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Beyond $1bn: Why Red Hat is a one off

Open source as a business. Not a business model

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Open...and Shut Some of the industry's smartest prognosticators, like Redmonk's Stephen O'Grady and inveterate free software advocate Glyn Moody, have questioned the likelihood of a billion-dollar open-source software vendor.

But in its most recent earnings call, Red Hat, the industry's leading open-source company, promised to surpass this goal in its next fiscal year, and later sent me the title for its opening keynote to the Open Source Business Conference that I'm involved with: Beyond $1bn: The Open Source Opportunity.

One billion in annual revenue is no longer the open-source dream. It's a reality, and it's apparently not nearly ambitious enough for Red Hat. But Red Hat may stand alone in being able to achieve it. Should we care?

After all, the gulf between Red Hat and its closest competitor in the open-source race for $1bn is vast. Perhaps impossibly vast. The closest pure-play open-source organization, Mozilla, did a healthy $104m in its most recent fiscal year, but it's a long way from $1bn. Meanwhile, Oracle's MySQL was on track to hit $94m before Sun Microsystems acquired it, and is almost certainly faring even better under Oracle's avaricious hand.

But not $1bn better. Not for years.

Others, which mix proprietary software and open source, fare little better. SourceFire is at $130m, while companies like Alfresco, SugarCRM, Pentaho, JasperSoft, etc. talk about reaching $100m as the likely threshold to filing for an IPO.

But no one - no one - is anywhere near Red Hat's $1bn. Why?

Well, for one thing, it turns out that open source, while a great model for developing and distributing software, is a pretty poor model for selling it, as Glyn Moody has pointed out. It's therefore not surprising that The 451 Group's Matthew Aslett has repeatedly stated that open source is not (or should not be) a business model, per se.

At any rate, the conditions for Red Hat's success are somewhat peculiar to it. Red Hat's "certified, supported, and updated" model fits the world of enterprise infrastructure more readily than it does to enterprise applications or consumer software. It's not that such application software is unimportant. Far from it.

Rather, it's a matter of risk aversion: an IT manager would prefer to spend a few thousand dollars on a Red Hat server than go cheap on a less trustworthy foundation. The real money is spent up-the-stack in applications, anyway, so the cost of a RHEL or JBoss server is comparative peanuts.

Peanuts that add up to nearly $1bn in annual revenue for Red Hat.

But even this is not a given. There have been, after all, plenty of open-source infrastructure companies, not one of which has been anywhere near as successful as Red Hat. This is, in large part, a testament to the hard-headed pragmatism that drives Red Hat management, even as the company's developers retain their evangelistic zeal for the values open source.

Red Hat was the first Linux vendor to dump its retail business to focus on the enterprise with the release of Advanced Server back in 2002. At the time this was considered suicidal because it threatened to alienate the desktop users who would bolster Red Hat's brand. Instead, it served to focus the company's attention while competitors got mired down in the complexities of enterprise and consumer Linux deployments.

Laser-focused on the enterprise, Red Hat has not shied away from maximizing its pricing leverage. For example, Red Hat's pricing for Red Hat Enterprise Linux (RHEL) on IBM mainframes is a hefty premium over its standard server pricing (a fact that irritates IBM). It's not that it costs more to support IBM's customers, but rather that Red Hat can charge a premium, and so does. As mentioned in the question-and-answer period of its recent earnings call, Red Hat sells on value, not discounts.

Red Hat is running a business, not a charity.

More recently, the company has made changes to how it distributes source code in an effort to bloody free-riding competitors like CentOS. Red Hat has watched enterprises, increasingly comfortable with Linux, dump paid RHEL subscriptions for unpaid CentOS servers. Red Hat may be in the business of open source, but it's not in the business of serving free lunch to its competitors. The source code packaging changes make life harder for copycats, and keeps Red Hat customers faithful.

Lastly, while Red Hat is one of the first companies to stand up against the painfully ugly state of our global intellectual property regime, it's also increasingly invested in a growing defensive patent portfolio. A portfolio whose breadth and quality keeps getting stronger.

Red Hat, then, is an open source business, with exceptional execution against a well-defined, consistent vision. Few companies - open source or otherwise - can claim the same.

Will there be another Red Hat, a pure-play open-source company with $1bn in revenues? I doubt it. Not only is Red Hat unique in its market and its execution within that market, but other companies have found even more powerful ways to build businesses around open source without having to sell open source, itself. Like Google. Like Facebook.

Put in this light, while Red Hat is a hugely impressive company, its ability to cash in on contributions to open-source software projects is somewhat limited, at least as compared to its socializing, advertising peers.

I doubt many in the Raleigh, North Carolina company mind too much. ®

Matt Asay is senior vice president of business development at Strobe, a startup that offers an open source framework for building mobile apps. He was formerly chief operating officer of Ubuntu commercial operation Canonical. With more than a decade spent in open source, Asay served as Alfreso's general manager for the Americas and vice president of business development, and he helped put Novell on its open-source track. Asay is an emeritus board member of the Open Source Initiative (OSI). His column, Open...and Shut, appears twice a week on The Register.

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