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Battling with Microsoft on foreign soil

Red Hat CEO Matthew Szulik sees potential overseas where open source is fast establishing a foothold. But there are obstacles.

It's been one step forward, one step back for Matthew Szulik, chairman and chief executive of Red Hat.

The company, which is the top Linux seller, appears to have emerged unscathed by the campaign waged by the SCO Group, which has sought to convince customers that Linux poses intellectual property risks. While SCO has suffered its share of setbacks, Red Hat is cashing in on tens of thousands of new subscriptions for Red Hat Enterprise Linux.

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On the flip side, Red Hat's major foe, Microsoft, has announced plans to stockpile thousands of new patents. If Microsoft makes good on its intention, Szulik knows it might choke off the flow of new technology available to build into Linux. At the same time, investors are suing Red Hat after the company restated three years of financial results. What's more, the stock has recently dropped to the upper teens from its 52-week high just above $29.

Szulik, who delivered the opening keynote Tuesday for the LinuxWorld Conference and Expo, sat down with reporters and editors from CNET News.com for a broad-ranging conversation about the company and the open-source business.

Q: Microsoft has been doing a lot of price cutting. Have you felt the impact?
A: As an issue, that consistently comes up. There hasn't been a change. Perhaps it's just more visible now.

What do you make of the various Linux comparison studies Microsoft has carried out?
When I see these studies come out, I'm wondering...this is American industry at its best? The best they can do is fund studies that question whether Linus Torvalds is the primary architect of the Linux kernel? Or the issues of security that "my widget set is more secure than your widget set" or to fund these guys out in Utah?

The customers we are speaking to don't want to hear that. Customers want to hear about the compelling vision. What's the quality of your product and service? What's the financial relationship and the sustainability of your business?

When you make that pitch, what is your win rate? I mean, there's still a non-Linux majority in the business world.
I think that we have lots of room for improvement. Keep in mind what has driven Linux adoption is, first of all, Unix to Linux migration.

The best they can do is fund studies that question whether Linus Torvalds is the primary architect of the Linux kernel?
It is not over yet. It is the migration of proprietary applications, in-house developed applications, to an Intel, AMD, 32-bit or 64-bit environment. It was only about 12 months ago that (customers got) a quality Linux operating system that could run live sophisticated databases and that had the memory management capabilities. This is relatively a new phenomenon.

What about where there is no legacy computing environment?
What gets increasingly interesting is where there is no legacy environment. So you get into parts of Asia, you get into the developing countries, you get into Russia, you get into China, you get into India, you get into Sri Lanka, you get into these government relationships that are new, that they are just starting to look and say: OK, you know, I don't have a mainframe that I have got to migrate.

That's why you start to see many of these international governments taking the bold positions that they are taking. It's not simply from a consumption standpoint of getting a cheap product for a buck.

How forcefully are you pursuing a strategy of doing an end-around by going after overseas customers?
As forcefully as we possibly can within our economic structure. Back in January, I was in India and I had a chance to have a private one-on-one meeting with the president of India. And it was quite ironic because he knew all about Red Hat and open-source software. He talked about being an advocate of open-source software since the early '90s and about how he was going to use open-source software to move the educational system of India forward. That's the secret of making the pie bigger.

Your pricing in some of these international markets is not cheap. Do you have special pricing for those markets or do those folks use some other version of Linux?
Our competitors would like to claim how expensive Red Hat is, but there are no separate fees for upgrades and there are no separate fees for maintenance. I think that our competitors are doing a good job of misleading.

So do your subscriptions cost less in developing nations?
Depending upon the market and the opportunity, I think we price according to the competition.

Microsoft is spending a lot of effort cultivating good relations with overseas governments. Also, there's a move by some governments to support homegrown versions of Linux.
We're certainly staffing up internationally. We just recently hired the IBM sales director for Asia-Pacific who has joined Red Hat to head up our Asia-Pacific operations. In certain markets, you can't (use) the broad brush.

I think that Linux is rapidly evolving to becoming a much more robust, much more secure environment than it was the year before.
The Korea marketplace has a dominant Unix theme to it and a non-Windows theme. This is a different market relationship, of course, to China, which is different, of course, to Japan. So you need to really look at these marketplaces very independently. Malaysia, for example, has a very different set of opportunities than perhaps Japan does, you know. But for a young, growing company, these are all enormous challenges, there are issues of localization, there are issues of culture, there are issues of pricing.

Do you think that Red Hat's benefiting from anti-Americanism to some degree? Even though you are an American company, the Red Hat logo goes a long way in many different countries.
Anti-Americanism has more causes than computing software. There are some very, very key drivers that haven't changed about why you see international markets accepting open-source software. First of all, they want a choice. Second, they want the flexibility to be able to use software products on their terms and make modifications without the threat and intimidation of legal action.

As a result, we are starting to see a younger user of software and the development of a competency at a much younger age of scientific and technical and computer science learning and aptitude. I believe that those are the compelling reasons.

When it comes to security, do you think Linux is going to have to fend off more attacks in the next year?
I think that Linux is rapidly evolving to becoming a much more robust, much more secure environment than it was the year before? But I wouldn't want to self incriminate myself and say, ?Oh, it's going to be bulletproof" and all of a sudden turn all the (hackers) loose on us.

What are the big challenges confronting Red Hat and the open-source movement?
I think the new challenges and issues that will be placed in front of us will be around patent and copyright.

What specifically?
It's no secret that Red Hat and the open-source community for some time have challenged what we think is a patent process that needs review and further circumspection. We would not want to see the current patent law be applied to future and new jurisdictions. We think copyright in this country is currently misplaced.

What points would you have the courts throw out?
One of the most fundamental issues is that of full disclosure as it relates to a software submission. When you apply for a patent...you can only deliver a subset of the source code or intellectual property that you are looking to receive a patent on and not the full disclosure in its entirety...If the real issue is trademark or trade secret, then apply for trade secret protection. But right now, the issues of copyright and trade secret protection are somewhat mushed together.

I think we are frightened to death of these guys in Redmond.
I think there are some smart people in the administration and the government challenging some of those historical assumptions. So much of the world's economy right now has been moving in this transition from analog to digital. But some of the (copyright rulings) that were made over the last 100 years go all the way back to John Phillips Souza. It's time for changes.

Are there other (international) jurisdictions you examined where you concluded that was the better way?
Well, I think the most important thing that we want to do is continue to inspire the public debate because that really hasn't happened. When President Bush took office, he talked about really challenging the whole U.S. (Patent and Trademark Office) and try to create global standards. What we want to make sure is that the small guy, like a Red Hat, has the same opportunity to compete in the public debate as the larger companies that are increasingly competing based on their lobbying influence with the size of their leverage in Washington D.C.

Such as?
There are some smart, larger companies than Red Hat.

One of those larger companies was talking at its analysts meeting last week in Seattle about how it wants to increase the number of its patents. How much of a threat you see from Microsoft's patents and how much of their effort do you think is geared toward open source?
Patents are a relatively new phenomena in comparison to other activities that have been patented...How patents have been acknowledged and how patents are awarded is what we are really questioning, not patents by themselves. It's not limited to software. I think you will see the same happening elsewhere. You have teachers being driven to generate copyright. How do you continue to inspire creativity when there is the threat of litigation and copyright infringement in medical research? It just goes on and on and on. Is it a threat? When we know what is patentable and we know the legitimacy from which a patent is awarded, then we can deal with that. As I have said, there is a lack of a clear and consistent award process for software products specifically. That is disturbing to us, based on the nature of our software products and how we build software products in a global open-source community.

Red Hat is now building a defensive patent portfolio. How big is it at this point?
It's tiny in comparison. I wouldn't say that it's an overt building of a patent portfolio. I think that we are just trying to do the right thing to make sure that open-source creativity and invention is not reserved by a competitor that may use it in a wrong way.

Is that the biggest threat to the open-source philosophy?
Consumption for fee is also a very big threat. People paying for products and services is a threat. The competitive nature of an industry that's in an enormous state of transition is a threat.

What do you mean by consumption?
People buying products and services from Red Hat or any other open-source company.

For much of its history, Red Hat has been defined as opposition to Microsoft, and you are getting to the point now where you are investing in other companies. I'm curious. You saw the statement by Jonathan Schwartz regarding Novell? As you look over the horizon, will Red Hat need to make a big acquisition or perhaps partner or even be merged into a larger entity in order to flourish in this next realm of the IT industry?
I just learned about the Jonathan Schwartz comment, so this is relatively new to me. This is an interesting time because the (acquisitions) topic has come up frequently. Red Hat has made over 14 acquisitions. And not all of them have been very successful, I am not proud to tell you. So from my own personal perspective, I'm highly suspect of the success of?acquisitions in the software business.

Our greatest challenge is internal and consistent execution as opposed to doing something like making an acquisition that may not be lucrative, that may take with it large organizational integration challenges that would distract us from getting Release 4 out of the door...We never rule it out.

But you are not a big fan of the idea.
Not personally. No.

One of the discussions related to this Novell business was that IBM created a little monster called Red Hat in terms of supporting you over these last couple of years and helping Red Hat to gets its dominant share. Now that IBM has invested in Novell, there is speculation that Sun is just jerking IBM's chain to buy Novell to compete with Red Hat and so on. What do you make of that scenario?

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I'm from the (former UCLA basketball coach) John Wooden school. He was just focused on getting his team ready to play to the best of their abilities. All this (creates) great speculation, and I'm somewhat surprised that it would take place in such a public way because of (full disclosure) requirements. But I think people should be responsible for their own decisions, first and foremost. Secondly, these companies have their own long-term strategy about what their role in open source is or is not. They will have to be accountable for their own decisions.

Do you think that there is sufficient competition in the Linux market?
There is tons of competition.

But when you look at ISV (independent software vendor) certifications to Mandrake or Debian, it doesn't seem to be very high compared to ISV certifications for Red Hat Enterprise Linux. And when you look at the price Red Hat is charging, or the number of customers in terms of market share, it's certainly hard to argue that Red Hat is not dominant. Is that a healthy situation and one that will continue?
Who is CNET's competition?

We have several competitors.
So we are in the same boat, right?

Well, wait a second. We don't have 55 percent market share.
Let's back up. Five years ago the company was fortunate enough to go public. We got capitalized. There were many competitors. Remember LinuxCare? Remember VA Linux? The precursor to SCO was Caldera, the 800-pound gorilla in 1997. They had Ray Noorda's money, they had ISVs. There is a lot that's changed through successful execution.

So my perspective of market share and dominance is that it's partly due to capitalization because it's been very, very expensive to build a global company.

I don't think our company and our management and our board sit back and say, ?When we get 50 percent market share or whatever it is, aren't we smart?" I think we are frightened to death of these guys in Redmond. We are frightened to death of the guys that are up in Provo, Utah. I think this is an incredibly competitive marketplace.