OpenStack is driving mega-deals for Red Hat, but it isn't the best foundation for Red Hat's future. OpenShift, on the other hand, offers a promising alternative.
Just because one can make money from OpenStack doesn't mean one should. Red Hat, on its recent earnings call, gladly assumed the title of "Red Hat of OpenStack," meaning the "vendor that does certification and confidently allow[s] both hardware and software vendors to participate in the ecosystem." In a similar vein, I've called OpenStack Red Hat's "Linux moment," a chance to productize the growing cloud movement.
But OpenStack is arguably the wrong cloud for Red Hat. Sure, there's real money for Red Hat in OpenStack. Even so, it may not be the best kind of money upon which to build Red Hat's future. OpenShift is the better path.
Addicted to OpenStack
Red Hat's earnings call was awash in OpenStack, with 56 mentions of the cloud tech. (OpenShift, the company's promising PaaS offering, got 32.) Red Hat CEO Jim Whitehurst was quick to stress private cloud-oriented OpenStack's limited suitability to replace public clouds like Amazon Web Services or Microsoft Azure, noting that "a few quarters ago there were a lot of people thinking that OpenStack was going to be their savior against public cloud," an idea he dismissed as wrong-headed.
SEE: Why Red Hat's OpenShift, not OpenStack, is making waves with developers (TechRepublic)
Still, Red Hat was happy to trot out OpenStack as a savior of its earnings growth, if not its future against the public cloud:
- One-third of Red Hat's largest deals in Q4 involved OpenStack
- Over 500 customers have bought Red Hat's OpenStack distribution
- Three of its largest four deals, each over $10 million in revenue, revolved around OpenStack, with 11 deals in the quarter involving OpenStack (nine included OpenShift)
- OpenStack deals are considerably larger, on average, than OpenShift deals, in part because they bring Red Hat Enterprise Linux (RHEL) subscriptions along with them
- Though OpenStack (and OpenShift) are currently "losing a lot of money" due to sales and R&D investments, they are perceived to be "stickier" technologies than RHEL with higher average deal sizes and less likelihood of self-support
Analysts have noted an acceleration of mega-deals for Red Hat. Whitehurst explained that the general trend is being driven by companies modernizing their infrastructure, but also that the very nature of OpenStack (and OpenShift) pushes for larger investments. (He specifically noted that an OpenShift deal is 20X pricier than a RHEL deal on the same server.)
It's easy to get addicted to such big deals, and to OpenStack for delivering them.
What's wrong with big?
One vertical that has particular interest in OpenStack is telecommunications, a relatively new market for Red Hat. Three of Red Hat's top-four ($10M+) deals included OpenStack as companies, with two of these deals coming from telcos. As ZDNet's Steven J. Vaughan-Nichols has written, OpenStack is "the telecoms' cloud of choice." Why? Because it enables them to "reduce deployment times for cloud 'zones' from months to days."
No wonder Telecom is the fastest-growing vertical for OpenStack deployments, as telcos build out their 5G networks (and struggle to keep up with 4G data demands). Such telco demand is a gift that keeps on giving to Red Hat, with Whitehurst insisting that "It's pretty safe to say that that new [5G] infrastructure will be commodity hardware running OpenStack," with Red Hat a primary beneficiary from that roll-out.
SEE: How Red Hat is making money on the public cloud with a hybrid approach (TechRepublic)
Underscoring this point, Whitehurst suggested that as big as those two telco deals were, they promise to get even bigger: "Those [deals] are for tiny, tiny components of their network at this point. As those things expand they can get quite large." Though financial services is Red Hat's biggest vertical, telecom is growing in strength. That affinity promises to grow more pronounced as OpenStack helps Red Hat grow earnings on the back of mega-deals.
Unfortunately, such deals could take Red Hat down a path that diverges from the needs of mainstream enterprises. Most companies aren't telcos, and most don't really need OpenStack. They do, however, need OpenShift.
AWS and the Plebeian cloud
Meanwhile, Amazon Web Services (AWS) is building out the cloud that powers the future, catering to a much broader array of developer needs. Amazon's ambition is so big, and so broad, that even Sir Martin Sorrell, CEO of the world's largest advertising agency, WPP, cited Amazon as his biggest concern on a conference call: "What worries [me] when [I] go to bed at night and wake up in the morning? It's Amazon."
Sorrell went on to describe Amazon as "frightening if not terrifying." The reason, as The Economist highlighted, is that Amazon has quickly ratcheted up the level of competition across a wide array of industries, and particularly enterprise IT: "Amazon's epic journey is forcing companies to lower prices and to improve products or to suffer." The only way to compete with Amazon is to offer a better product, preferably one that it doesn't offer.
On this score, Red Hat is safe. AWS has disdained to productize OpenStack. The reason, however, is that it (correctly) views OpenStack as a "Mom Jeans" attempt at relevance, a backward-looking attempt to dress up private data centers as cloud.
This is why I continue to believe OpenShift, not OpenStack, is Red Hat's future. Sure, OpenStack can fund a few years of growth catering to private cloud needs. OpenShift, by contrast, is a better answer for that "modernization" Whitehurst described. As he indicated, OpenShift helps customers that want "to run stateful applications and migrate existing WebLogic [and] WebSphere-type workloads onto a scale-out infrastructure." OpenShift makes it easy for enterprises to get real with containers and promises a better way for Red Hat to compete and collaborate with AWS for the future.
- Red Hat's OpenStack moment: Just like Linux in 2003? (TechRepublic)
- Why Red Hat's OpenShift, not OpenStack, is making waves with developers (TechRepublic)
- OpenStack: The telecoms' cloud of choice (ZDNet)
- How Red Hat is making money on the public cloud with a hybrid approach (TechRepublic)
- Red Hat goes all in on OpenShift and containers at Red Hat Summit 2016 (TechRepublic)