Red Hat Enterprise Linux, or RHEL, has been a key product for the company, which has spent years trying to turn a profit by selling branded versions of an operating system whose components are available for free on the Internet. Red Hat sells RHEL as an annual subscription that includes the software, support and bug fixes, and the software has boosted the company’s fortunes.

“It’s made them profitable. It’s a dramatic change,” said Katherine Egbert, an analyst at C.E. Unterberg, Towbin. Although Red Hat’s drawn-out subscription payment plan precludes a sudden increase in revenue, Egbert expects that the company will garner more sales through partners such as IBM, Dell and Hewlett-Packard.

Improving RHEL is crucial for Raleigh, N.C.-based Red Hat in dealing with its two main competitors. It must continue its march against Sun Microsystems and others that sell Unix, the operating system on which Linux is modeled. And it must grapple with Microsoft, which has advantages including overwhelming dominance on desktop computers and the largest presence in the market for higher-end networked server computers.

In addition, Red Hat must stave off rival SuSE Linux. SuSE beat Red Hat to the mainframe market by years, has just about caught up to Red Hat in partnerships with hardware and software companies, and is strong in Linux-friendly Europe, where governments in particular have shown a willingness to forgo Microsoft products.

SuSE and Red Hat both are growing, but Red Hat comes out ahead so far, said IDC analyst Dan Kusnetzky. “In the overall market for Linux server software, by revenues and unit shipments, Red Hat is still the dominant supplier,” with more than 50 percent market share in 2002, he said.

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