Jim Whitehurst is hitting his stride as Red Hat CEO, and does himself proud in this excellent ZDNet interview. Whitehurst was COO at Delta Air Lines prior to joining Red Hat, adding credibility to his take on the enterprise software game:
I was a senior exec, and like every other senior exec I had a huge IT budget. Mine was as large as Red Hat's revenues last year. You sit there and say, "Why are my IT costs going up, but I'm getting less and less functionality?" Every IT professional says the same thing: my lights-on costs are going up. But wait a minute! I bought a laptop, and it cost me half as much as it did three years ago, and my costs are going up? I get the joke now.
If you look at the S&P 500, seven of the top twenty companies are tech, and other than Google, they're not high-growth. But they're just printing money because switching costs are so high. There's this incredible amount of residual goodwill to Red Hat because we're seen as an alternative to that. Oracle announced a 20-something percent price increase just as the economy starts heading south. How can you do that unless you're pretty sure nobody can switch? High switching costs led to infrastructure cost creep. Once you get hooked, you can't get off.
Bingo. In the case of Oracle, industry consolidation has put it into a position of such power over its customers that it has killed off much of its competition. IBM and others have done the same. Enterprises now get to choose between competing behemoths that have little incentive to lower prices.
Open source (and SaaS) may well be the only hope of bringing back meaningful competition to the enterprise software game. The problem, however, is that open source still lacks one trait that enterprise buyers, given their druthers, strongly prefer: Largesse. Who in open source can provide that security blanket?
Well, Red Hat and Sun can, but their respective product foci are too narrow, compared to Oracle, Microsoft, and IBM. If a customer is looking for choice in infrastructure, Red Hat and Sun deliver in spades (as does Novell at the operating system level). But none of these companies get you very far beyond foundations.
So, in Red Hat and Sun we find largesse but not full product portfolios to compete with the applications of the big proprietary vendors. Over time, as open-source application vendors bulk up, perhaps this issue will go away. But for now, the enterprise software market belongs to the behemoths. Prepare to pay up.