NEW YORK (TheStreet) -- Red Hat (RHT) CEO Jim Whitehurst says the transition to cloud technology is destroying the old computer hardware and software markets.

"I would say we are maybe a third of the way through" this transition, he told me. Hardware is becoming a service, and software is becoming standardized.

"There's literally a trillion dollars of market cap associated with providing the equivalent of screws and rivets to enterprises for information technology," he continued. "That's two thirds of Microsoft (MSFT - Get Report), most of Hewlett-Packard (HPQ - Get Report), all of Cisco (CSCO - Get Report), us, Oracle (ORCL - Get Report), and IBM (IBM - Get Report)," among other companies.

"I'm guesstimating that by the time we're said and done, the screws and rivets will commoditize and there may be just $300 billion of market cap" in that business. "You're talking about $700 billion of market cap going away."

That future market will consist of commodity hardware, commodity software tools and commodity services, sold at razor-thin margins by companies like Red Hat and Amazon.Com, he predicted.

So just because Red Hat had good numbers, and just because Amazon.Com (AMZN - Get Report) may show good numbers, that doesn't mean all is well for big computing vendors. It's not, Whitehurst said. "What you're seeing the industry do is try to win a portion of the shrinking pool."

Red Hat is certainly getting its piece. The first open source company to reach $1 billion in sales yesterday announced $1.53 billion in revenue for its most recent fiscal year, with net income of $285 million, $1.40 per share, against net of $240 million or $1.23 per share a year earlier.

Whitehurst likes to compare computing to the Industrial Revolution. That revolution began around 1750 but didn't really take off until 1810, when standards for screws, nails and rivets made components into commodities, allowing the mass production of trains and other industrial goods.

It has taken computing 60 years to reach the same level of standardization, he said. Open source and cloud technologies are the screws, nails and rivets. It's exciting now, but what will be much more exciting will be the trains these tools create. Trains like Facebook (FB), and technologies like big data which flow from cloud.

"IBM is flat, HP is in trouble, Dell went private -- that's all part of a longer term transition," Whitehurst explained. "You go from the 70% margins of traditional information technology to the 5% to 6% margins of Amazon."

Open source creates standards, Whitehurst said, like the Linux operating system, OpenStack cloud infrastructure and platforms such as Red Hat's OpenShift or Cloud Foundry, developed by VMware VMW and now part of Pivotal Software. These standardized parts will help define the new infrastructure, although Whitehurst admitted that process has "a long way to go."

"Conceptually we're going to see everything defined by software." Network storage will become software. Networking itself will become software. "That's why we invested in Gluster," an open source system for software-defined storage. All hardware will be commodity hardware, he said, with functions defined by software, and that's where the mass production of cloud services will come from.

Red Hat's competitors understand the trend, Whitehurst said, whether or not they support it. "The chief technology officer at Cisco is going to be doing a keynote" at Red Hat's annual summit conference this summer. "And we'll talk about what we're doing with them."

Over time, of course, the only way for tool companies like Red Hat to continue to prosper is by building more complex tools. That's why Red Hat is building a Business Performance Management (BPM) suite. "BPM is a set of services people use to model business processes." Red Hat will build tools with which developers build those applications, but won't enter the application space itself.

Whitehurst feels his company has enough on its plate, doing to software what Amazon.Com is doing to cloud infrastructure -- turning it into a commodity and crushing the margins.

At the time of publication the author owned shares in AMZN.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.