Red Hat joins the billion-dollar club

IDG News Service - It's official: Red Hat is the first open-source software company to generate a billion dollars in annual revenue.

Red Hat released its financial results Wednesday for its 2012 fiscal year, ended Feb. 29. Revenue was US$1.13 billion, up 25 percent from the year earlier, and net income was $146.6 million, up from $107.3 million the year earlier, Red Hat said.

Passing the $1 billion milestone is "a statement about open source, and the relative ubiquity of open source. Very few companies have been able to reach that mark," CEO Jim Whitehurst said in an interview. "It's quite a statement that we've been able to achieve that with a radically different business model."

With a billion or more in annual revenue, Red Hat joins a somewhat elite league of midsized enterprise software companies, such as OpenText ($1 billion in 2011) and Nuance Communications ($1.3 billion).

"The billion-dollar figure is a kind of a magic figure for technology companies," said Charles King, chief analyst at Pund-IT. Though an arbitrary milepost, it's a good indicator that the company executives have found a formula not only for success, but for maintaining success.

Perhaps more significantly, Red Hat's success validates the idea that open-source software can form the basis of a viable business model.

"Red Hat's success is a testament to the role it played in bringing Linux to the mainstream, and the continued shift towards open source in the enterprise," said Mark Shuttleworth, founder of fellow Linux distributor Canonical, in an email exchange.

When Red Hat held its IPO (Initial Public Offering) in 1999, the idea of making money from open-source software was not a proven concept. Although open-source software was widely used then by academics and the technically inclined, enterprises were still wary of using the software, citing security fears and the need for holding a vendor accountable when something goes wrong. And investors would ask how a company could make money giving away the source code of its software at no cost.

"Consensus among many in the IT community [then] was that open source was a goofy, post-hippie kind of thing," King said.

Red Hat's basic business model consists of making the source freely available, and then charging subscription fees for enterprise-grade support. Today that model is copied--albeit on a smaller scale--by a wide range of open-source software companies, such as Eucalyptus (for cloud computing software), Alfresco (content management software) and Jaspersoft (business intelligence). Large IT vendors, such as Oracle, IBM and Dell, routinely offer some of their software as open source. Even the world's largest proprietary software vendor, Microsoft, has dipped its toes in the water, releasing some of its ancillary code as open source on its Codeplex repository.

"Today, we're at a place in IT where online collaboration is such a broadly accepted concept," King said."Red Hat is an extremely well-run company, and collaborative development is paying off for everyone in the ecosystem," said Jim Zemlin, executive director at The Linux Foundation. The company is one of the largest contributors to the source code of the Linux kernel, he noted. "It is this commitment to collaborative development that is one of the key ingredients to its success."

Joab Jackson covers enterprise software and general technology breaking news for The IDG News Service. Follow Joab on Twitter at @Joab_Jackson. Joab's e-mail address is Joab_Jackson@idg.com