Linux

Linux is a family of open-source operating systems built around the Linux kernel. First created by Finnish student Linus Torvalds in 1991, it is arguably the world's most successful example of open-source software. This means its underlying code is not a corporate secret; rather, it is freely available for anyone to view, use, modify, and share. This collaborative model stands in stark contrast to proprietary, closed-source systems like Microsoft Windows or Apple macOS, where you pay for a license and the code is kept under lock and key. At first glance, a “free” product might seem like a terrible foundation for a business. How can a company make money from something anyone can download for nothing? The investment opportunity, and the genius of the business model, lies not in selling the software itself, but in selling professional services, support, certifications, and reliability built on top of that free foundation. Companies have built billion-dollar empires by packaging Linux into rock-solid, enterprise-ready solutions that large corporations depend on to run their most critical operations.

The word “free” in open-source primarily refers to freedom, not necessarily zero cost (or “free as in speech, not as in beer,” as the saying goes). While you can indeed download a version of Linux for free, a large financial institution or a global e-commerce platform simply won't risk its multi-billion-dollar operation on a version supported by a community of volunteers. Instead, they turn to commercial vendors. These companies act as a trusted filter. They take the vast, ever-changing world of open-source code, then test, harden, and package it into a stable, secure, and reliable product. They provide a simple, powerful value proposition to large businesses: “We handle the complexity and risk, so you don't have to.” The business model is typically subscription-based, providing the company with stable, predictable, and recurring revenue—a characteristic that every value investor should appreciate. The core software may be a commodity, but the trust, service, and ecosystem built around it are a premium, high-margin product.

To understand how to invest in the success of Linux, you need to look at the companies and industries that have mastered its commercialization.

• Enterprise Distributions: The poster child for this model is Red Hat, which was acquired by IBM for a stunning $34 billion in 2019. Red Hat doesn't sell Linux; it sells subscriptions to its flagship product, Red Hat Enterprise Linux (RHEL). This subscription gives customers access to certified software, guaranteed security patches, performance tuning, and world-class technical support. Other major players following a similar model include SUSE and Canonical, the company behind the widely popular Ubuntu distribution.
• The Cloud Backbone: Linux absolutely dominates the modern internet, especially the world of Cloud Computing. The massive server farms run by Amazon Web Services (AWS), Google Cloud Platform (GCP), and Microsoft Azure are overwhelmingly built on customized, highly optimized versions of Linux. Investing in these cloud giants is, in a very real sense, an indirect investment in the continued dominance of Linux as the default operating system for serious computing.
• Mobile Dominance: If you have an Android phone, you are a Linux user. The Android operating system, developed by Google (Alphabet), is built upon a modified version of the Linux kernel. This makes Linux, by a huge margin, the most widely deployed operating system on the planet, powering billions of devices in nearly every person's pocket.

How can a business based on free software build a durable competitive moat? It seems counterintuitive, but the moats in the enterprise Linux world are surprisingly deep and wide.

• High Switching Costs: This is the most powerful moat. Once a large corporation has built its critical IT infrastructure—its databases, applications, and internal systems—on a specific distribution like RHEL, migrating to a competitor is a nightmare. It's incredibly complex, expensive, and fraught with risk. This reality effectively “locks in” customers, leading to extremely sticky and reliable subscription revenue.
• Brand and Trust: In the high-stakes world of corporate IT, reputation is paramount. A Chief Technology Officer is paid to manage risk, not to save a few dollars on an operating system by using an unproven vendor. Companies like Red Hat have spent decades building a brand synonymous with stability and security. That trust is a powerful asset that is very difficult for a newcomer to replicate.
• Ecosystem: Commercial Linux vendors cultivate vast ecosystems of hardware and software partners. This means thousands of other products, from database software to networking hardware, are officially certified to work flawlessly with their version of Linux. This network effect creates another strong barrier to entry.

No investment is without risk. The open-source model's greatest strength is also a potential weakness: the core product is a commodity. This theoretically puts a ceiling on pricing power, as competition is always just one “fork” away (where a new group takes the free code and starts its own version). However, as the $34 billion price tag for Red Hat demonstrated, the market places an enormous value on the trust, ecosystems, and high switching costs that incumbents have painstakingly built over many years.