Is Red Hat in financial trouble? [LWN.net]

Is Red Hat in financial trouble?

Posted Feb 28, 2011 22:01 UTC (Mon) by hp (guest, #5220)
In reply to: Is Red Hat in financial trouble? by daglwn
Parent article: Red Hat's "obfuscated" kernel source

I don't think there's a moral problem with Red Hat raising their margins. After all right now they have very low margins relative to the industry. Raising them would be good for a lot of people, investors (anyone with an S&P500 fund), employees, and even customers in some ways (higher-margin companies usually can do more innovation and are more stable).

Practically speaking, though, the question is how much they _can_ raise the margins and how quickly.

to post comments

Is Red Hat in financial trouble?

Posted Feb 28, 2011 22:19 UTC (Mon) by boog (subscriber, #30882) [Link] (1 responses)

A few responses to the discussion on business and ethics:

- a FOSS business is expected to have low margins;

- monopolies have high margins that should be undercut by FOSS companies;

- nothing is stopping RH taking a long-term view of shareholder value (growing the cake not their slice); does that charming American law mention a time limit?

As a non-FOSS example of the last point, take Apple, who happily and repeatedly make their own top-selling products obsolete with their breakneck pace of development; many companies really struggle not to rest on their laurels in that kind of situation.

Debian seems to be the tortoise in this race.

Is Red Hat in financial trouble?

Posted Feb 28, 2011 22:31 UTC (Mon) by hp (guest, #5220) [Link]

Not sure I agree that a FOSS business is expected to have low margins. The stock market does not currently expect Red Hat to have low margins. Investors appear to believe they will have high margins. Maybe there's an alternative explanation for the stock price, but in my opinion it's based on hopes for either an acquisition or higher margins.

I do agree that high margins will involve some competitive advantage, but I don't think it has to go so far as a monopoly. My view is that "monopolistic competition" as an economics textbook would say is a good balance between interests of the company and the consumer. These are the Cokes and Wrigleys, where they can't charge infinite amounts for sugar water and gum, but they do have some pricing power. Bob Young's vision for Red Hat in 1998 was a story about Heinz.

I think most people would say that management is supposed to focus on long-term value. Stocks are normally valued assuming perpetual duration.

But it's context-dependent; if a manager thinks the best outcome for shareholders is to liquidate the company and give them their money back, they're also supposed to do that. Some stocks obviously will not have perpetual duration.

In practice managers can do pretty much whatever they want, since there's no way to prove in court that such-and-such complex judgment was wrong. But managers who don't have investor confidence may not last very long.

If you were Red Hat management, you can't come out and say "oh, we'll have bad margins." The stock price would crater. In an interview a while ago, Red Hat's CEO said something like he'd compromised with analysts and agreed to increase margins 1% per year.