimed Computer Geeks Hold 'Windows Refund Day' (January 17, 1999) Mac, Windows And Now, Linux (October 8, 1998)

Though it is possible to download the Linux operating system for free from any number of Internet sites, in the 12 months ending in May, Red Hat reported $12 million in revenues, most from selling shrink-wrap versions of Linux for $39 and up. What the company adds to the software is service and support. It also hopes to develop refined Linux applications like word processing.

With 67 million shares outstanding after its offering of 6 million shares, Red Hat finished the day with a valuation of around $3.5 billion. Red Hat's co-founders, Robert Young and Marc Ewing, each retain 14 percent of the company, according to the prospectus.

Red Hat sold 55 percent of the commercial shipments of Linux in 1998, up from 42 percent in 1997, according to IDC. Still, many questions remain about the profitability of the company and, indeed, about the whole concept of marketing free software. Since Linux cannot be copyrighted by any single distributor, it cannot be licensed, so once people or companies purchase the system from Red Hat, they can share it with whomever they choose, passing it from desktop to desktop.

Paul Bard, an analyst with Renaissance Capital in Greenwich, Conn., which operates a mutual fund that invests in initial public offerings, said that even if Red Hat were to become a popular alternative to Microsoft, "you can't compare the two companies because Microsoft actually owns something."

But that reality did not dampen spirits here today. Tim O'Reilly, founder and chief executive of O'Reilly and Associates, a publisher of many popular books on open-source technology, said the market response to Red Hat would attract more venture capital to open-source development -- and probably more public offerings.

At the same time, Mr. O'Reilly said there remained a lingering question about how the infusion of capital and attention from the news media and investors would affect the passionate commitment of the community of Linux developers.

In 1994, the first LinuxWorld Expo was held on the campus of North Carolina State University, where exhibitors showed their wares on portable card tables covered with blankets, and cocktail parties were held in the parking lot.

This week's LinuxWorld -- sponsored by IDG World Expo -- has the aura of a big-time trade show, with neon signs, corporate booths and marketing and public relations specialists around every corner.

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Matt Richtel at mrichtel@nytimes.com welcomes your comments and suggestions.

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