Red Hat To Replace Struggling CIT On S&P 500

Standard & Poor's on Monday said it will add Red Hat to the S&P 500 stock index after the close of trading July 24, a move open source experts are calling a major step forward both for Red Hat and for open source business models.

Red Hat, based in Raleigh, N.C., will replace struggling CIT Group, which is receiving a $3 billion infusion from bondholders aimed at keeping it out of bankruptcy.

"This is another indication that Linux is becoming the dominant technical platform of the future," said Jim Zemlin, executive director at The Linux Foundation, in an email.

Google's announcement of Chrome OS and Microsoft's submission of code to the Linux kernel are other notable examples of "the industry shift to Linux and the multi-billion dollar ecosystem it represents," according to Zemlin.

Red Hat has managed to weather the economic downturn better than some of its software industry competitors. In its fiscal year 2010 first quarter ended May 31, Red Hat reported profit of $18.5 million, or $0.10 per diluted share, compared with $17.3 million, or $0.08 per diluted share in the year-ago quarter. Quarterly revenue was $174.4 million, up 11 percent year-on-year, and subscription revenue rose 14 percent during the quarter to $148.8 million.

To be eligible for inclusion in the S&P 500 a company must meet certain liquidity and trading volume criteria, so the choice of Red Hat shows that the company has attracted significant interest from institutional investors.

"In essence, investors -- who aren't really technology people -- are looking at an open source business model and deciding it's worth investing in," said David Dennis, senior director of product marketing for Groundwork Open Source, a San Francisco-based startup in the monitoring and systems management space.

Groundwork's packaging and development model is similar to Red Hat's in that both companies' solutions pull in various open-source elements and combine them with their own code to function as a unified solution, Dennis said.

Groundwork didn't set out to emulate Red Hat's business model, but given Red Hat's success, it's a model that appears to have a future, Dennis said. "It mostly just turned out that way, although in hindsight it turns out to have been a pretty good decision."