Brim full of revolutionary ardour

Bob Young is an unlikely revolutionary. A 45-year-old who loves fly fishing, he started his business to meet his mortgage payments. Yet the company he started, Red Hat, is at the forefront of a software revolution. It is the first quoted developer of Linux - an operating software system delivered over the internet and dubbed the communist alternative to Microsoft, which supplies the operating system for about 90% of the world's personal computers.

Largely worked on by an army of volunteers and freely available, Linux competes with Microsoft's Windows NT in the business world to operate large databases and process transactions.

Yet, last month Red Hat went to the heart of global capitalism - the US stock market - where it received a rapturous welcome. Initially priced at $14 on the the Nasdaq exchange, Red Hat shares have reached $135. The four-year-old company, which made a loss of $10,000 on almost $11m of sales last year, is valued at $8bn.

Microsoft, the evil empire to most developers who use Red Hat, cited its upstart rival's stock market success as proof that Bill Gates's company was not really a monopoly. It told the judge in its landmark anti-trust case that Red Hat exemplified the serious new competition it faced.

Young, a former computer salesman and father of three, owns about 14% of Red Hat, a stake valued at about $900m. The man who has already built and sold one company - a computer leasing venture - was told recently by some old school friends in Canada that he had made it to the ranks of Canadian-dollar billionaires. "I was shocked. I hadn't really stopped to look at it. I mean, it's all just paper money."

Well-packaged system

The history graduate from Toronto is quick to explain the Linux paradox. "All revolutions require a partnership between the people at the barricades and the capital markets that will fund and support them. Everyone forgets that in order for George Washington to fight the British superpower someone had to fund the army."

Red Hat's business model is equally paradoxical: it makes money by selling a version of a free product. Young argues that few people have the ability or time to download a computer operating system. Executives are wary, too, of investing in something which relies on support from unknown developers around the world. Red Hat sells a CD-rom version of Linux along with technical manuals and support.

Computer industry executives have welcomed Red Hat for offering a well-packaged software system which provides diversity in a market dominated by one large group.

Yet it took Young and his Red Hat co-founder, Marc Ewing, some time to work out how Linux, which now boasts nearly 10m users, could be a business model. It started after Young was posted to New York to work as a salesman for the Canadian company which had bought his leasing business. His job was to win clients from the large US companies which dominated the leasing market. To get to know the needs of potential users of large computer networks, Young took to spending his evenings at the clubs for users of Unix, another operating system. There he heard about Linux, which had been developed as a hobby by Linus Torvalds, a Finn, when he was a student in 1991.

Young was impressed by the enthusiasm these "propeller heads" had for Linux, but balked at the business rationale. "When I asked them what Linux was about they said it was designed to come from engineers according to their ability to engineers according to their need. The Berlin Wall had not long been down and so I said: 'I'm not sure that that's a viable economic model, guys.'"

But he found Linux's anarchic openness is its strength. If a bug hits Linux, hundreds of developers can help fix it immediately without worrying about licence restrictions. Microsoft jealously protects its source codes. "In most businesses in the free market the customer is in charge. But in the computer software business a company can behave like a feudal landlord. They rule by controlling the access to knowledge."

Recognition that there was a willing market for Linux prompted Young to work out a way of packaging the software and then selling it. "It was a cop-out to say we can't make money out of this."

Young realises that his emphasis on making money as well as his relatively advanced years makes him unusual in the Linux world. "What I wanted when I first got into it probably did run counter to what everyone else was attracted to. I was a businessman trying to build a business to pay my mortgage."

Young was looking for supplies of Linux for a mail-order business when he met Ewing, a Linux programmer and the technical brains behind the partnership. The company is named after Ewing's favourite hat when he was a student, although Young recognises its revolutionary connotations. For meetings with Wall Street bankers and fund managers, Young wears red socks.

He used his sales savvy to convince several of the industry's biggest names to invest in Red Hat, which employs almost 200 people in North Carolina. These backers now include Intel, IBM, Dell, Compaq and Novell.

'Sitting in cubbyholes'


In spite of Red Hat's stock market success, however, some analysts question its ability to make money. They are chiefly concerned about the nature of Linux. Red Hat's competitors can and do take its system and sell rival versions which they claim are better. Linux-based companies such as Caldera are expected to list on Nasdaq in the coming year.

Red Hat has the advantage of being first and of establishing brand recognition - it has an estimated 55% of the retail market. But Dan Kusnetsky, an industry analyst at International Data Corporation, says: "It's not clear whether or not Red Hat has a viable business plan. It's a matter of execution."

Analysts who support the company are excited by the growth potential from the corporate market. Some forecast revenues from that source to increase from 19 to 40% of Red Hat's revenues over the next few years.

As well as meeting these market expectations the company has to maintain some level of support from the Linux developers who adapt the software. Young estimates that about 30% of this community are volunteers, which he characterises as "long-haired, Birkenstock-wearing programmers sitting in dark cubbyholes all night". The rest are professional engineers working for firms like Boeing or Nasa, he says.

The tension between the community at the heart of Linux and its first listed company has already earned Young some criticism. His comments about the company's future in a recent interview for online news service ZDNet led Shaun, a messaging support engineer from North Texas, to reply: "The revolution is Dead! Long live the King!"

Red Hat's most obvious attempt to keep the programmers supportive misfired. An offer of about 10% of the company in its initial public offering turned embarrassing when several developers were rejected under a rigorous reading of financial regulations. Ever the salesman, Young says at least it let the world know Red Hat was on the market.