Red Hat: It's the value, stupid

As I walked through the war zone that is Wall Street yesterday on my way to a Red Hat meeting, I assumed the worst. I scanned the rooftops for Paul Cormier, Red Hat's EVP of Products and Technologies, ready to catch him if leaped. I scanned the cardboard boxes along the pavement, expecting to see Red Hat CTO Brian Stevens claiming a cozy spot on the curb. Finally, I dug through dumpsters in search of Jim Whitehurst, Red Hat's CEO and no stranger to market meltdowns as the former COO of Delta Air Lines.

They were nowhere to be seen.

Instead I found Whitehurst, Cormier, and Stevens waiting for me in Room 616 of the Red Hat Enterprise Linux-fueled New York Stock Exchange, which managed to process a massive sell-off of equities over the past week without skipping a beat. Indeed, on a day that saw the Dow Jones industrial average crater by 508.39 points, RHEL kept the NYSE humming.

Perhaps this wasn't something to celebrate, but it's a testament to the power of Red Hat's software, and a painful reminder to Microsoft that its software is not ready for the heaviest enterprise loads, given its own .Net-inspired crash of the London Stock Exchange last month. Microsoft urges us to "get the facts" about Windows performance. Don't worry, Microsoft: we got them.

But it wasn't to poke fun of Microsoft that I spoke with Red Hat. Instead, it was to see how a faltering economy is hurting or helping its business, find out why there aren't more Red Hats, and to learn why enterprises continue to turn to Red Hat even as budgets tighten and implode.

First off, while it wasn't a joy fest for Red Hat today at the NYSE, I was surprised to learn that CIOs are still upbeat, at least as far as Red Hat is concerned. Cormier told me, "I had so many people say to me today, 'Wow! I get it.'"

What is "it"?

"It," as each executive told me in turn, is value. When I asked whether enterprises buy Red Hat technologies primarily because of open source, Cormier responded, "No. It's the value. It's completely value. The fact that it's open source helps, but it's really value."

That value, it turns out, emerges in different forms:

Stevens: Red Hat changes the nature of the CIO conversation around OpEx vs. CapEx. We're a leverage point to help customers save money somewhere else, whether that's hardware, software, or services.

Whitehurst: People forget that software can be a multi-round game. Most software companies get customers locked in and theyr're stuck. Eighty percent of commercial software functionality is created to drive an upgrade cycle; in other words, to serve vendor needs, not customer needs.

We turned the model on its ear with our subscription model. Red Hat's subscription model provides continuous value to the customer: the day we stop delivering value that customers want, they stop renewing. Dramatically reduced lock-in. We've aligned economic incentives with our customers. We add the features that customers want, not those that artificially create an upgrade cycle. We completely change the value proposition for customers.

Fine, but will open source fully realize the benefits of delivering this value?

Whitehurst: There are clear use cases where ripping and replacing with open source saves companies money, which is part of the value proposition. If a company is at the end of the life on a BEA maintenance contract, for example, it's going to save money immediately by moving to JBoss. Open-source companies need to be very clear about their value proposition, and focus on providing a first-year payback on that investment.

Cormier: We're seeing companies that have been experimenting with things like VMware for virtualization for a long time, but now they're starting to wonder if they can actually afford to roll it out. That's Red Hat's opportunity.

It all sounded fantastic. Red Hat is delivering the value that enterprise software vendors have long promised, then promptly stuffed the value into their pockets at every opportunity. Why, then, aren't there more Red Hats? Why is there only one major standalone open-source software vendor?

Cormier: Open source takes longer. We've been in the business for 15 years (and the enterprise business for eight). It doesn't happen overnight.

Whitehurst: There has to be a clear balance between open source as the development model and open source as the business model. In the latter case, it's important that open-source companies build businesses that succeed because of open source and not in spite of open source. To do so, it's critical that open-source companies figure out what value they can provide the enterprise, value beyond simply support.

Stevens: That's right. It all comes back to value. Back in the day, the enterprise was owned by Unix. Then along came Intel and brought commodity hardware to the market, and then Red Hat helped to make Linux enterprise-ready on that commodity hardware. We dramatically lowered the cost and improved the performance of what enterprises had come to expect from proprietary Unix. We were fortunate to land upon this compelling value for the enterprise. Other open-source companies need to find missing value in the enterprise, and deliver it.

The theme that I heard emerging over and over and over again was "value." Value for the customer, value for which enterprises will pay. In Red Hat's case, it's about providing stability amongst a dizzying array of packages and technologies that make up the Linux kernel. IT buyers gladly pay for that service, and for the improved price/performance that Red Hat delivers.

For an open-source Business Intelligence, CRM, or content management vendor, however, that value might be different. The key, in Red Hat's words, is to figure out what customers want and deliver it. It sounds simple, but given the dearth of big open-source companies, we clearly need to dig a little deeper in understanding enterprise requirements and how open source can help to fulfill them.