Just how strong is Red Hat's open-source business?
Red Hat stands alone as the only significant public open-source company. Is this a testament to its execution, or is it a hint that open source is not well-suited to big business?
While I believe that open source will increasingly be the heart of many big technology businesses, it will almost certainly feed new entrants to markets, not incumbent vendors.
Looking at Red Hat's report on its most recent fiscal year (FY 2009), however, suggests that for these new entrants, open source can be a very profitable business indeed. I've already reported on the high-level financial results.
What is particularly intriguing is the data behind those results:
- Red Hat is forecasting $720 million to $735 million in FY 2010, an annual growth rate of 10 percent to 13 percent over 2009.
- 40,000 new Red Hat Enterprise Linux customers in FY 2009, the "vast majority of which are...customers that are starting off small." Lots of room to grow, in other words.
- Nearly half of Red Hat's top-100 renewal customers upgraded to or increased the number of RHEL advanced platform servers in their Data Centers. (In its fiscal Q4 2009, Red Hat renewed each of its top-25 contracts up for renewal at 132 percent of the prior year's value.)
- 30 percent of Red Hat's largest 30 deals included a Middleware (JBoss, usually) component.
- Average contract lasts 23 to 24 months, with pricing remaining "consistent for the last several years."
- Channel bookings grew 23 percent in FY 2009, while Red Hat more than doubled its number of partners to 4,500.
- In fiscal Q4 2009, Red Hat closed two large deals, one of which was a multi-year, multi-million dollar deal that represented its largest conversion from free-to-paid (a key initiative for FY 2010) as well as a six-figure conversion deal with another customer.
- 57 percent of bookings came from the Americas, 28 percent from EMEA, and 15 percent from APAC.
- The recession has not "changed the length of [Red Hat's] sales cycle in any meaningful way."
- Subscription gross margin improved 60 basis points over the year to approximately 94 percent while training and services gross margin improved approximately 280 basis points from Q4 last year, driven mainly by better utilization and higher gross margins from the Amentra business.
- Red Hat ended its fiscal year with $846 million in cash and investments and is now debt free.
One of Red Hat's big initiatives for FY 2010 is to increase the rate of adoption of its for-fee products from prospects still using for-free versions of its software (Fedora, CentOS, etc.), a process it only started in late 2008. As Red Hat CEO Jim Whitehurst notes in the earnings call, enterprises often find it "very expensive" to support themselves. As the data above suggests, Red Hat is getting better at convincing them to move to Red Hat's subscription offerings.
As the economy continues to sour, it's likely that Red Hat, and not its proprietary peers, will disproportionately benefit, especially as Red Hat learns to upgrade accounts from "free" to "fee." Whitehurst notes:
We've seen a lot of interest from customers in open source as their budgets have gotten tight. We see that interest continuing and a lot of discussions started then are just now coming to fruition. So, I haven't seen real reduction in tight budgets, maybe there is not the same quiet level of desperation in people's voices but budgets are tight this year, Budgets are set and we think that's good for us at open source.
Or, rather, it's probably particularly good for those vendors that treat open source as core, not complement. Like Red Hat.
Follow me on Twitter @mjasay.
Matt Asay 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. Matt is vice president of business development at Alfresco, a company that develops open-source software for content management. He is a member of the CNET Blog Network and is not an employee of CNET. Disclosure. You can follow Matt on Twitter @mjasay. 
They are paid for service for a product they develop in an ecosystem (open source, linux kernel) that they support and help develop.
I can download the source code for their Red Hat Enterprise Linux (RHEL). Doesn't mean I know what to do with it, but that's my problem. That's what CentOS (Community ENTerprise Operating System) does; take the RHEL source code and rebuild it into a distributable package.
So saying they are Proprietary is spreading FUD.
Qumranet - which is the driving force behind KVM, an Open Source virtualization engine and SPICE, a virtualization management platform. Red Hat shelled out $107M to improve Open Source virtualization.
Identyx - Open Source identity management and virtual directory company.
JBoss - Open Source JEE services. Middleware, service oriented architecture, portal services, the list goes on and on. Oh, yeah, and Red Hat paid $420M to continue to release that code back to the Open Source community.
Netscape server line - that's where Fedora Directory Server and Dogtag, a PKI solution, come from. Red Hat bought these assets and turned around and Open Sourced them.
The list goes on and on, Sistina, Cygnus, etc. All made Open Source.
Beyond that, Red Hat has also made Open Source all of their products - look at Spacewalk (RHN Satellite), FreeIPA, NetworkManager, and so on. Again, the list goes on and on.
So how about next time you want to make an infantile, inaccurate statement, why don't you at least do the minimum Google search. Have a look at http://fedoraproject.org/wiki/RedHatContributions and http://en.wikipedia.org/wiki/List_of_mergers_and_acquisitions_by_Red_Hat and check the facts before you make yourself look like an idiot.
- by interoperate April 26, 2009 3:34 AM PDT
- @ Mr Dee
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(6 Comments)Implying that Red Hat is "just as proprietary like any other Company in the industry" is 100% malicious FUD.