The global economic downturn has compelled a growing number of companies to search for ways to reduce IT costs. Uptake of open source software is climbing in this environment, which means more opportunities for the companies that have built their businesses around the open source Linux platform.
Red Hat, one of the most prominent commercial Linux vendors, reported its quarterly earnings Thursday and revealed that its total annual revenue was $652 million, an increase of 25 percent over the previous year. Subscriptions to Red Hat’s commercial support service, which accounts for $541 million of that revenue, were up 20 percent. Red Hat CEO Jim Whitehurst, a former Delta Airlines COO who joined Red Hat in 2007, cites the recession as a factor that has contributed to the company’s success.
“Our ability to demonstrate real value and deliver cost savings to our customers enabled us to achieve significant new milestones during the quarter,” Whitehurst said in a statement. “Our value proposition is even more compelling in a challenging economic environment, and we believe that’s a key driver to our solid financial results and market share gains.”
Red Hat’s strength is attracting the attention of market analysts and big players. According to a report from Reuters, a Citigroup analyst recently characterized Red Hat as “a tempting acquisition target” and asserted that larger technology vendors are becoming interested in the Linux vendor’s strategy.
Several analysts at other firms have suggested that Oracle could be a potential buyer. Although this notion has generated a lot of rumor and speculation, it seems very unlikely. Oracle already offers commercial support services on top of its own repackaged version of Red Hat’s Linux stack.
Oracle CEO Larry Ellison has expressed the belief, on numerous occasions, that acquiring Red Hat would make little sense for his company because the permissive licensing of the Linux distributor’s open source software products make it possible for Oracle to build a business around the technology without having to own it. Oracle has, however, acquired other open source companies, including embedded database vendor Sleepycat. Oracle also made an unsuccessful bid for MySQL—an open source database vendor that was eventually acquired by Sun.
Red Hat is expanding beyond its server platform roots and is exploring a lot of other areas. Its acquisitions of JBoss and Qumranet give it strong footing in the middleware and virtualization spaces. Although Red Hat is exploring other areas of the server space, the company has consistently rejected the prospect of making a major play for the desktop market.
At the Open Source Business Conference (OSBC) in San Francisco, Whitehurst reportedly expressed skepticism about the relevance of Linux on the desktop. In his view, Microsoft’s dominance in the desktop market is too deeply entrenched to shake. He also doesn’t see much opportunity for building a strong support business around the desktop. “First of all, I don’t know how to make money on it,” Whitehurst said, according to a report by Infoworld. “Very few people are running a desktop that’s mission-critical.”
Red Hat invests resources in desktop development projects and commercially offers desktop Linux distribution for enterprise and developing markets, but the desktop isn’t a core part of the company’s business. Red Hat has previously articulated a lack of interest in targeting the consumer desktop market.
Red Hat’s earnings report reflects its enduring strength in this difficult economic climate, but there are still a few risk factors for the Linux vendor. Red Hat’s courtroom woes continue: the company is discovering that the Java database technology that it acquired with JBoss is a lightning rod for aggressive patent litigation. Red Hat faces yet another costly lawsuit from a database vendor.
Another factor that could potentially have a detrimental impact on Red Hat’s support business is the growing number of companies that are eschewing expensive support contracts and are instead turning to free community-driven distros such as CentOS.
Despite these challenges, Red Hat seems destined to thrive. $652 million in revenue doesn’t come even remotely close to matching Microsoft’s tens of billions, but it’s definitely not pocket change, either. Red Hat has proven itself to be resilient and its ongoing success serves as a validation of its open source business model.