Red Hat Co-Founder’s Latest Venture Prepares to Battle Amazon

From selling typewriters in his native Ontario, Canada, in the 1970s to wrestling with Microsoft (MSFT) in the 1990s as the co-founder and chief executive of open- source software company Red Hat (RHT), Bob Young has been a fiercely competitive serial entrepreneur. His latest venture is 9-year-old Lulu.com, a website that revolutionized self- publishing by automating the process of creating, printing, and selling books. Young says Lulu had $35.9 million in revenue last year and is approaching $40 million in 2011. Now he’s preparing the 130-employee, Raleigh (N.C.) company for a challenge of its own: Online bookseller Amazon’s (AMZN) recent entry into the publishing arena.

Just as Red Hat’s open-source strategy transformed a market dominated by proprietary software systems, Young champions Lulu as a way for writers who might not find traditional publishers to distribute and profit from their creativity. Authors retain copyright and 80 percent of the profit from their sales; Lulu takes the remaining 20 percent and charges for optional services such as proofreading and cover design. The site has 2 million registered users, with 1 million authors who upload 20,000 new titles to Lulu each month.

Young, 57, spoke recently with Bloomberg.com contributor Karen E. Klein about the threat Lulu faces from Amazon, the future of print, and why entrepreneurs don’t take on as much risk as commonly perceived. Edited excerpts of their conversation follow:

Karen E. Klein: Amazon announced plans this fall to start publishing fiction and nonfiction books in print and e-book editions. That’s a direct threat not only to traditional publishers, but also to self-publishers such as Lulu. What do you think about it?

Bob Young: Amazon does what they do very well. I’m not privy to their internal strategy, but it does create a lot of opportunity for us, because both traditional and next-generation publishers are watching what Amazon is doing, and they’re not overly thrilled that Amazon wants to take over their functions. They’re looking for alternatives, and that positions Lulu very nicely.

Q: You don’t sound worried. Should you be?

A: It’s a personality quirk. Lots of people are nervous about change, whereas I’m one of those people who is genuinely fascinated by change.

I don’t ride roller coasters or jump out of airplanes with a parachute; I hate scary things. But I loved working at a business that Microsoft, then the world’s largest computer company, was trying to put out of business. Today, Amazon is trying to put me out of business. Instead of being nervous about it, I’m energized. My wife gets the same buzz out of roller coasters that I get trying to compete with Jeff Bezos and Amazon. They might put me out of business, but it’s going to be a very interesting ride while they do.

Q: The publishing industry is on something of a roller-coaster ride right now.

A: We are in the midst of a remarkable few years. It’s a phenomenon we all saw coming, but you never know if a transition is going to be a gradual progression over 10 years or it’s going to happen with a sudden spike.

Q: Are we experiencing a spike?

A: There’s a new generation of electronic devices that’s exploded in the past few years -- the Nooks, the Kindles, the iPads -- that are enabling casual reading to move online. Going back to LexisNexis in the 1970s, people have been delivering content electronically without ever putting it on paper. But now, it’s the romance stories and the books you traditionally read on holiday that are available. Now, instead of buying mom a book for Christmas, you’re buying her an iPad.

Q: What does that mean for the future of physical books and the viability of the print-on-demand business?

A: We operate equally well across all devices at Lulu. And we still ship physical books; it’s still a growing business for us. For instance, we sell books to people who worry that what they put on their computer isn’t going to be readable in 20 years.

Paper is a great storage mechanism for knowledge; it’s the one we’re most comfortable with. One of the benefits of the Kindle is that you can read it in bright sunlight. Well, a book you can read in any kind of light. It’s hard to beat paper, pencil, and an eraser when you’re interacting with a document or you’re taking in knowledge that a teacher is trying to convey.

Q: Does that mean you have hope for the endangered corner bookstore?

A: I sure as hell hope there’s a future for the neighborhood bookstore. If I have half an hour to kill and I have a choice of a coffee shop, a clothing store, or a bookstore, I’ll be hanging out in the bookstore.

The way I see it playing out over the next 10 to 20 years is, the total value of the publishing industry is actually going to go up. If publishing in North America is a $100 billion annual business, I think it’s going to be $150 billion. But $100 billion of that will be electronic. That means the paper version is going to go from $100 billion to $50 billion, and half of all the jobs in the paper publishing business are going to go away.

Q: What’s the long view of entrepreneurship after 35 years?

A: I see textbooks on the topic of entrepreneurship, and I tend to think that’s an oxymoron. I, and many entrepreneurs like me, are not actually that smart. And because we’re not that smart, but we are ambitious, we know we can’t get ahead in the commonly accepted social framework. I could not have gone to work for IBM (IBM) and moved up sufficiently to have a successful career, because I was not as smart as many of the people who would have gotten a promotion long before I did.

So working at IBM was a risky proposition for me, because I’m not good at playing by other peoples’ rules. By starting my own companies, I was given the freedom of creating my own rules.

Q: Do you think that entrepreneurs don’t really take on as much risk as we assume they do?

A: That’s the great myth about entrepreneurship. They’re not nearly the risk-takers that our society has made them out to be. We just see risk differently than other people.

Q: Nearly two years ago, you pulled Lulu back from a planned IPO on the Toronto Stock Exchange due to weak demand from potential investors. Are you planning to pursue an initial public offering in the future?

A: We came this close to getting it done last time, but with conditions in the market at that time we weren’t able to pull it off. It was disappointing, but not a major setback for the company.

As it would for any very successful company, an IPO would be a very tactical move for us. And our authors and others would like to share in our success, so it’s something we continue to think about. But we don’t have any specific plans right now.

Q: This fall, you announced a partnership with Barnes & Noble (BKS) that allows your authors to distribute their e-books on the Nook. How is that working?

A: We’ve uploaded more than 30,000 titles on behalf of our authors to the Barnes & Noble Nook bookstore, and they’re selling very well. Our authors don’t care how their book sells; they’re desperate for an audience.

Q: Which publishers are using Lulu now?

A: I can’t give you a single name you would recognize. In that respect, we’re very much like eBay (EBAY). They became a billion-dollar business before the first brick-and-mortar company ever toyed with putting products on there. They appealed to a whole new generation of merchants who understood how to use eBay to sell. That’s exactly what we’re seeing: a new generation of publishers using Lulu to sell content.

Every time I listen to someone who speaks with authority about what’s going to happen in this industry, I listen admiringly, but I have zero confidence in their predictions because of the rate of change going on right now. It’s quite fascinating what’s happening, and it’s what gets me out of bed in the morning.

To contact the reporter on this story: Karen E. Klein at karen@kareneklein.com

To contact the editor responsible for this story: Nick Leiber at nleiber@bloomberg.net

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Red Hat Co-Founder’s Latest Venture

Carolyn Hack Davis via Bloomberg

Lulu.com founder and Chief Executive Officer Bob Young shows off his trademark red socks, which he adopted as a lucky charm during his Red Hat days.

Lulu.com founder and Chief Executive Officer Bob Young shows off his trademark red socks, which he adopted as a lucky charm during his Red Hat days. Photographer: Carolyn Hack Davis via Bloomberg