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Red Hat: the mother of all business models

January 15, 2006 | Comments: (0)

Red Hat: the mother of all business models

The biggest problem in open source today is that few know how to monetize it. There are great developers out there who will write free (as in freedom and price) software regardless of a profit motive, but they are the minority. These generous benefactors are not sufficient to fuel the continued rise of open source software.

So, we need more developers making more money to fuel...more development. But how? There are a few promising models (and the Open Source Business Conference is the best place to learn and develop new ones), and many more that are complete rubbish.

I'd like to focus on one, in particular, that I think is absolute genius: Red Hat's. Oddly enough, I can't think of a single other company that uses Red Hat's model, despite its evident success. I'm not sure why, except that I do think few understand the nuances of Red Hat's model. I'd therefore like to spend a few minutes trying to unpack exactly how Red Hat operates.

Red Hat's model is a product of necessity. The company had to figure out how to survive its lack of code ownership, and found a brilliant way to turn this apparent deficiency into a strength. In turn, this has allowed Red Hat to invest in innovation that all benefit from, but which benefits Red Hat particularly. (As a related side note, without a good business model, open source and innovation are at odds - a good business model will allow a company to heavily innovate, secure that it will be able to profit from such innovations as much as and more than its competitors.)

It's a bit like Arsenal allowing Thierry Henry (shown here pummeling Middlesborough in January 2006, 7-0) to play for opposing teams, knowing that the goals in Arsenal's favor will always outweigh those against it.

Here's how Red Hat's model works:

Red Hat helps to drive Linux development, ensuring momentum and competitiveness for the open source project.
Red Hat splits its Linux offerings into two camps: Enterprise (Red Hat Enterprise Linux - the one you'll see prominently displayed on the company's website) and Community (Fedora). Attention and energy is primarily focused on the product that will actually bring in revenues (RHEL), but Red Hat is careful to also nurture the development community, which will pay it little to nothing but which brings other, less tangible benefits.
Red Hat tests and certifies RHEL to run on certain hardware, with certain software. Red Hat restricts access to this certified, supported RHEL - you can get the raw source for the uncertified RHEL, but not the compiled, ready-to-go binaries. Only paying customers get that. (Note: Red Hat recognizes that few to no large enterprises are going to depend on an unsupported, self-compiled distribution.)
Red Hat ties support to its software - you cannot get and run the RHEL binary noted above without buying commensurate units of support. Red Hat ensures this through its ingenious subscription agreement. If you want the real Red Hat, you must pay - there's no effective way around it. (There are workarounds, but they're not worth the bother. Red Hat knows this, and mints money from the result.)
Red Hat delivers updates (and ensures customers stay with it) through the Red Hat Network. Companies plug in, get updates, occasionally call for support, and make Red Hat an explosive, important open source company.

That's it, in a nutshell. The important things to remember are:

Red Hat's model works because Linux is successful.
Red Hat ensures Linux's success by investing heavily in it, and marketing it heavily.
Red Hat does nothing to prevent would-be customers and developers from trying it out (quite the opposite).
Red Hat makes it hard to impossible to get the compiled, binary version of its tested/supported/enterprise-ready software without paying it. (A recognition that while source is free, few actually want source, and even fewer pay for it.)
Red Hat ensures an ongoing relationship (and payment channel) with its customers through a subscription agreement.

Sheer brilliance. Red Hat is able to deride competitors who have hybrid models while effectively having one itself, scoring marketing points and positioning itself as the one, true open source Linux vendor. Red Hat is able to lower the barriers to trying out its products without abandoning the ability to convince customers to pay upfront and ongoing support/license fees. Red Hat is able to make a truckload of money.

The only question at this point is, why aren't you using the Red Hat model, too?

Posted by Matt Asay on January 15, 2006 05:49 AM

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COMMENTS

To compete in the Red Hat arena, using the same business model, and "selling the same product", you either have to take "existing" market share from MS other Linus vendors, or take a substantial share of the "new" market. At this point Linux total market share is relatively small compared to MS. So who is your real competition, MS or other Linux vendors?

Is the total potential market large enough for Red Hat, Novell, MS, and others? This business model could be used by others, with significantly less business risk, if it were used with a different product, such as some set of "must have" applications etc.

Posted by: bigpicture at January 15, 2006 11:00 AM

The competition is the server where Windows is NOT a mayority and is vs Solaris/HP-UX/AIX and other Linux distros.

Posted by: Jza at January 15, 2006 07:08 PM

Maybe it's just me, but I don't see that as genius. Red Hat is prospering for multiple reasons including just plan good accounting and prudant day to day business decisions. However, their bread and butter comes from services, according to their sec filings. Sale of Red Hat Enterprise obviously bring in some money but consulting for integration, engineering services, etc. are Red Hat's killer application. The Red Hat operating system merely facilitates these--ableit very efficiently.

Matthew C. Tedder

Posted by: Matthew C. Tedder at January 16, 2006 09:12 AM

Novell and now Sun with opensolaris both doing the same

Posted by: bhargav joshi at January 16, 2006 10:09 AM

Please remember that RH was one of the early, if not first, US based Linux vendors to "commercialize" the product (correctly). When you are first to market it is very easy to grab loads of market share in your niche provided you don't do something idiotic to have your customers abandon you ...

ref: Apple vs Microsoft.

RH has a large install base now which is the only thing keeping it afloat much like Sun. Had they not gotten their foot in the door early by having one of the first viable distros for business then the picture would be much different today.

Posted by: PcG at January 16, 2006 06:58 PM

Redhats success in my opinion is short lived. What is the benefit for the average company to pay $189 for their WS version and $1500 for their AS version. It is very expensive, when you can get a "supported" CentOS distro for free. The updates are available within 12 hours of Redhats. You don't get email support, but most companies don't use it, and if you have (And I have), you will see that Redhats standard response is to "try our new kernel". CentOS and RHEL are virtually identical minus 2-3 "commericial" packages. We have almost 200 servers in our datacenter now and add a new one every 2 days. Redhat is always trying to get us to buy from them, and it kills them that I use CentOS. You can see the frustration when they try and give me some benefit of using RHEL over CentOS. They can't tell me I need a "supported" RHEL when we already have 180 machines running CentOS perfectly. It won't take other companies long to figure this out. Even at their lowest prices RHEL would cost me over 50K a year for my servers. I think I will buy another car and tell Redhat to stick it. If you don't do the same then you deserve what you get.

Matt Heaton / President Bluehost.com

Posted by: Matt Heaton at January 16, 2006 08:16 PM

Matt Heaton

You forget that if Redhat dies so does CentOS
and thier copycat compiler antics.
Then you deserve what you get.

CentOS and you only get by because
Redhat does well. Fact.

Dude

Posted by: Dude at January 17, 2006 05:56 AM

Nice article, thanks

Making revenues from free & open source software is one of the most frequently asked questions these days. While there have been a few successful examples of companies (like MySQL, Red Hat etc) which are making money, Iâ€™d surmise that these are still very early days for open source revenue & profit models.

While open source as an operational paradigm certainly has been having exceptional success against proprietary and closed-software models in the recent past, in my opinion, a lot more thought need to be given and experimentations done before the emergence of viable revenue models for the free & open source models that can successfully compete with the current proprietary software revenue model. Some specifics of the business models are emerging fast, but it will take a few years for the market to test each of these out and hopefully, the fittest will survive.

A site that focuses exclusively on revenue models from open source is Follars.com â€“ Free, Open-source Dollars!

Ec @ IT, Software Database @ eIT.in

Posted by: eIT at August 16, 2006 01:33 AM

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