Red Hat: Bad economy is good for open source

Both Oracle and Red Hat are doing well, but it seems clear that Red Hat's open-source model is the big winner in the recession.

For those wondering whether Oracle or Red Hat is weathering the recession best , this week may have settled the question. On Tuesday the market cheered Oracle for only seeing a 5.2 percent drop in revenue, with a 7.2 percent drop in profit (absent the strong dollar, Oracle would have seen a 4 percent increase in revenue and a 5 percent increase in profit).

Red Hat? Well, on Wednesday Red Hat announced fiscal first-quarter revenue of $174 million, up 11 percent from the prior year. Subscription revenue was up 14 percent year over year to $148.8 million. The company's total deferred revenue balance is now $567.3 million, an increase of 15 percent on a year-over-year basis. Net income for the quarter was $18.5 million.

Both Oracle and Red Hat are doing well, and Oracle is obviously dealing with much bigger wads of money, but it seems clear that Red Hat's open-source model is the big winner in the recession.

In fact, on Red Hat's earnings call, Chief Executive Jim Whitehurst indicated: "Budgets remain tight and we don't see an end in sight for this. In relative terms, this is pretty good for us." He went on to call out the big differentiator for Red Hat's business: certified ecosystem.

The key differentiator for us in Linux is our certified ecosystem. Even those that are clones of RHEL [Red Hat Enterprise Linux] lack this certified ecosystem. The second differentiator is value: great service and support at a compelling price.

We have a very disciplined business model which is based on commoditizing key parts of core infrastructure. We've been laser-focused on this. Open source is particularly good at that. We'd certainly like to work with other open-source companies but they have fundamentally different business models than we have.

Repeatedly asked on the earnings call about competition from Oracle, Red Hat executives took turns dismissing Oracle's Solaris ("When customers decide to jump from Solaris they go straight to Linux, skipping OpenSolaris") and Oracle's Linux strategy ("We've yet to lose a major customer over the last year to Oracle's Linux offering. The only one to leave Red Hat in the past couple of years is Oracle itself.").

"Budgets remain tight and we don't see an end in sight for this. In relative terms, this is pretty good for us."
--Jim Whitehurst, CEO, Red Hat

Indeed, though Red Hat's JBoss business is growing much faster than RHEL, Red Hat seems devoutly focused to RHEL's staying power in a bad economy. The reason is financial: JBoss, as Whitehurst noted, often requires a significant upfront integration cost, which makes it less palatable for CIOs looking for short-term cost savings. RHEL, on the other hand, offers immediate, short-term gains.

Even so, Whitehurst was quick to point out that JBoss will continue to grow faster than RHEL, and that it, along with other Red Hat technology like Qumranet's virtualization products, helps position Red Hat as a leading infrastructure provider to the nascent cloud-computing market. ("It's hard to imagine why anyone would build a cloud on a proprietary stack in this day and age")

With profit and revenue up, Red Hat continues to impress, especially as it's not dependent on a competitor for its revenue, which remains the Achilles' heel in Novell's otherwise bright earnings reports .

The question is whether it can grow well beyond its core RHEL business. Linux is a great foundation upon which Red Hat can build, but build it must. Today very little of its sales come at Microsoft's expense. At some point in the not-so-distant future, the UNIX-replacement business will slow and Red Hat will need more than JBoss to compete with Microsoft.


Follow me on Twitter @mjasay.

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About the author

    Matt Asay is chief operating officer at Canonical, the company behind the Ubuntu Linux operating system. Prior to Canonical, Matt was general manager of the Americas division and vice president of business development at Alfresco, an open-source applications company. Matt brings a decade of in-the-trenches open-source business and legal experience to The Open Road, with an emphasis on emerging open-source business strategies and opportunities. He is a member of the CNET Blog Network and is not an employee of CNET. You can follow Matt on Twitter @mjasay.

     

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