Will Red Hat rule on high?

Red Hat's red hot. Its share price is booming, it owns 55 percent of the server market -- but can it do a Microsoft?

Technology has typically tended towards domination by one company, from Edison Electric to IBM to Microsoft. Is Red Hat Software the next company on that list?

Wall Street seems inclined to think so. Investors are smiling on Linux stocks in general right now, and Red Hat in particular. The Raleigh, N.C.-based software company is, pardon the pun, red hot. This week alone its stock jumped more than 90 points, blowing past its previous high of 254. Now trading above 280, Red Hat's market capitalisation has grown more than $4bn since Monday, putting its value at more than $19bn.

Of course, it was a great week for Linux stocks. Besides Red Hat's run-up, both Andover.net and VA Linux both having successful IPOs. That heady market valuation still comes nowhere near Microsoft, which at $479bn qualifies as the most valuable company in the world. But Red Hat had $4.4m in sales in its most recently announced quarter -- and no profits.

Still, the stock run-up suggests that the market thinks Red Hat might pose a threat to its rivals in Redmond.

"Certainly Red Hat seems to be priced like it is, so I guess there are some believers that think Microsoft might be overthrown," mused George Weiss, a Gartner Group analyst.

Red Hat is starting to leverage that high market cap to build its business, 'merging' with Cygnus. Rumors even sparked that it would buy Corel, which has been aggressive in perusing the Linux application space. (Earlier, similar rumors had swirled about Applix, which makes a suite of Linux applications and have been sold with Red Hat's version of Linux).

Investors like Red Hat's stock because it now holds about 55 percent of the Linux market. And, while that market is almost entirely based on the server, not the desktop, many analysts think it's just a matter of time before Linux starts to make its mark with the wider populace.

Corporations are giving Linux a big boost, with Red Hat leading the way. Perhaps more importantly for Red Hat's future, companies like IBM and Dell have strategic deals with the company. Monday, when Dell and Red Hat announced they were extending their current partnership, Red Hat's stock jumped more than 31 points.

Ultimately, though, even domination of the Linux space does not make Red Hat the next Microsoft, observers say.

"I sort of doubt that Red Hat is the next Microsoft; I don't know that anybody will be," said Dwight Davis, an analyst at Summit Strategies's Kirkland, Washington, office.

Davis says he wouldn't even pick Linux as the next dominant platform. "Not that it's not doing well and can't be expected to do better in the future. But it doesn't give you the platform to turn your company into a dominant vendor the way Microsoft did."

Davis argues that dominating the server side shouldn't be confused with making money. "Don't mistake units for revenue," he cautioned. "The real revenue is on the services side, and I have my doubts as to whether or not you can achieve the same sort of revenue gains as (Microsoft)."

In short, where Microsoft controls its own products, analysts note that Red Hat might not manage to even keep up with Linux. "(Linux) is like an organism that contracts and expands ... the ability of any one vendor, like Red Hat, to figure it out on even a monthly basis is a major task," said Gartner's Weiss.

Davis and others cite the very nature of open-source code, continued competition from Microsoft, and the Internet-driven prospect of the rise of information appliances all working against Red Hat's evolution into a gargantuan.

Of course, in the wake of the Internet -- which may well represent the proverbial paradigm shift -- even Microsoft itself may not maintain its sway. And if mighty Microsoft can't do it, how can little Red Hat?

That's the question Wall Street is betting on.

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