Software

Here's Red Hat's open secret on how to make $3B selling free stuff

There are only two ways to make money with open source, Red Hat's CEO says. Pick one.

Red Hat just pulled off an astonishing feat: While most of the legacy tech vendors have struggled to react to tech trends like open source and cloud, Red Hat just churned out its 64th straight quarter of total revenue growth. For those struggling to do the math, let me do it for you: Red Hat hasn't seen a quarter where total revenue didn't grow for 16 years.

On the company's most recent earnings call, Red Hat CEO Jim Whitehurst explained how the magic works. With open source, he said, there are only two ways to make money, and most companies can't figure out either of them.

Sharing secrets

Whitehurst isn't one to keep secrets, and earlier this week he gave away the keys to the Red Hat kingdom:

[There have] only been two successful models for monetizing open source. One is the public cloud model (...offering open source as a service) and then [there is] Red Hat's model, which is to be a significant contributor and offer on-premises [software] and drive roadmaps for customers, et cetera.

Buried in that "et cetera" is a fair amount of detail as to why "being a significant contributor" matters so much. The more code you contribute, the more you can influence project roadmaps to the benefit of your customers.

Interestingly, he didn't say "be the only contributor," which is where many so-called open source startups go wrong. Rishidot analyst Krish Subramanian nailed this when calling out that part of Red Hat's genius has come from "picking the right open source projects and contributing code to these projects. You can't win in open source without code contribution."

Red Hat doesn't want to be the sole contributor to a project, as the most interesting projects (to customers) will be those with vibrant communities upholding them. Instead, Red Hat just wants to be a top contributor.

SEE: Linux distribution comparison chart (Tech Pro Research)

Hence, in discussing Red Hat's Kubernetes competition, Whitehurst called out the "far gap" between Google, Red Hat, and the no. 3 contributor. Google monetizes Kubernetes through its cloud offering while Red Hat does so through both cloud and on-premises offerings (OpenShift). In third place? Well, whoever that is doesn't monetize it much at all.

As for Docker, the container darling that has belatedly realized that all the money in containers is in orchestration, generally, and Kubernetes, specifically, the company contributes very little to Kubernetes and earns proportionately little revenue.

"I don't see Docker in many of the deals that we are involved in," Whitehurst said. Despite the obvious bias, it's an entirely believable statement.

The truth shall make you money

What's somewhat bizarre is that Red Hat's model is now well-known. When I first dissected it back in early 2006, there was still mystery involved, but that was 12 years ago. Since then, Red Hat has applied its model to a range of other infrastructure software, moving beyond operating systems into middleware, virtualization, PaaS, and more.

Given the amount of money at stake, we should have several Red Hats by now, but we don't. In big data we have Cloudera, Hortonworks, and MongoDB, but none of them fully replicates the Red Hat model (though Hortonworks comes closest). In Cloudera's case, co-founder and chief strategy officer Mike Olson has gone on the record to declare, "You can no longer win with a closed-source platform, and you can't build a successful stand-alone company purely on open source." And yet...Red Hat has now surpassed a $3 billion annual run-rate. That's a lot of cash.

Of course, the public cloud vendors—or, at least, AWS—are making even more money by either selling open source as a service or by building their services on the back of open source projects, but competing with the public clouds is not for the faint of heart. MongoDB has enough developer clout that it has managed to build a significant business, with 11% of its revenue now coming from its cloud service, but most companies can't monetize open source as a service in the shadow of the cloud giants.

Which leaves us with the Red Hat model of monetizing open source, initially for on-premises deployments and now, increasingly, through its hybrid cloud approach. It's an open secret as to how to do it, yet few seem willing to follow Red Hat's lead. That's a pity.

Also see

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Image: Red Hat

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.

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