Open Source

Why Red Hat is happy to have others make billions on its open source dime

Red Hat is targeting $5 billion in revenue for itself, but it is enabling other companies to make much more than that using its products.

redhat.jpg
Image: Red Hat

Red Hat generates $2 billion in annual revenue but, by its CEO's own admission, that's not nearly as much value as it gives away. In a recent interview, Red Hat CEO Jim Whitehurst likened his company to a machine tool manufacturer in the Industrial Revolution—a company that does well, but not nearly as well as the companies that put those machine tools to use to build, for example, cars.

And yet Red Hat—on a "mission from God" of sorts—seems perfectly happy with its role as enabler of other multi-billion-dollar enterprises.

$5 billion for building others' dreams

Red Hat has always been a somewhat religiously ambitious company, one that embraced an almost zealous antipathy toward proprietary software. Over a decade ago, I flew out to the company's Raleigh headquarters for a job interview, and distinctly remember bragging about how I had helped introduce an innovative open source-plus-proprietary software business model into my company. The interviewer, a developer, looked at me blankly and asked, "Why?" Confused, I asked, "Why what?" To which he responded, "Why would you have proprietary software?"

It was not a question that would have made sense anywhere else, but at Red Hat it was gospel.

SEE: The world is swimming in open source, but only one company is making any money

Today, the company is a bit less religious about the software it uses. Though the company once stuck to a 100% open source stack inside the company, filled with Linux desktops running OpenOffice, Zimbra, and more, today's executives are far more relaxed about using the tools that best help them do their jobs, whether it's a Mac or (gasp!) Microsoft software.

Where they haven't relaxed their standards, however, is in the software Red Hat delivers to its customers. In this, the company makes no compromises, largely because it no longer needs to. As Whitehurst declared: "Open source basically has become a place where user-driven innovation happens in software." This is particularly pronounced at the infrastructure layer, leaving plenty of room for proprietary innovation at the application layer, as Whitehurst said, "most infrastructure is going to be open source and most business functionality above it is going to be proprietary."

Intriguingly, Whitehurst seemingly admits that the latter is a much more lucrative market.

Getting rich off my labor

If so, he wouldn't be the first. Wall Street insider Peter Goldmacher once characterized the relative levels of "winning" in big data. Goldmacher tiered winners into three categories, with the Red Hat-like companies at the bottom of the pyramid.

"The Big category of winners is the infrastructure providers like the Hadoop vendors and the NoSQL vendors," Goldmacher wrote. "These are critical enabling technologies and the winners here have very bright futures as we believe these are the technologies companies will build businesses on for decades to come."

SEE: How Red Hat is making money on the public cloud with a hybrid approach

Goldmacher, like Whitehurst, points to those that build on open infrastructure as a much bigger category of winner. Whitehurst, for his part, likens companies like Red Hat to "machine tool" vendors in the midst of the Industrial Revolution:

If you go back and think about the industrial revolution [during the early days of automobiles], the winners weren't the people who made the machine tools. It was Ford and GM and these mass manufacturers who used the machine tools everyday and ultimately perfected the technique of mass manufacturing. To some extent I think that's happening a bit in technology. It's not exclusively web companies, but that's an easy one to put your head around and see the key drivers like Google and Facebook.

A quick look at the revenues and market capitalizations of Google and Facebook would suggest that Whitehurst is right: These companies that are building on open source infrastructure are dramatically bigger than Red Hat. In comparing his company to other, less successful open source companies, Whitehurst pointed to their business models as problematic: "If you don't have the unique business model that allows you to add value on top of the free functionality, in the end you're going to fail."

Or, in the case of Red Hat, succeed, but make a lot less money than a Facebook (or even a Capital One, which is also increasingly driven by open source) in the process. Red Hat is now targeting $5 billion in revenue, which will be a stretch for the open source leader, but one the cloud should help it reach.

In the process, the company will deliver far less revenue than the companies it helps to enable. Somehow, I don't think it will cry over the loss. For a company as committed to enabling open source infrastructure as Red Hat, real success isn't a revenue goal, but rather the revenue it enables in others.

Also see

About Matt Asay

Matt Asay is a veteran technology columnist who has written for CNET, ReadWrite, and other tech media. Asay has also held a variety of executive roles with leading mobile and big data software companies.

Editor's Picks