Red Hat has a balance sheet that many other companies would envy. The
company was lucky (and smart) enough to be the first Linux company to go
public during the brief Linux portion of the dotcom bubble; it even had
sufficient time to do a second offering to bring in another pile of cash.
That windfall, along with careful management, left the company with
$329 million in cash and investments at the end of November, 2003
(the last quarter for which numbers are available). That cash pile has
been growing in recent quarters; Red Hat certainly need not be concerned
about running out of money anytime soon.
So one might well wonder why Red Hat has just issued
$500 million in bonds. Why take on half a billion dollars in
long-term (20 years) debt when you haven't really figured out what to do
with the cash you already have? We asked the company, and were told:
We decided to take this great opportunity to capitalize our company
for the purpose of achieving our goal to become the defining
technology company of the 21st century. We are focused on building
and expanding our organization long term.
There are no specific plans for the cash at this time.
In other words, they aren't telling. One may well speculate that there are
acquisitions (big ones) in the works; this idea is reinforced by this
(Raleigh) News & Observer article:
"We believe the time for us as a company to take control of the
market is now," said chief financial officer Kevin Thompson. "What
we've done is capitalize ourselves so that we can react very
quickly to opportunities that come up in the marketplace."
Customers are demanding products that Red Hat can't offer, Thompson
said. It likely will have to buy other companies to add new
products and services.
One assumes that Red Hat has some "opportunities" in mind, but they are not
ready to talk about them at this time.
The truth of the matter is that Red Hat was able to get this money on great
terms. The interest rate on this loan is 0.5%. So Red Hat could simply
put the money into certificates of deposit (currently paying 4% or so in
the U.S. for long terms), pay off the loan in 20 years, and pocket the
interest. If Red Hat invests this money in this way, it has just acquired
a few million dollars per year in free income for the next two decades.
This is not a deal the company could afford to turn down.
The real question, perhaps, is why the (unnamed) investors decided to loan
money to Red Hat on such terms. Long-term U.S. treasury bills pay 4.2% as
of this writing - eight times what Red Hat is paying. The U.S. government
is unlikely to reinvest such money as wisely as Red Hat, but it has the
advantage of its coercive powers when payback time comes. Treasury bills
pay more, and are safer too.
The answer to that question can only lie in the conversion feature of these
bonds. The purchasers can convert the bonds to stock at a rate of about
$25/share at any time. That rate is significantly above Red Hat's current
stock price ($18.50, as of this writing) but, remember, these investors are
working with a twenty-year horizon. The bonds are, essentially, a
long-term call option which enables the investors to get their funds back
if the stock price never goes above $25. Unless Red Hat goes into
bankruptcy, the bond holders will probably do OK.
Red Hat started the first Linux financial boom with its IPO. What we may
be seeing here is the beginning of the second, more sustainable boom.
Serious money is, once again, flowing into Linux companies. The first boom
changed the industry in many ways, and left numerous investors rather
poorer than they were before. The second boom may be seen as when Linux
really took off; it will doubtless bring changes as well. As
always, it is going to be interesting to watch.
Comments (5 posted)
The new year is upon us, and so, like many other publications, we feel an
irrational urge to wave our hands in the air and make predictions for what
we think the coming year will bring us. So here we go. Needless to say,
anybody who is thinking of acting on any of the following would be well
advised to get a second opinion...
The "enterprise Linux" business came into its own in 2003, as Red Hat, in
particular, found a steady stream of willing customers which drove the
company into a profitable state. Red Hat's enterprise offerings must be
providing value to the company's customers, given the claimed 90% renewal
rate on enterprise support contracts. But the per-system licensing of Red
Hat Enterprise Linux has rubbed some community members the wrong way; many
developers feel that Red Hat's contracts do not reflect the sort of world
they thought they were helping to build.
So, we predict that, in 2004, the enterprise Linux backlash will
grow, and we will begin to see whether that backlash can change the
enterprise Linux market. A number of free enterprise Linux projects are
out there, including CaOS, Whitebox Linux, and UserLinux. These projects
have an uphill road ahead of them; to be successful, they will have to
convince skeptical companies that they will be able to provide high-quality
support for many years into the future. They will also have to make
independent vendors see them as important enough to certify applications
for. Oh, and, of course, they will have to create a top-quality
distribution aimed at the needs of this sort of customer. Creating that
distribution will not be easy, but it may prove to be the simplest of the
challenges faced by any would-be challenger to Red Hat's enterprise
The interesting thing is, of course, that these challenges look remarkably
similar to those faced by Linux itself a few years ago, when
the idea that Linux could pull the rug out from under proprietary Unix
systems and challenge Microsoft seemed ludicrous to many. But it
happened. Now, challenging enterprise Linux with truly free Linux looks
like a daunting task. But it may yet be that a free distribution combined
with a distributed network of supporters could supplant today's enterprise
offerings in just the same way that Linux has taken Unix's place. The
community is capable of amazing things. Not everybody would see such an
event as a good thing, but it could happen.
The desktop wars will heat up again in 2004
. For those of us who
remember the KDE/GNOME flame wars of years past, the relative calm and
cooperation which has prevailed more recently has been a welcome thing.
But there are pressures building which threaten to upset the peace.
The first of those pressures is licensing. Ironically, KDE's choice of the
GPL for its libraries may work against it here. The looser GNOME library
licensing allows its toolkits to be used, royalty-free, with proprietary
applications. Proprietary KDE applications can only be distributed by
paying royalties to Trolltech, which owns the Qt libraries. Many users and
would rather not see proprietary applications exist at all, or, at least,
not without paying those who have developed the underlying toolkit. These people
are happy with KDE's licensing. Most users, of course, don't care.
Distributors, however, usually want to
enable vendors to sell applications on their platforms. This interest will
push them toward the GNOME camp.
The other point, however, is that distributors are increasingly under
pressure to make a choice. Supporting two desktop systems adds to the
total workload of maintaining a distribution, and that costs money which
may not be available. There is a common perception at this point that the
two desktops are functionally identical in all the ways that matter; if
that is true, why bother with two of them?
In 2004, these pressures will lead to rising emotions in the camps of both
desktops as they see decisions being made for or against them. Perhaps the
result will be a greater degree of cooperation between the two development
communities via freedesktop.org or
other mechanisms. Or, perhaps, our newsgroups, web sites, and mailing lists
will once again play host to heated debates and flame wars in vain attempts
to establish one desktop as being superior to the other.
Beyond that, however, the hackers will stay busy and
desktop Linux will amaze us again. In 2003, it was widely
recognized that Desktop Linux has everything that many, if not most,
business users need to get their jobs done. 2004 will be the year that
desktop Linux stops playing catch-up (in some areas, at least) and truly
begins to blaze interesting trails of its own. Projects like Dashboard, GNOME Storage, and Reiser4 are just the beginning
of a wave of innovative projects which will change how we use our
2004 may not, however, bring Linux into many more homes. A Linux system is
more than adequate for Grandma to send email and wander around on the web.
Your editor insists that his children use Linux for their email, browsing,
and homework tasks, and it handles those jobs well. The sad truth,
however, is that there still needs to
be a Windows system around for other vital tasks - such as playing games.
Home users are not interested in dual-boot systems; until Linux can do
everything they need, they will stick with the same old stuff. Linux may
eventually have a free application base which replaces many of the
commercial offerings currently filling the shelves of computer stores,
but it remains hard to imagine free games, for example, which can compete
with the hit-driven commercial variety. Until there is a lively market for
commercial Linux applications, there will be some hard limits to how many
desktops we can occupy.
The SCO case will drag on, and become more complicated, in 2004
IBM may well succeed in getting many of SCO's complaints dismissed early in
the year, but SCO probably has a good chance of keeping some of its breach
of contract charges alive. SCO may have to retreat to some of its earliest
charges (i.e. JFS, RCU, NUMA, SMP), but IBM may have to go to trial to
prove that its code in those areas is not derived from SCO's Unix. SCO
can probably muddy the waters enough to keep the judge from dismissing the
Even if the IBM case is dismissed in 2004, however, there is the issue of
SCO's threats of copyright infringement suits against Linux users. One may
be tempted to dismiss these threats as just that much more empty SCO
bluster. It is worth considering, however, the pressures that SCO will be
under, including the agenda of its lawyers and the looming "dividend"
payments on the BayStar investment. SCO has no hopes for increasing
revenue from its remaining software products at this point; it must
litigate further to bring in cash. With the lawyers in charge, chances are
that SCO will, indeed, launch new suits.
In fact, the company may well find backbone-challenged Linux users that
will cave in and pay up rather than risk a court battle. Such an event
will do short-term wonders for SCO's stock price and cash flow.
The simple fact is, however, that the SCO Group has still put forward very
little evidence to back up its claim, and what evidence it has
presented has mostly been laughed off the stage. The company's claims to
own the "Unix ABI" will get no further. Beyond that, Novell's new
copyright assertions have the potential to stop the show dead, at least
until that dispute has its own day in court. But, regardless of the validity
of Novell's claims, SCO's case is empty and the world, increasingly, is
seeing that. By the end of 2004, the SCO cases will probably still be
alive in some form, but the end will be in sight.
As an aside, Novell will face a severe test of its credibility in the eyes
of the community. Nobody wants to see the SCO case resurrected in the
future by a Novell which, perhaps after a management change or two, decides
that its Unix copyrights (if they are Novell's) might yet be worth
something. If Novell is serious about being a part of the Linux community,
it needs to make a statement, soon, about just what it intends to do with
the Unix copyrights it claims to own.
The GPL may have its day in court. The SCO Group has, of course,
stated its intent to break the GPL in court. But that company's arguments,
thus far, have failed to impress. SCO's GPL challenges should not get
far. More interesting GPL-oriented cases may come from a different
Many developers working in the industry are full of stories of rampant GPL
violations, especially where embedded systems are involved. Last year's
episode with the LinkSys WRT54G router is just the small tip of a large iceberg in
this regard. To an extent, people have been willing to look the other way;
it just hasn't seemed worth the trouble to challenge closed-source uses of
GPL-licensed code in many cases. There are developers, however, who are
increasingly unwilling to close their eyes to violations of their
licenses. Expect more challenges against vendors using GPL-licensed code
in non-licensed ways. The lack of any court decisions on the GPL will
eventually embolden a violator to try his luck in front of a judge. At
that point, we will begin to see what the judicial system really
thinks of the GPL.
2004 will make us care more about security
. In 2003, we saw an
ominous string of attacks against the servers which support the Linux
development community. There is no reason to believe that these attacks
will stop anytime soon. Sooner or later, perhaps in 2004, somebody is
going to do some real
damage on a scale we have not yet seen. A
major breach, perhaps compromising the systems of many Linux users, will
cost us money, time, and much credibility.
In recent years, most attacks against Linux systems have exploited known
vulnerabilities for which patches existed. A well-managed site is nearly
immune to attacks using known vulnerabilities; all of the major
distributors are quite good (usually) about quickly preparing updates when
a problem comes to light. The attacks we saw at the end of 2003, however,
made use of previously unknown holes in rsync and the kernel. Defending
against unknown vulnerabilities is much harder, and there do exist
attackers who realize this, and who are smart enough to find such
problems. In the coming year, we may well see some truly scary exploits of
this sort of "zero-day" vulnerability.
There is some good news, however. By the end of 2004, we will see wider
deployment of hardened Linux systems. The incorporation of SELinux and
various other security technologies into the Fedora Core distribution
(and, from there, into Red Hat Enterprise Linux) will drive much of this
deployment, and threats from the outside will do the rest. Adding SELinux
is a significant step in the evolution of Linux distributions; if this work
is done properly, Linux users should soon have a much higher level of
security available with a default system install. Proper containment of
security breaches should, for example, make that next web server buffer
overflow be much less of a threat than it is now.
2.7 kernel development will begin
after the 2.6.0 kernel has had a
few months to stabilize. Expect the 2.7 development series to be quite
different from 2.5, however. By the time that 2.5.0 came out, there was a
massive backlog of patches waiting for inclusion. The 2.4 stabilization
process had taken nearly a year, and there was a long shopping list of
planned changes for 2.5, including the block layer rewrite, expanding the
device number type, a new loadable module subsystem, a new
kernel build mechanism, asynchronous and direct I/O, and many others.
On the eve of 2.7, the "patch pressure" is far lower. There's no end of
ideas for 2.7, including virtual memory work (page clustering, shareable
page tables, etc), the never-ending desktop interactivity work, and much
internal reworking to eliminate race conditions, and so on.
But many users are (or will be) far happier with
2.6 than they were with 2.4, and the list of features that the Linux kernel
must have to not be jealous of its Unix predecessors is shrinking. The
Linux kernel is maturing, in other words. It may well be that, with 2.7,
the pace of change begins to slow a little.
Or maybe the kernel hackers will come up with some amazing new ideas and
run with them; at that point, all bets are off.
It's going to be an interesting year. That
, perhaps, is the only
truly safe prediction to be found among all the others on this page. All
the rest are offered with no warranty as to their veracity, suitability for
any particular purpose, or connection with any sort of reality whatsoever.
LWN.net does not provide indemnification for users of its predictions -
though purchasers of our "predictions license" (available for a
limited-time special half-price deal through January, 2007) will get a
promise from us to not sue them.
Comments (29 posted)
We recently received a message complaining about the lack of "LWN status
update" news in recent times. It is true we have backed off on such
articles; LWN should carry the news, not be
the news. But, for
those who are wondering, here's a brief update.
When we started the subscription program, we set our goal at 4000
individual subscribers as a minimum needed to keep going. We have not
achieved that goal; there were just over 3000 subscribers when the "great
expiration" hit at the end of September. At that point, about 1000
subscriptions ran out over the course of a few weeks. We have since clawed
our way back up to just under 3000 subscribers again. It is gratifying, to
say the least, that the renewal rate was so high.
3000 subscriptions is sufficient to keep us going for now, but we still
need to find a way to increase that number substantially. We are pondering
various ideas; stay tuned over the next few months as we figure out how to
Meanwhile, thanks to the generosity of the folks at HP, LWN editor Jonathan
Corbet will be attending (and speaking at) Linux.Conf.Au
from January 14 to 18. We look forward to reporting from what
is, by all accounts, an outstanding conference. There is also a distinct
appeal to going to a place where the temperature is above freezing.
Finally, LWN.net will celebrate its sixth anniversary in about two weeks.
Six years ago, we could never have dreamed of the directions LWN would take
us - it was, after all, simply intended to be an attention-getter for a
Linux consulting and support company. It has been (and continues to be) a
great ride, however, and we expect to keep doing this for a long time.
Thanks to all of you for being such a great and supportive reader
Comments (6 posted)
Page editor: Jonathan Corbet
Inside this week's LWN.net Weekly Edition
- Security: The Savannah compromise; New vulnerabilities in cvs, jabber, kernel, mpg321, ...
- Kernel: Subverting <tt>mremap()</tt>; 2.6 API changes; Kernel threads made easy; Device numbers; Laptop mode.
- Distributions: A Quick Look at Mandrake 10.0 Pre-Beta; Bluewall GNU/Linux; SLAX; Ankur Bangla Live CD 1.0; Lindows and Xandros reviews
- Development: The GNOME Platform Bindings,
new versions of Mailman, AFPL Ghostscript, LPRng, GNOME System Tools,
Gnomoradio, PythonCAD, GStreamer, MusE,
Gnumeric, flPhoto, Epiphany, SBCL, Lython, Python.
- Press: IT shifting from MS, Free Software after 20 years,
Red Hat sells $500M in bonds, DVD-Jon is acquitted, 2004 predictions.
- Announcements: Irish Free Software Organization, Libre Music project, SCO Analysis,
PHP Conferences, KDE Application Database.
- Letters: Patents.