Risks Related to our Linux-based Open Source Business Model
Our open source software business model is unproven
We have not demonstrated the success of our open source business
model, which gives our customers the right to freely copy and distribute
our software. No other company has built a successful open source
business. Few open source software products have gained widespread
commercial acceptance partly due to the lack of viable open source
industry participants to offer adequate service and support on a long term
basis. In addition, open source vendors are not able to provide industry
standard warranties and indemnities for their products, since these
products have been developed largely by independent parties over whom open
source vendors exercise no control or supervision. If open source software
should fail to gain widespread commercial acceptance, we would not be able
to sustain our revenue growth and our business could fail.
We depend on the support of Linux developers not employed by the us
[sic] to release major product upgrades and maintain market share.
We may not be able to release major product upgrades of Official
Red Hat Linux on a timely basis because the heart of Official Red Hat
Linux, the Linux kernel, is maintained by third parties. Linus Torvalds,
the original developer of the Linux kernel, and a small group of
independent engineers are primarily responsible for the development and
evolution of the Linux kernel. If this group of developers fails to
further develop the Linux kernel or if Mr. Torvalds or other prominent
Linux developers, such as Alan Cox, David Miller or Stephen Tweedie, were
to join one of our competitors or no longer work on the Linux kernel, we
would have to either rely on another party to further develop the kernel or
develop it ourselves. We cannot predict whether enhancements to the kernel
would be available from reliable alternative sources. We could be forced
to rely to a greater extent on our own development efforts, which would
increase our development expenses and may delay our product release and
upgrade schedules. In addition, any failure on the part of the kernel
developers to further develop and enhance the kernel could stifle the
development of additional Linux-based applications.
We may not be able to effectively assemble and test our software
because it consists largely of code developed by independent third parties
over whom we exercise no control, which could result in unreliable
products and damage to our reputation.
Official Red Hat Linux, in compressed form, consists of
approximately 1.1 gigabytes of code. Of that total, in excess of 1,000
megabytes have been developed by independent third parties, including
approximately 10 megabytes of code contained in the Linux kernel. Included
within the 1.1 gigabytes of code are more than 800 distinct software
components developed by thousands of individual programmers which we must
assemble and test before we can release a new version of Official Red Hat
Linux. If these components are not reliable, Official Red Hat Linux could
fail, resulting in serious damage to our reputation and potential
litigation. Although we attempt to assemble only the best available
components, we cannot be sure that we will be able to identify the highest
quality and most reliable components or successfully assemble and test
them. In addition, if these components were no longer available, we
would have to develop them ourselves, which would significantly increase
our development expenses.
The scarcity of software applications for Linux-based operating
systems could prevent commercial adoption of our products.
Our products will not gain widespread commercial adoption until
there are more third-party software applications designed to operate on
Linux-based operating systems. These applications include word processors,
databases, accounting packages, spreadsheets, e-mail programs, Internet
browsers, presentation and graphics software and personal productivity
applications. We intend to encourage the development of additional
applications that operate on Linux-based operating systems by attracting
third-party developers to the Linux platform, by providing open source
tools to create these applications and by maintaining our existing
developer relationships through marketing and technical support for
third-party developers. If we are not successful in achieving these goals,
however, our products will not gain widespread commercial acceptance and
we will not be able to maintain our product sales growth.
We may not be able to generate revenue from sales of Official Red
Hat Linux if users can more quickly download it from the Internet.
Anyone can download a free copy of official [sic] Red Hat Linux
from the Internet. However, because this download can take up to 36 hours
using a standard telephone connection, many of our users choose to buy the
shrink-wrapped version of Official Red Hat Linux. If hardware and data
transmission technology advances in the future to the point where
increased bandwidth allows users to more quickly download our products
from the Internet, users may no longer choose to purchase Official Red Hat
Linux. This could lead to a significant loss of product revenue.
We may not succeed in shifting our business focus from traditional
shrink-wrapped software sales to offering subscription-based product and
We are focusing our sales and marketing efforts on providing
subscription-based products and services as opposed to relying on sales of
shrink-wrapped software. This change has required us to expend significant
financial and managerial resources and may ultimately prove unsuccessful.
The failure to successfully implement this transition of our sales model
could materially adversely affect our operating results.
Our customers may find it difficult to install and implement
Official Red Hat Linux, which could lead to customer dissatisfaction and
damage our reputation.
Installation and implementation of Official Red Hat Linux often
involves a significant commitment of resources, financial and otherwise,
by our customers. This process can be lengthy due to the size and
complexity of our products and the need to purchase and install new
applications. The failure by us to attract and retain services personnel
to support our customers, the failure of companies with which we have
strategic alliances to commit sufficient resources towards the
installation and implementation of our products, or a delay in
implementation for any other reason could result in dissatisfied
customers. This could damage our reputation and the Red Hat brand and
result in decreased revenue.
We may be unable to predict the future course of open source
technology development, which could reduce the market appeal of our
products and damage our reputation.
We do not exercise control over many aspects of the development
of open source technology. Historically, different groups of open source
software programmers have competed with each other to develop new
technology. Typically one of these groups develops the technology that
becomes more widely used that that developed by others. If we adopt new
technology and incorporate it into our products, and competing technology
becomes more widely used, the market appeal of our products may be
reduced, which could harm our reputation, diminish the Red Hat brand and
result in decreased revenue.