Why Redhat is Worth at Least 34 Billion Dollars

In what may be the largest software company purchase in history, IBM has purchased Redhat for $34 billion. Redhat is the world’s biggest and most technically advanced Linux Server Management company. This transaction comes on the heels of two other major purchases of Linux-based companies. In June, Microsoft purchased Github, the largest Linux project center in the world, for $7.5 billion. In July, SUSE, a Linux Server Management company, was sold to an investment firm for a mere $2.5 billion. The total for 3 companies most people have never heard of is $44 billion. Now some folks are saying that IBM paid too much and Redhat is not worth $34 billion. These are people who do not know how important Redhat is to the functioning of the Internet and in fact to the functioning of the world’s economy. The purpose of this article is to explain why Redhat is already worth much more than $34 billion – and now that Redhat has access to the huge IBM sales force and customer base, Redhat will soon be going on a massive growth spurt.


First, let’s start with a bit of history. I vividly recalled a morning in March 1986 when I purchased Microsoft stock the first day it was available to the public. I taught at Bellevue College just a couple of miles from Microsoft. I had students from Microsoft. I knew Microsoft would be big. Microsoft is now netting $40 billion per year on sales of more than $100 billion per year and has an estimated worth of about one trillion dollars. In 1986, Microsoft was a leader in the “new technology” of personal computers.

Today, Redhat is a leader in the “new technology” of cloud computing. Cloud computing is made possible by about 100 million servers connecting several billion people around the world. Nearly all of these servers are now running Linux.

This includes one million Microsoft Azure servers – nearly all of which were secretly switched to Linux in the summer of 2017. Redhat is the company that maintains and protects more of these servers than anyone else in the world. As one analyst put it, "Everything always runs on any cloud with Red Hat.” It is almost certain that Redhat all by itself keeps more than one billion people connected. So IBM purchased Redhat for less than $34 per person.

Up until the IBM purchase, most analysts predicted just three dominate cloud companies – Amazon, Google and Microsoft. However, with this purchase of Redhat, IBM has suddenly moved up from the bottom of the pack to the top.

How will IBM move past the big three in the Cloud business? Just look at this from the IBM press release: “For IBM, the acquisition is about growing IBM's business in the cloud—private, public, and hybrid—based on the position of the company as the open source and open standards player versus the "proprietary" models of Microsoft, Amazon, and other major cloud players.”

Clearly the IBM plan is to call their cloud an “open source” cloud. Buying Redhat, the leader of the Open Source Cloud movement – makes this more than a marketing slogan – it will be the truth. IBM suddenly becomes one of the good guys instead of one of the bad guys.

For Red Hat, the deal is about scaling up the company's reach. "We can scale at greater speed.... We can only reach a certain number of customers right now." Put another way, IBM already has a huge sales force and accounts with almost every business in the world. Redhat now has access to this huge sales force and account structure. This move is going to be huge for Redhat.


Let’s assume for the sake of argument that Facebook, Amazon, Google and Microsoft are all worth about one trillion dollars each. They are all now using Linux on there servers as their primary operating system. That is four trillion in market value running Linux in just four companies. Amazon Cloud and MS Azure Cloud both had revenue of 27 billion in the past year. Some have estimated that eventually, the cloud market will be worth more than one trillion dollars per year. So the cloud market is there. The day is coming when Redhat will also be worth one trillion dollars. Folks will look back on IBM buying them for a mere $34 billion as the steal of the century.


This is not the only good open source Linux purchase IBM has made.  IBM bought Bruce Schneier's infosec consultancy a couple years ago, which is now called IBM Resilient. Imagine combining the world’s best server company with the world’s smartest security company. IBM is really making some great moves.

I am not the only one who thinks that Linux is the operating system of the future. Here is a quote from Thomas Bushnell, Google Technical Projects Director: “You would be a fool to use anything but Linux.”

What is shocking is not that IBM paid $34 billion for Redhat. It is that most Americans have never heard of Redhat and have no idea of what Redhat does – despite the fact that the entire Internet and even the entire world economy is now dependent on Redhat and their server maintenance contracts. Even worse, most Americans have likely never heard of Linux - despite the fact that Linux now runs more computers across the globe than any other operating system.

If you make a post to Facebook, you are running Linux. If you have an Android phone, you are running Linux. If you have a Google Chromebook, you are running Linux. If you have a smart car, a smart refrigerator or a smart washing machine, you are running Linux. And if you are shopping at Amazon, you are not only running Linux, you are likely running a Redhat version of Linux.

The reason most Americans have never heard of Linux or Redhat is because Linux is rarely taught in American public schools. This sad state of affairs is likely to leave American kids at a huge disadvantage when it comes to the economy of the future. What American schools should be doing is to match what schools in the United Kingdom have been doing for several years – teaching the Linux operating system through the amazingly cheap Raspberry Pi computer project.

In 2013, Google kick-started the Raspberry Pi education program in the UK by passing out more than 15,000 Raspberry Pi computers for free. Currently, nearly one thousand schools in the UK (about 25% of all schools in the UK) having coding clubs using Raspberry Pi – and indirectly teaching the free Linux operating system. Hopefully, the IBM purchase of Redhat will make more Americans aware of the crucial role of the Linux operating system – and some day lead to the introduction of Linux to American public schools.

How the IBM Purchase of Redhat will Affect the Linux Community
The IBM purchase of Redhat is certain to have a major influence on several other Linux projects. The biggest of these is Canonical (more commonly known as Ubuntu). Canonical is slightly smaller than Redhat in terms of the number of servers they manage. But Canonical does not make anywhere near the revenue and profit of Redhat. Nor do they have anywhere near the number of employees. Of the four major Linux Server providers, Redhat, SUSE, Canonical and Debian, Redhat has 12,000 employees, SUSE has 1,200 and Canonical only has 600. These are all more than the Linux Foundation which only has 200 paid employees. But all of these groups have dedicated community volunteers that number in the thousands. Community is the real strength of every open source project. Debian is almost entirely run by the volunteer Debian community. All of these Linux organizations just became more valuable due to the IBM purchase of Redhat.

The rumor in the Linux community is that Canonical will either be sold to Microsoft – or listed on the Stock Exchange in the next year or two. Either way, Canonical has to now be worth at least $20 billion. But should Canonical be sold to Microsoft, there could be problems due to some rather unpleasant history. While IBM has generally been a “friend” of Linux and other open source projects, Microsoft has not. In fact, while Microsoft has recently tried to change its image, in the past Microsoft has attempted to kill Linux and Linux based projects. So should Microsoft buy Canonical, some very important Ubuntu based projects might jump ship. The biggest of these projects that might jump ship is Linux Mint. While Linux Mint is currently based primarily on Ubuntu, it has been developing an operating system based on Debian just in case something happened to Ubuntu. I am a Linux Mint user and the first thing I did after the IBM announcement was download a copy of Linux Mint Debian to start testing it.

What will happen to Ubuntu?
Canonical aka Ubuntu is entirely owed by Mark Shuttleworth. Mark sold a website certificate signing firm in 2000 for half a billion dollars and started Canonical in 2002. Mark also paid $20 million in 2002 for a 10 day ride on the International Space Station.


Mark Shuttleworth inside the Soyuz capsule in 2002.

Ubuntu now has over 50 million users. It is estimated that Mark is now worth over one billion dollars thanks to paying customers like Netflix. For the past couple years, Canonical has worked with Microsoft to create the Windows subsystem for Linux. Unlike Redhat, Canonical has struggled to make any kind of profit.

Despite this fact, Mark gave a speech recently at the Open Stack Summit claiming that Ubuntu is actually better than Redhat. Here is some of what Mark said (keep in mind that he is a little biased):

"Amazon increased efficiency, so now everyone is driving down cost of infrastructure. Everyone engages with Ubuntu, not Red Hat or VMware. Google, IBM, Microsoft are investing and innovating to drive down the cost of infrastructure. Every single one of those companies works with Canonical to deliver public services. Not one of them engages with VMware to offer those public services. They can't afford to. Clearly, they have the cash, but they have to compete on efficiencies, and so does your private cloud. When we take out VMware we are regularly told that our fully managed OpenStack solution costs half of the equivalent VMware service. When we're invited to bid and present head-to-head with Red Hat, we win four out of five times, including in companies that have never had any other Linux than Red Hat in the building.”

Clearly Mark believes in the future of Ubuntu. There is some independent evidence to support his claim of being the dominant cloud operating system. According to the May 8, 2018 Cloud Market statistics, on the Amazon Web Services (AWS) cloud, Ubuntu dominates the Amazon cloud with 209,000 instances, well ahead of its competitors 88,500; Red Hat Enterprise Linux (RHEL) 88,000, CentOS's (a free version of Redhat) 31,400, and Windows Server's 29,200. These numbers are somewhat distorted because many of the Ubuntu downloads on the Amazon cloud are just beginners learning how to use Linux. Among serious commercial websites, Redhat is still the clear leader.

So the real question is whether the IBM purchase of Redhat will increase or decrease the odds of buying Ubuntu? Knowing how Mark likes to be in charge of Ubuntu, I believe that he would rather do an IPO and issue Canonical stock than to sell his baby to Microsoft or Amazon. The point of the IPO is just to raise more cash so Ubuntu can make bigger inroads in the server market. The IBM $34 billion purchase of Redhat will greatly increase the value of Ubuntu in the eyes of stock market investors. It is like open source and Linux suddenly receiving the IBM Seal of Approval. I therefore believe that this IBM purchase will increase the odds of a successful Canonical IPO in 2019 and therefore greatly reduce the odds of Microsoft or Amazon purchasing Canonical.

What will happen to Fedora, CentOS, Gnome, PulseAudio and all of the other open source projects that are at least partially funded by Redhat?
Both Redhat and IBM have both stated that the IBM purchase will have no affect on any of the Open Source projects. Given that both Redhat and IBM have a long history of supporting open source projects, I think it is a safe bet that we can trust them as both appear to understand the value of the open source community.

But even if I am wrong and IBM kills the Redhat Golden Goose – and if Microsoft makes Canonical an offer they can not refuse – and SUSE goes under too, this will still not be the end of the Linux community. Because out there on the horizon is one open source Linux group that is so uniquely structured that it is impossible for any group of billionaires to buy.

That group is Debian. The Debian project is a volunteer organization with about 1000 active developers. They are funded primarily by an umbrella group Software in the Public Interest SPI which is a 501c3 non-profit that anyone can join . SPI has over 1000 members. It does not look possible for any corporation to buy either SPI or Debian as both seem to be run buy a community of developers who do not want to be bought. The latest SPI report indicates an annual income of over $600,000 and total assets of over one million dollars.

The Debian code is 74 million lines which would cost more than one billion dollars to create. There are 141 active Debian derivatives including Ubuntu and Mint.


SPI 2017 board meeting in New York: Valerie Young, Martin Michlmayr, Luca Filipozzi, Tim Potter, Jimmy Kaplowitz, Martin Zobel-Helas & Michael Schultheiss (left to right)

I think we can count on these seven leaders of the open source Linux community to keep Debian going. (note that they also support LibreOffice and 40 other projects).

The Linux Family Tree… Strength Through Diversity
Debian is not the only Linux family that is not dependent on either Redhat or Ubuntu. To better understand the effect of Redhat and Ubuntu on the entire set of Linux families and distributions, we first need to understand the structure of Linux families and distributions. There are 6 major upstream Linux families of operating systems. But there are more than 300 distributions of Linux operating systems that derive from and depend on the upstream Linux families for support:


Here are the current rankings of the top 12 distributions by average daily page hits during the past 6 months.


Currently Manjaro, which is an Arch family distribution is getting the most hits on their Downloads page. This is followed by Mint which is a Ubuntu distribution and Elementary which is also based on Ubuntu. Zorin is also based on Ubuntu. So Ubuntu has four of the top 12 free distributions. Debian has two (MX Linux and Debian) plus the four Ubuntu downstream distributions. Arch has two (Manjaro and Arch) and Fedora also has two (Fedora and CentOS). Note that there are many more Linux distributions. To see the most recent list, check out the following website: https://distrowatch.com/

This page lists the top 100 Linux distributions in order of page hits. But click on More Statistics at the bottom of this list to go to a page that has over 300 Linux distributions.

It should be noted that average daily page hits is not an entirely accurate way to measure the popularity of a distribution. Many downloads are simply put into virtual machines for test purposes. A better estimate of popularity might be forum question and answer posts. It is also certain that some groups, such as Beginners prefer simpler operating systems like Ubuntu, Mint, Elementary and Zorin while more professional users prefer more powerful operating systems like Fedora, Manjaro, Arch and openSUSE.

One of the greatest strengths of the Linux Operating system is that it is not merely one operating system. It is more than 300 operating systems that are related to each other in a complex web in which they learn from each other in the open market place of ideas how to make a better operating system. Redhat and Ubuntu may be the leaders driving much of the development of Linux. But should anything ever happen to either one of them, the Linux community will still have many excellent options to choose from.

Conclusion… The world will not end after all!
While many people in the Linux community were shocked by the IBM purchase of Redhat, I personally feel that this was a marriage made in Heaven. It proves that Open Source software development is the model of the future and Linux is the operating system of the future. Perhaps this revolutionary purchase – and the amount of press it has gotten - will convince more parents and teachers of the need to teach the Open Source Linux model in our public schools. Far from being a blow to the Linux community, this earth shaking IBM purchase of Redhat may be the beginning of an even brighter future for all of us.

As always, I look forward to your questions and comments.


David Spring M. Ed.

Spring for schools at gmail dot com