Cloud has been the bane of legacy vendors' existence. Not so with Red Hat, which not only found a way to get along with the public cloud, but also to thrive in it.
Red Hat's secret formula for making billions of dollars selling free software is not-so-secret, as I've recently written. What still remains somewhat shrouded in mystery, however, is what's driving Red Hat's business.
In a word: Cloud.
A year ago, analysts pointed to the cloud as a harbinger of Red Hat's doom. Today, those same analysts are slowly waking up to the opportunity that a multi-cloud world affords the open source giant.
"The issue with Red Hat has been that we've been saying cloud was good for us, that it makes us more strategic with customers," Red Hat CEO Jim Whitehurst told Barron's, "while the bear case was cloud was bad for us, because people would replace Red Hat infrastructure with cloud infrastructure."
Indeed, Red Hat's success is a sign that enterprises, while hot for public cloud, are pragmatic about how they get there. Many enterprises apparently want their preferred data center vendors to join them in the flight to the clouds.
Making money with new
Digging into Red Hat's earnings, the big driver of growth is cloud, with older businesses like Linux doing fine but newer, cloudy businesses like OpenShift booming.
A year ago Red Hat's biggest deal, worth over $20 million, was all about Linux. Today, dive into the details of Red Hat's 26 deals worth more than $5 million last quarter, and they're "virtually entirely OpenShift" or "primarily OpenShift," as Whitehurst told analysts on the earnings call. OpenStack also finds its way into some of those larger deals.
SEE: Cloud migration decision tool (Tech Pro Research)
Linux? Well, "None of them...were heavy, heavy, big [Red Hat Enterprise Linux]. [Yes] we had some RHEL in them, but they were primarily...emerging tech," Whitehurst said on the call.
What about middleware? "OpenShift drives greater affinity to our middleware," Whitehurst said on the call.
Does cloud, including OpenShift replace some middleware use cases? Yes, but "one of our real strengths is we can run both traditional stateful applications and cloud-native applications" using OpenShift, Whitehurst said on the call. As such, Red Hat has positioned itself for both the cloud-native and cloud-wary enterprises.
Throughout the earnings call, it's cloud that keeps raising all the other Red Hat boats, including more legacy products like RHEL and JBoss. It's a remarkable story and, again, it's one that suggests enterprises aren't jettisoning their technology investments as they move to the cloud, but rather are looking for ways to bridge their earthbound data centers with public and hybrid cloud services.
Opening the future
Given the magnitude of the cloud shift, it's likely that Red Hat can spend the next decade printing money by helping enterprises move to the cloud. In this world, OpenShift replaces RHEL as the foundational "operating system."
SEE: Here's Red Hat's open secret on how to make $3B selling free stuff (TechRepublic)
Over that same decade, however, Red Hat's next big wave will likely involve the open source machine learning/artificial intelligence projects that companies like Google keep releasing. In Red Hat's model, it doesn't need to originate the technology to profit from it. Instead, it gets paid for contributing to these projects and packaging them in such a way as to make them more consumable by enterprises. In a recent interview Whitehurst confirmed this, declaring, "Now that large enterprises are also contributing to open source, we have a virtually unlimited amount of material to bring our knowledge to."
In short, just as Google, Amazon, and Microsoft paved the way to the cloudy future that Red Hat's customers are happily paying it to pave for them, these same companies are releasing fantastic open source ML/AI that Red Hat will make consumable by mere mortals.
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