IBM just paid a mind-blowing $34 billion for a software company that does not sell software. Its new acquisition, Red Hat, actually does just the opposite. Over 25 years of existence, Red Hat has made a habit of buying companies that sell proprietary software and then releasing that software for free.

Why? It starts with a controversy that lies at the heart of software design: open source.

What Is Open Source?

The software you use every day, whether it's the apps on your phone or programs on your computer, exists in multiple forms. The version on your device is the finished or "compiled" version. It's a lump of code that's been translated into a language your hardware can understand. But before you get to the finished version, human beings have to actually write those instructions in a language they can understand. This is the "source" or "source code."

just because you've got the finished pie doesn't mean you have the recipe

The two are irrevocably connected, but the relationship almost always flows one way. Source code can be compiled into a finished product, but a compiled app can't be deconstructed down to the source. Think of a compiled app like a finished pie. It's fit for eating and has components you can roughly identify, such as filling and a crust, but just because you have a piece of pie in front of you doesn't mean you know how to make another one just like it.

Traditionally, giants such as Microsoft or Apple have kept their source code for Windows and OS X software under lock and key. They sell copies of the apps created from it. They keep the recipe secret and sell (or give away) the pie.

Open-source advocates, however, publish the recipe for free and do so for a whole host of reasons. Some adhere to an ideological stance that software should be free not just to use but also to modify. Others believe, more conservatively, that open-source software is simply functionally superior to proprietary alternatives; with it, any baker can dabble with a recipe to make modifications that benefit pie lovers everywhere.



The fundamental conflict arises when it comes time to make money. In the 1975 "Open Letter to Hobbyists," proprietary software poster child Bill Gates characterized users who shared Microsoft's "BASIC" programming language without paying for additional copies as thieves taking food off Microsoft's table as it struggled to recoup the time and money it had invested in creating the program.

Open-source advocates criticized Microsoft's approach. They saw no reason to artificially limit the spread of a piece of software that can be reproduced infinitely at virtually no cost. But that did leave an important question: How do you make money when the product is free?

Making Money on a Free Product

If you make source code free, it's hard to base a business on selling the app. It was possible back before the World Wide Web really took off, when the relative rarity and slow speed of internet access made it hard for everyday users to download software. Companies could manage a profit by simply selling the free software on physical media like diskettes or CDs. Those days are long gone.

Instead of selling actual software, Red Hat would provide support—for a fee

Red Hat, founded in 1993, built its business around services that support and enhance open-source software. It would sell companies on adopting the open-source GNU/Linux operating system instead of using more expensive proprietary software. From there, Red Hat would provide support for those systems, up to and including the option to customize the software to a given company's needs, always releasing the results into the wild to build ever more support for the free software underneath.



This model proved extremely successful. Since the free software at the core of the business was under constant development by thousands of coders across the globe, it proved adaptable and efficient in ways that proprietary software never could be. Motivated hackers could simply adapt the code to their needs, and since this work was done out in the open it eliminated the duplication of effort, as explained in open-source evangelist Eric Raymond's foundational 1997 essay "The Cathedral and the Bazaar."

While other companies explored the same business model, Red Hat was by far the most successful, going public in 1999 with a valuation of $3.5 billion.

Put Your Money Where the Source Is

The enormous $34 billion price tag on IBM's acquisition of Red Hat is the most eye-catching part of the historic deal, but this is not new ground for IBM. In 1998, the behemoth corporation made a foray into this alternate world of software business by distributing the open-source "Apache" web server software—made for controlling the always-on machines that make webpages function—alongside its own extremely unpopular proprietary software known as "WebSphere."

Why undercut your own product? Because no one is buying it.

Why undercut your own product? Because no one was buying it. James Barry, an analyst who was at IBM at the time, explains in that "We had like .2 of one percent [market share]." Faced with the infeasibility of buying either of its private competitors in the space, Microsoft or Netscape, IBM threw in with the open alternative, which had gained widespread support by virtue of its being open to modify and free to use.



The acquisition of Red Hat, IBM's largest ever, follows in that same tradition of going to where the people are. Red Hat's business, while still concerned with distributing its own flavor of Linux, has moved on to providing support and development for open-source software that's widely used in data centers and cloud-computing applications by companies who can't be bothered with proprietary software to do the same job that free software can already do.

And for its 34 billion bucks, IBM isn't buying software it plans to turn around and sell. Instead, it's buying the opportunity to sell the vital services and labor that spring up around it instead. Because while the software might be free, the massive amount of time and labor it requires to maintain is not.

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