The really new economy: Red Hat's IPO

A company that distributes "free software" announces a $96 million public offering.

Published June 9, 1999 4:00PM (EDT)

The June 4 announcement that leading Linux distribution vendor Red Hat Inc. is planning to raise $96 million through an initial public offering sparked little surprise in the free software/open-source world. Move along, nothing new to see here -- Red Hat's decision to go public is just the first trickle in what will soon be a rushing torrent of open source IPOs.

Still, Red Hat's S-1 filing -- the document any wannabe public company is required to file with the SEC -- does make for some interesting reading.

First there are the usual tidbits that such filings reveal -- such as the kind of hard-boiled profit and loss figures that private companies like Red Hat are usually loath to make public. And as judged against the standard set by many recent Internet IPOs, Red Hat's performance in its last fiscal year can only be considered stellar -- a mere $130,000 in the red against revenues of $10.8 million. It's also intriguing to learn that Frank Batten Jr., the chairman of the Virginia media corporation Landmark Communications, currently owns roughly a quarter of Red Hat. What does Frank Batten Jr. think in his heart of hearts about open source? Inquiring reporters will no doubt want to know.

Then there are the required "risk factors" -- the list of potential disasters that could derail future Red Hat profitability. S-1 risk factors tend to err on the side of absurd overstatement (world famine, alien invasion). But the risk factors assembled by Red Hat constitute a pretty compelling analysis of weaknesses in the open-source business model. The threat of being crushed by Microsoft is one such risk -- though Red Hat is hardly unique in that respect. But then there's the fear that the open-source community might stop supporting Red Hat if the company becomes too overtly commercial. Being too commercial is hardly a typical risk factor. Welcome to the brave new world of open-source business.

There's also a big potential problem if future prospective customers enjoy the bandwidth necessary to conveniently snarf free copies of Red Hat Linux directly from the Red Hat Web site. Not to mention that the license that requires the Linux source code to be kept freely available to the general public has never been tested in court.

That license is the GPL -- the general public license conceived and executed by Richard Stallman and the Free Software Foundation (FSF). The entire text of the GPL is buried deep down near the end of the 500-plus-page Red Hat S-1 -- and its clear, direct language comes as something of a shock after so much mind-numbing legalese.

Will any prospective investment banker actually read that far, and start puzzling over just what exactly is implied by a license that "is intended to guarantee your freedom to share and change free software -- to make sure the software is free for all its users?" Probably not. One thing is for sure -- scant reference to the phrase "free software" is made in the S-1 filing before the point at which the text of the GPL license is included.

You can understand why. The average investor is likely to be confused at how a business specializing in "free software" could be a viable profit center. Not for them the careful distinctions between "free speech" and "free beer." Better to simply shy away from that quagmire and remain safely on the steady ground of "open source."

But the mere fact that there is now an official SEC document that includes the text of the GPL serves as fairly astonishing proof that the rules of the software business really are being rewritten. Stallman and the FSF have been assailed as anti-capitalist radicals for their work in ensuring that the world can enjoy the benefits of free software. Now, Stallman's legacy is intimately entwined with the ultimate icon of late 20th century capitalism -- the initial public offering. One can only wonder what the 21st century will bring.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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