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Sky-high shares. By Friday, August 13, shares in Red Hat Inc. had climbed well into the 80's - over five times the original selling price. Anybody who got their hands on Red Hat's stock before the beginning of public trading is now sitting on a substantial paper profit. It would seem that free software really can make money.

Unfortunately, a number of people who thought they were going to end up with some pre-IPO stock ended up without. Those lucky enough to be a part of the community offering figured things were taken care of once they had finally passed through the difficult process of getting E*Trade to let them participate in the IPO. Only then, at the last minute, Red Hat raised the IPO price. This was a rational thing for Red Hat to do; if they could get the extra cash from the stock sale, they really should do exactly that.

But E*Trade then required everybody who was participating in the IPO to "reconfirm" their offer, and within a very tight time window. Only people who were actively watching at the time had a chance of doing this. LinuxWorld attendees, far from their telephones and email, had no hope. E*Trade tried to straighten things out in its own confusing way, and, in the end, quite a few people were able to get their stock; often not before Friday, however. Meanwhile, the whole process has left quite a few people upset and discouraged.

If the Red Hat Wealth Monitor is to be believed, the value of the community shares is now about $60 million. Some members of the free software community have certainly been able to share in that wealth, and that can only be a good thing.

Will the next Linux company to go public make a similar offering? Red Hat has taken a lot of grief in the last few weeks as a result of the above troubles. Seeing this, other companies considering public offerings will likely think twice before stepping into the same tar pit. We hope they will go for it anyway. It is an effective - though imperfect - way to give something back to the community that made Linux companies possible in the first place.

Meanwhile, why are Red Hat's shares so expensive? Red Hat is a good company that has come a long way. But it currently has a market capitalization of almost $5 billion. Remember that we are dealing with a company that had less than $11 million in revenues last year. Think about how long it would take you to make your money back if you were to break open your piggy bank and buy all $5 billion worth of shares. What can possibly justify such a valuation?

Seemingly, Linux stocks will be treated like Internet stocks, where real world considerations apply weakly at best. But think for a moment: part of the valuation of Internet stocks comes from the idea that whoever gets to be the market leader in a certain field gets to set the standards and will make big pots of money someday. Microsoft did it; Netscape was expected to do it; RealNetworks, Amazon, MP3, eBay, etc. are all still thought to have a chance of doing it. Thus the all-out push for market share and the lack of concern for profits. And, partially, the high stock values.

Red Hat has a share of the Linux OS market. But what will that buy them? Red Hat has very little standard-setting power in the Linux world, and that is not likely to change. That is, after all, one of the reasons we like Linux: no more proprietary standards owned by single, powerful companies. Market share could prove fleeting as well. When you can switch vendors and still run Linux, lock-in is a thing of the past.

Thus, even by the reasoning, such as it is, that is normally applied to Internet stocks, Red Hat may currently be overvalued. If investors have run up the price of this stock because they think that Red Hat can own the Linux market the way Microsoft owns office suites, they are likely to be surprised. That is not how Linux works. If you are considering trading in this stock now, a quick look at Amazon.com's price history may be a worthwhile reminder of what can happen to expensive shares. Be careful out there.

LWN introduces its new Linux Stocks Page. The above admonitions notwithstanding, LWN has jumped into the game with the LWN Linux Stocks page. This page, currently in alpha-test, provides near-real-time stock values of Linux-related companies, and includes our "Linux Stock Index," a magic number intended to track the performance of the sector as a whole. We are looking for comments on how to improve the page; please have a look and let us know what you think.

One last look at LinuxWorld. According to IDG's press release, just over 14,000 people attended LinuxWorld this time around, up from around 10,000 last Spring. The event had a quieter feel than last Spring, however, and some of the vendors on the exhibit floor reported lower levels of activity this time around.

LinuxWorld may be finding its place. As a technical conference, this one was clearly second rate. Those seeking technical content this time of year will be much better off at events like the O'Reilly Conferences which start on August 21. But for those who want to learn about or participate in the business of Linux, LinuxWorld is unparalleled. Their logo - a penguin with a necktie - seems to be well chosen.

We have added some final touches to our LinuxWorld coverage, including a few new photos and a story on the best and the worst of the CD giveaways to be found on the exhibit floor. More LinuxWorld information can be found on Marc Merlin's LinuxWorld page as well.

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August 19, 1999


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