The Open Road

At the recent Red Hat Summit, company CEO Jim Whitehurst quipped that "flat is the new up," but he clearly wasn't referring to Red Hat. On Wednesday Red Hat announced another strong quarter, with revenue of $183.6 million for the company's second fiscal quarter of 2010.

That's a rise of 12 percent compared with the same period last year. Despite the company's against-the-grain performance in a weak market, however, it may need to invest more in its middleware business to ensure future growth.

But first, the good news. Of Red Hat's total revenue, roughly 85 percent, or $156.3 million, came from subscription revenue. That's an increase of 15 percent compared with the year-ago period. Putting this into context, IDC projects Linux subscription revenue to top $1 billion by 2012. Red Hat should claim virtually all of this at its current pace of growth.

Customers seem content to pay Red Hat for free software that they could get more cheaply elsewhere. While recent IDC data hint at hard times to come for commercial Linux vendors, it hasn't hit Red Hat. Not yet. The company is still a darling with CIOs.

And it may not for some time, with Red Hat reporting deferred revenue of $581 million, up 17 percent compared with the same period last year. The company is increasingly profitable, too. It reported net income of $28.9 million, or 15 cents a share, compared with $21.1 million, or 10 cents a share, for the year-ago quarter.

As part of its quarterly earnings call, Red Hat executives revealed a range of reasons to think its business is on track:

• All top-25 customer accounts renewed, and at 120 percent of the prior year's value. Most customers are expanding their adoption of Red Hat, and more and more are upgrading to Advanced Platform.
• Only three of its top-300 customers up for renewal didn't renew in the quarter, and two of those have returned to Red Hat after the quarter closed.
• Two deals were over $5 million, while 10 deals hit $1 million. Red Hat EMEA (Europe, Middle East, Africa) closed its biggest deal ever in the quarter.
• Of the top 30 deals, 23 included Red Hat Enterprise Linux (RHEL) Advanced Platform, and five included a JBoss component. This suggests that Red Hat's big customers are upgrading to Advanced Platform, according to Red Hat CFO Charlie Peters.
• JBoss continues to grow much faster than the core RHEL business.
• Deal length extended to 22 months from 19 months last quarter, reflecting
• One former Red Hat customer, a large financial services company (almost certainly Credit Suisse), dropped Novell's SUSE Linux and returned to Red Hat with a big order in the quarter. Credit Suisse is one of the companies Novell pulled away from Red Hat by using Microsoft-subsidized coupons, but Peters indicated that the customer had returned because of Red Hat's superior value. It appears that Red Hat is a better value than free.
• Red Hat is taking share from its competitors rather than seeing an increase in net new server purchases.

Despite the mostly sunny skies, Red Hat's slowing revenue growth remains a concern. The trend kicked off in 2005 and has continued apace since then despite a brief respite in 2007, as The 451 Group reports.

Of course, as Red Hat gets bigger, and as the economy remains stagnant, it's normal that Red Hat's revenue growth will slow.

But it's also normal that as it slows, companies like Red Hat will look for increased growth beyond their core businesses. Oracle is perhaps the most obvious example of this.

Red Hat doesn't need to get into video game consoles (e.g., Microsoft's Xbox) or hardware (e.g., Oracle's pending acquisition of Sun) or a variety of businesses far afield from its core infrastructure business. After all, Red Hat clearly has a lot of room to grow its JBoss/middleware business, and arguably needn't acquire its way to that growth.

But it does need to significantly change the way it views its channel partners.

Red Hat's traditional Linux partners are absolutely the wrong group to be selling its middleware offerings, a fact that took Red Hat some time to digest. Now, however, Red Hat seems to be getting the picture and has launched its Catalyst Program to sell turnkey open-source solutions through a growing ecosystem of value-added resellers (VARs).

Catalyst, however, is still in its infancy. It remains to be seen whether this program will stick, as Red Hat has moved away from ecosystem efforts like its Red Hat Exchange in the past.

For Red Hat's sake, it should stick with this one. Through Catalyst and other means, Red Hat needs to place more emphasis on the world outside of Linux. The company believes that virtualization and cloud computing are big opportunities, and they are, but these are mostly ways to build upon RHEL, rather than ways to extend its reach into fast-growing, diverse markets.

Red Hat is an execution machine and will undoubtedly be able to continue to grow its Linux business, and possibly to accelerate that growth again through enhanced investments in virtualization and cloud computing. But the real growth for the company is a bit higher up the stack in its middleware business.

Peters said that the company is investing significantly more in JBoss than RHEL, proportionate to the revenue each brings. That's good, but also obvious, given that Red Hat's JBoss business is comparatively small to its RHEL business. It may be time to invest even more in JBoss.

Open source offers a fantastic way to reach developers and users of one's technology. Ironically, however, the very group most inclined to adopt open source is the least likely to pay for it.

Therefore, to make an open-source business thrive in enterprise software, vendors must learn to distinguish between developer-users and IT operations-buyers. As I'll explain, however, open-source companies may need to guard against becoming too successful in order to preserve their exit opportunities.

It is, of course, quite possible to make money in open source. Lots of it. Red Hat, for example, is approaching $1 billion in annual revenue. MySQL had generated more than $90 million in sales the year it was acquired by Sun Microsystems for $1 billion.

That's real money.

It doesn't, however, come from the developers that download open-source code. Developers, in former MySQL CEO Marten Mickos' words, "spend time to save money."

Hardly the ideal customer.

Developers download software, which a great way to initial a buying conversation but a terrible way to finish it. Open-source companies talk about selling support, but this is a losing proposition. Developers, after all, are highly likely to support themselves through online forums or other means. They don't pay for software, and they don't buy support. Not most of them, anyway.

This is one reason that pure-play support models simply don't scale in open source. They focus on the exact wrong audience.

Sure, there's a honeymoon period for new open-source companies that launch support offerings around established community-led projects. Some developers buy support, either through personal need or corporate requirements. After that initial rush for support, however, it's a tough slog selling support to developers. It's like selling ice to Eskimos.

This brings us back to a real dilemma in open-source companies: how to monetize popularity (i.e., downloads).

Developers are the most efficient way to spread adoption of one's product but perhaps the least efficient way to monetize it. To get paid, vendors must learn to separate IT developers from IT operations, and build offerings for both.

Red Hat is a classic example. People think that Red Hat sells support. It doesn't. Not really.

The primary reason enterprises buy a Red Hat Enterprise Linux (RHEL) subscription isn't for Linux support, and certainly isn't for the bits: you can get the bits free from CentOS, and support comes heavily discounted from Oracle.

No, the reason companies purchase a RHEL subscription comes down to certification that RHEL works with a wide variety of hardware and software, as well as with the Red Hat Network, which delivers updates to an enterprise's RHEL servers.

In other words, IT operations pay Red Hat to help manage their Linux servers in production. The money is in operations.

Red Hat isn't alone. Look at JBoss. The company started minting money, once it licensed Hyperic's software to build the JBoss Operations Network.

SpringSource took it one step further and actually bought Hyperic, the company, as the foundation for its Build-Run-Manage message, a message founded in selling to IT operations, not developers. (Rob Bearden, chief operating officer at SpringSource, was deeply involved in both decisions and remains one of the smartest people in the industry on building open-source businesses. If there's any wisdom in this post, it is his.)

For new open-source companies grappling with how to supercharge sales, the answer is operations. It may not be a systems-monitoring tool like Hyperic or Zenoss, but it likely is about systems management, as operations need and pays for it.

There you have it: the secret to your billion-dollar open-source opportunity. Except for one niggling fact: despite the value of IT operations to make sales, it's really developers who create the most company value, from an asset perspective. SpringSource's sales didn't justify its $420 million valuation. Its developer base did. Developers have strategic value, in terms of IT operations and creating tactical value.

In fact, SpringSource's valuation might well have gone down, had it been making more money, just as TechCrunch's Michael Arrington astutely argues could happen with Twitter. Sales provide a measurable, tangible valuation. Developer traction creates an amorphous, strategic value.

Hence, while IT operations is the crux of making sales in open source, it might well be that open-source companies should focus on community development and avoid making too much money so that they can maintain a healthy valuation. But not too healthy: there isn't an incredible amount of IT vendors that can swallow $1 billion acquisitions, the IPO era seems to be over.

Is this the new open-source entrepreneur's dilemma?

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What is the value of an open-source asset? Over the past several years, and most recently with SpringSource, we've seen a number of open-source companies acquired at valuations of 10x or better. Did the buyers get their money's worth?

It's a tricky question to answer--and likely depends upon far more data than I have at my disposal. It also depends on the acquiring company executing, which has not been the case with Yahoo (which bought Zimbra) or Sun Microsystems (which bought MySQL). No open-source company can offer a panacea for an acquiring company's failure to execute.

But after talking with a range of the companies involved, it would appear that the answer is "yes"--open-source acquisitions are paying good dividends.

Consider:

• JBoss, bought by Red Hat for $350 million at a valuation 15 times sales (i.e., a 15x valuation), has gone on to grow twice as fast as Red Hat's core Linux business and is the key to its ability to sell strategic value to CIOs, rather than simply commodity Linux servers.
• XenSource, inarguably the richest acquisition at 166x, was doubling its customer count every quarter at the time Citrix bought it for $500 million. This would be less significant except that the company had already pulled in 1,000 customers. Compounding that number...? That sort of growth is hard to hard and continues to feed Citrix today. XenSource's valuation was overly rich but then, it was bought on the heels of VMware's explosive IPO. Some valuation hubris was to be expected.
• Zimbra, which Yahoo paid $350 million to acquire, has largely been buried in the belly of a company that has yet to figure out what it wants to do when it grows up (and out of Google's shadow). Even so, the company, which was doing north of $20 million at the time of acquisition, continues to grow quarter after quarter. Yahoo may not know what to do with Zimbra, but Zimbra's customers apparently do: buy more.
• And then there's MySQL. Ironically, Sun's $1 billion acquisition of MySQL, which was ridiculed as dramatically rich in valuation, has the lowest multiple of the lot, given that MySQL recorded sales of over $90 million the year it was acquired. Despite Sun's myriad problems over the past year, MySQL is growing, recording some of its best quarters ever.

Open-source assets, then, are growth assets. And their growth appears to be hard to check, even in cases of significant mismanagement. Perhaps this is the nature of open source: the company behind it may falter, but ultimately, the success of the project is only a download away, provided that the development community remains vibrant (and, in each of the examples above, it has).

Zimbra's paid user growth increases in lock-step with downloads

(Credit: Zimbra)

So long as development continues, so will downloads. If downloads continue, there really should be no reason that a company can't benefit from it. It may derive substantial or anemic benefits, but it should benefit.

Looking around, it's hard to find a company that, on balance, isn't happy with its open-source investments. If open source didn't work, we'd expect to see companies exit, but in addition to the companies mentioned above, Oracle (Sleepycat), IBM (Gluecode), Cisco (Jabber), and others have increasingly bought into open source, and none shows any signs of abating its interest in increasing its open-source activities.

One might think that buying an open-source asset, rich in adoption but relatively light in monetization, would be a poor investment. Based on the data I've seen, however, this supposition is wrong.

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Peter Fenton

No other investor has had as much success in open-source software as Peter Fenton, general partner at Benchmark Capital.

A competitive triathlete, Fenton has turned the standard marathon of open-source business-building into a sprint, churning out four big open-source sales--JBoss ($350 million), Zimbra ($350 million), XenSource ($500 million), and SpringSource ($420 million)--while most investors have yet to turn a profit on any.

Not that Fenton is a one-trick pony. He also just sold FriendFeed to Facebook and sits on the board of Twitter. It's fair to say that Fenton can now afford a second Aston Martin.

But Fenton is still busy, sitting on the boards of open-source companies Pentaho, Terracotta, and Engine Yard. He's also willing to share the secrets to his open-source success, telling The Wall Street Journal the key to building a winning open-source business.

Spoiler? Build a direct line to your customers using open source and then ensure an excellent product to pave the way to adoption, then usage, then sales. According to the Journal article:

Rather than "expensive sales efforts and negotiations with the upper management to get the most money possible," the people that will be using the software can easily download and try the product. This helps the best products proliferate and weeds out the underperformers.

"If you don't have the best product, you're not going to make it in open-source," unlike traditional enterprise software, where customers often flock to good-enough products.

Having a well-received product not only results in plenty of downloads, users and developers, it also makes the sales process that much easier. With SpringSource, "anyone the company sold to was already using the product," he said.

Sounds easy, right? Well, no, not if you've ever been involved in an open-source business. Building a great product is hard enough, but doing so in a transparent fashion while encouraging active adoption without appearing faux to your community...? That's hard.

Venture investing may be more art than science to some, but Fenton has done more than most to turn open-source investing into a science, as VentureBeat reports. For instance, many open-source companies are ecstatic to have widespread adoption, but Fenton is careful to call out the difference between adoption and actual usage, as he does in this Benchmark presentation (PDF).

In this presentation Fenton calls out two strategies for investing in either "farm-raised" or "free-range" businesses. Think of these categories as company-led (e.g., Zimbra) or community-led (e.g., SpringSource) open-source businesses. Neither is better than the other: they simply refer to whether an open-source community predates a company set up to monetize it.

The strategies Fenton takes depends. For "free range," it looks like this:

(Credit: Peter Fenton (Benchmark Capital))

For "farm raised," Fenton's strategy looks like this:

(Credit: Peter Fenton (Benchmark Capital))

All of which means your next open-source investment or company should be a snap, right? Maybe not. It's one thing to call the correct shots--and quite another to make them. Part of the reason Fenton has been so successful is that he has invested in exceptional operators at each company, including Marc Fleury and Rob Bearden (JBoss); Satish Dharmaraj, Scott Dietzen, Andy Pflaum, and John Robb (Zimbra); and Rod Johnson and Rob Bearden (SpringSource), among others.

Perhaps this is really the key to Fenton's success, after all is said and done: he knows how to attract top-tier entrepreneurs to top-tier open-source communities. That's not something one accomplishes with a jog or casual bike ride. That's the work of a triathlete, which makes Fenton perfect for the job.

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Red Hat has announced its 2009 Innovation Awards, with some impressive finalists making the list. From Whole Foods to Harvard Business School Publishing, major organizations are doing impressive things with Red Hat technology. Interestingly, however, the real "innovation" revealed by these awards is just how much more money Red Hat makes in its JBoss deals than in its Red Hat Enterprise Linux (RHEL) deals.

I reported earlier this year that Red Hat's JBoss business is growing at twice the rate of its RHEL business. This isn't surprising: JBoss is still relatively small change compared to RHEL, growing from a smaller base.

But that's not the whole story. JBoss drives $10 in services revenue for every $1 in subscription revenue, which makes JBoss much more interesting to Red Hat's channel partners than RHEL. JBoss and the solutions that run on it are also much more interesting to CIOs, who tactically choose RHEL to save money but strategically choose JBoss to help make money.

RHEL is effectively just a commodity business, which means the best way to juice the business is to grow the volume of transactions through the channel, because it's difficult to grow the size of those transactions.

RHEL is all about "selling boxes" (i.e., servers), in other words. It's tactical, not deeply strategic.

If you look at Red Hat's Innovation Awards finalists, the RHEL innovation leaders are those that are saving money on the operating system but still spending plenty on applications like SAP, because applications drive their business value. At Whole Foods Markets, for example, "innovation" means "use of Red Hat Satellite to manage its Red Hat Enterprise Linux systems that resulted in reduced costs, reallocated resources and the ability of the Whole Foods IT department to focus on strategic business initiatives."

Moving to RHEL, in short, was tactical: it allowed Whole Foods to innovate ("focus on strategic business initiatives") elsewhere. RHEL wasn't the innovation. It enabled the innovation.

JBoss is different. JBoss enables the Red Hat sales team to focus on the strategic initiatives within enterprises, because JBoss gets Red Hat closer to the applications that power these companies. An operating system lays the foundation for innovation. An application server and, critically, the applications that run on it, serves up the innovation itself, and makes Red Hat much more interesting to CIOs.

Red Hat has a decision to make moving forward. It can move up the software stack and sell JBoss-based solutions that get it a seat at the CIO's table with Oracle, Microsoft, IBM, SAP, and others. Or it can continue its tactical push by focusing on increased volume of RHEL-based servers into the market.

There is plenty of value (and money) in either the tactical (RHEL) or strategic (JBoss) approach, but Red Hat becomes a truly disruptive, game-changing company through enhanced focus on middleware and applications. As a (mostly) Linux vendor, Red Hat can make plenty of money but will never make waves.

Today, Red Hat is a big (but little) company. Big in its sales as it approaches $1 billion in revenues. But little in its ambition to disrupt the industry through open source by giving CIOs a true choice in the area that matters most to their businesses: applications.

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Some argue that open-source software can't innovate. In fact, one of the industry's former executives, Peter Yared, recently argued that "the only successful open-source companies sell commodities."

Yared clearly hasn't heard of SpringSource, an open-source application platform provider that is redefining the J2EE application server and, quite possibly, the future of open source.

Yared isn't alone in his beliefs. A friend recently wrote me to suggest that open source is at its best when disrupting big, profitable markets:

Commercial open source is a (commodity) replacement market. When it is not (i.e., people are building new, never-done-before cool/future-proof apps with open-source technology), then it is a pure-play Internet-based business model, one that is becoming so specific/demanding that people will want full control and (to) develop their own stuff, e.g., Google, Facebook, and others that heavily use open source to build their Web services.

SpringSource and its ubiquitous Spring Framework, however, promise something different. Something much more ambitious. Not only does Spring challenge the status quo in application development, deployment, and management (Hyperic), but SpringSource is proving that commercial open source can peacefully coexist with community involvement.

In a conversation with Spring creator and SpringSource founder Rod Johnson, he clarified SpringSource's competitive differentiation:

The essence of SpringSource is that we're not a commodity play but have a far more ambitious agenda. We're not interested in replicating what closed-source vendors already offer, at lower price: We are providing a superior experience to developers and operations teams--for example, in our integrated approach to unifying the application life cycle from developer desktop to the data center--which doesn't presently exist in Java.

Of course, our offerings are also leaner (more productive and faster), cheaper and more open than those of the old incumbents, and that's a huge selling point in today's market. But we're focused on being the enterprise Java leader--and not merely in open source.

SpringSource's mantra: Managing the full Java life cycle.

(Credit: SpringSource)

SpringSource isn't simply replacing IBM WebSphere, Oracle WebLogic, or Red Hat JBoss application servers. It is actually doing much more, and it offers, in my opinion, the best example of just how disruptive an open-source vendor can be precisely because SpringSource isn't seeking to be the open-source leader in Java, but the leader, period.

Gartner estimates that there are currently at least 2 million Spring developers, an impressive number suggesting that the Java community is looking to Spring to help it migrate Java applications onto lighter-weight containers (Tc Server), across highly virtualized environments, and ultimately to the cloud. Given SpringSource's strong financial performance, the company seems to be doing a good job of monetizing a significant percentage of that Spring adoption.

After meeting with the SpringSource executive team at its San Mateo, Calif., offices a few weeks ago to discuss its strategy, I'm convinced that the company is on track to improve that percentage significantly too.

We're at the point when it's not enough to be "the Red Hat of (CRM, ECM, ERP, etc.)." In a bad economy that sees open-source solutions adopted at an ever-increasing pace, now growing at a 22 percent CAGR (compound annual growth rate), according to IDC, it's time for open-source vendors to lead and develop markets, not simply follow in the wake of established proprietary vendors, picking up their crumbs.

SpringSource is demonstrating how it can be done. It's an aggressive company with the finances, management, and product ambition to become a very big player in enterprise IT within just a few short years. It's a company that Microsoft should fear and that Oracle or IBM should buy.

Of course, SpringSource being SpringSource, it might actually be planning to buy Oracle or IBM instead.

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There was a time when vendors knew how to color inside the lines. A database vendor sold databases. An operating system vendor peddled operating systems. And application server vendors were in the business of selling application servers.

Customers knew what "application server" meant, which is what paved the way for low-cost, high-value open-source application servers like JBoss, Geronimo, and others to arise. The category was well understood. The only thing the customer had to decide was whether she wished to overspend on a brand-name application server or buy into an open-source upstart.

As the economy continues to pressure IT budgets, a new breed of application server is rising, one that doesn't color nicely within the lines of the traditional "app server" definition.

First there was SpringSource, which in April 2008 claimed it had developed the first "proper Java application server" to hit the market in more than 10 years. IBM, Oracle, and Red Hat (JBoss) must have found this surprising, given that "proper Java application servers" were what they presumed to be selling to their customers.

SpringSource, pressing the issue further, this week announced Spring Roo, an "interactive, lightweight, user-customizable tooling that enables rapid delivery of high-performance enterprise Java applications." At just 4MB, Spring Roo is tiny, but its promise is big: "working applications within 10 minutes of finishing the download" (video here).

Red Hat is taking notice of SpringSource's moves, but SpringSource founder Rod Johnson is dismissive of Red Hat's ability to compete:

Red Hat recently announced a defensive move (JBoss Open Choice strategy) motivated by trying to play catch-up with SpringSource. Clearly the momentum of SpringSource tc Server and dm Server has Red Hat worried, along with the continued advance of the Spring Framework as the de facto standard component model for enterprise Java.

The "JBoss Open Choice strategy" appears to be a repackaging, rather than new technology, which attempts to position JBoss as still relevant in a brave new world of changing requirements. On a positive note, it appears Red Hat has finally realized that many developers and customers have long since moved away from the full Java EE stack; that the traditional heavyweight application server has declined in importance; and that the Spring programming model is important to their customer base.

The paint is barely dry on JBoss' incursion into IBM's and Oracle's application server territory, and already it's under attack from SpringSource, which is positioning JBoss as old technology, despite barely being out of its teens. It's a sharp attack, but perhaps a sign of open-source competition to come.

Consider MindTouch. The entire idea of a Java application server got a shaking this week from MindTouch, which announced a new application packaging feature for its collaboration platform, as TechCrunch reports. This feature:

(A)llows developers to create a compressed file for import into other MindTouch instances, letting enterprise users install add-on applications easily. This addition represents MindTouch's ambitions to become an application platform where installing applications (is) as easy as adding Firefox add-ons.

This may not sound very groundbreaking, until you consider that MindTouch is essentially announcing that it has turned the wiki into an application platform. Until last year MindTouch was mostly known for its DekiWiki technology. This application-packaging technology basically allows customers to build on wiki collaboration, which is much more than just a MediaWiki-style wiki, as ReadWriteWeb notes.

Neither SpringSource nor MindTouch fit the old application server mold, but it's not clear customers should care. Enterprises just want to get work done.

Just as Google is shaking up e-mail with Wave and Wolfram Alpha is redefining a corner of search, so too are SpringSource and MindTouch redefining what application server means for the modern enterprise, while open-source companies like Acquia redefine Web content management, Marketcetera pushes the envelope on financial trading platforms, etc.

Open source is the new innovator, and not merely the commodifying force in the market.

Indeed, with traditional software markets perhaps reaching a critical saturation point, we may see much more "coloring outside the lines" in enterprise software from open-source projects and companies. Oracle's response has been to consolidate, but others seem to be responding with a different strategy: innovation.

Disclosure: I am an adviser to MindTouch. Red Hat is a business partner. Acquia is in some ways a competitor.

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Bob Bickel, often credited with being one of the driving forces behind JBoss' success, has been in semi-retirement since Red Hat purchased JBoss, but he's apparently sticking his head out of hibernation to launch a new venture.

Look, Ma! I'm starting a new company.

If this doesn't sound very open source-y of Bickel, it's because it's not. But it does reflect Bickel's shifting interests: some might remember that Bickel helped to start Ringside Networks after the JBoss acquisition, an open-source competitor to Ning, the social-network platform company.

Not that Bickel is completely abandoning open source. He writes that "our site will have focus on running races, it will be simple to use, and it will be much more cost effective than the alternatives in the marketplace." I'm guessing "cost-effective" means he'll be using open-source technology at the heart of the Web site.

But then, that's an easy guess: who isn't using open source to power the Web these days?

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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.").

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.

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