How Red Hat Kills Its Main Product And Become A Multibillion-Dollar Corporation

Fifteen years ago, Red Hat faced a fateful choice: to discontinue or continue to release the Red Hat Linux operating system, which gave the name of the entire company. The company realized that open source alone could not create a business model that could compete with Oracle and Microsoft corporations. Decisive action was required.

According to Paul Cormier, current Red Hat head of products and technology, who took over as vice president of development in 2001, Red Hat was to replace Red Hat from a small development company to become a major player in the enterprise software market. Linux is an enterprise-class software product that will keep the code open, but will no longer be free.

Cormier was called mad at Red Hat. “The developers were not worried about any business models,” Cormier says. “They just wanted to make Red Hat Linux.” So after the transition to a new business model, we had a certain turmoil, some of the developers left, but most remained. ”

Cormier’s proposal put at stake the fate of the company, but he defeated the skeptics having managed to convince then-CEO Matthew Szulik to stop producing Red Hat Linux. The last stable version of this operating system was released in 2003, at the same time the first version of the corporate distribution of Red Hat Enterprise Linux (RHEL) was released. Since then, the company has shown steady growth in revenue and profits, helped by the growing popularity of Linux-based servers and the successful expansion of Red Hat into new markets.

Looking back, it is obvious that Cormier’s risky plan turned out to be prophetic, although it seemed to many a complete nonsense. How did Red Hat manage to take risks, defeat and build on success?

Software, scooters and toy blasters

Red Hat was founded in 1993 by Bob Young and Marc Ewing, and owes its name to the hat that Ewing wore while studying at Carnegie Mellon University. But Ewing had already left Red Hat, and Young had left the company by the time Cormier arrived. His arrival coincided with the release of the new version of Red Hat Linux, and he remembers well his conversations of that time, including a conversation with the head of developers.

The people in the office, meanwhile, were riding scooters and firing at each other from toy blasters, it was cool.

Red Hat then earned the main money on technical support by phone, and Cormier understood that such a business model does not scale.

“We really had no business model,” he says. - Boxes with Red Hat Linux were sold in bookstores for $ 29.95, and it could also be downloaded for free from the Internet. At that time, we had perhaps a dozen clients who paid us money, mainly for telephone calls. And we knew that all this did not scale: people simply did not understand what it was worth paying for. ”

Cormier recalls the many late-night meetings at which he urged top executives to replace Red Hat Linux with Red Hat Enterprise Linux, which from the very beginning will be offered only on a paid subscription basis, including for any updates, patches, and patches. According to him, the process was tight, because in search of a strategy that could bring the company billions of dollars, the management did not want to abandon the terms of licensing open source software.

Cormier won, but Red Hat still maintained the practice of free distribution of software. While RHEL brings money to the company, the spirit of the first Red Hat Linux lives on the Fedora operating system, which was first introduced in 2003 and based on Red Hat Linux code, and is now developing as part of the Red Hat-sponsored open-source project. Today, Fedora serves as a sort of testing ground for new features and technologies that are then offered to corporate customers as part of the commercial RHEL product.

RHEL source code is also available under the terms of the GPL (GNU General Public License) and can be freely compiled by anyone. But here Red Hat provides ready-made products based on this code only for money. Yes, there is such a thing as CentOS, a free RHEL clone compiled from Red Hat source code by CentOS developers. But this does not prevent Red Hat from charging a fee for subscribing to RHEL, since it is believed that only a subscription to RHEL guarantees the functionality of applications written for it after updating the operating system.

“The Red Hat Enterprise Linux binaries, the very binary that runs on the computer, are not free,” says Red Hat CEO Jim Whitehurst. - The source code is free and available to everyone. But we compile the binaries, and it is we who make the enterprise-class product from them. ”

For large customers, it is equally important that every two years Red Hat releases RHEL versions with the so-called long-term support. These versions have been supported for ten years, even to the point that Red Hat keeps track of critical Linux patches and portes them to older versions of its operating system.

“Put yourself in the shoes of the New York Stock Exchange, and you will realize that the frequent change of versions of the operating system on which you are built is what you least want,” says Whitehurst.

If Red Hat continued to distribute software and sell technical support for free, “it would remain a tiny company on the verge of profitability,” adds Whitehurst.

Red Hat Linux was very similar to today's Fedora with its high release rate in order to offer users the latest technology. But new versions and corrections often disrupted the functionality of old applications and did not leave a chance for the formation of an ecosystem of third-party software and hardware solutions. With the transition to RHEL, Red Hat was able to offer corporate customers exactly what they needed: a stable life cycle and clear release plans, as well as a streamlined scheme for installing software patches without risking disruption to the system and applications. And this model, of course, has proven its viability.

Patent Troll Invasion

With rising cash receipts, Red Hat has been targeted by patent trolls and particularly zealous open source software advocates. Despite an unusual position for software companies - Red Hat openly opposes the very concept of software patents - the company has developed a pragmatic strategy for acquiring security patents. Red Hat goes to court when it comes to fundamental principles, and resolves less important disputes out of court if it comes out cheaper.

“If you accept the concept of modular innovation, where many different people contribute to progress based on the achievements of their predecessors, then it becomes obvious to you that patents only slow down the process,” says Whitehurst. “I don’t think that we are so different from any other software company, we just have to deal with a huge mass of patent trolls.”

Red Hat lawyers always have court cases, especially in the East Texas County Court (known as the “patent lawsuit”). The company even somehow teamed up with its long-time rival, Novell, to win the case in 2010 with the “daughter” of the famous patent troll Acacia. Moreover, the new partners once prepared a joint expert opinion on behalf of Microsoft, which was needed when considering some kind of patent lawsuit.

However, Red Hat does not shy away from solving problems with money. In particular, in April 2011, the company went to an out-of-court settlement with Acacia, and in 2008 paid $ 4.2 million in a lawsuit by FireStar Software.

By the way, Red Hat software subscriptions provide customers with legal protection against lawsuits involving the use of Red Hat software. The fact is that patent trolls often attack not Red Hat itself, but its customers, and then the company, as a rule, takes a hit on itself.

“Sometimes customers call us and say that they were sued for using our products. Then we defend them, ”says Whitehurst. - We strive to resolve each case in an optimal way. We prefer to sue someone, because their patents are not applicable for one reason or another. One can only negotiate with someone outside the court. Moreover, we usually conclude a pre-trial agreement so as to exclude not only our customers, but also all users of the corresponding program code from the impact. ”

Despite the troubles with patents, Red Hat has become one of the leading players in the enterprise server market, focusing on what it does best: creating superior software.

“We never come to the client and say:“ There is one application that is not supported on the RHEL platform, ”says Cormier. “If it is supported on Windows, then it is supported on RHEL as well.”

Daniel Vandemore, chief architect at Net-Results, has been working with Red Hat solutions for over a decade and agrees that moving to a balanced release strategy has greatly enhanced Red Hat's appeal to corporate customers.

“Packaging applications for a frequently updated distribution is like trying to catch a falling knife,” says Vanimore. - Literally everything, from the new version of glibc and down to such trifles as changing the version of MySQL, can hurt the performance of your application. In this case, there are so many possible configurations that if you try to test them all, then there may not be time for development. Harnessing this unpredictability and providing RHEL support over the years, Red Hat has significantly increased the attractiveness of its operating system for third-party software vendors. ”

On the way to the third billion

In 2012, Red Hat crossed an important milestone and became the first company in history whose annual revenue was one billion dollars and was fully (or almost completely) obtained through the development and maintenance of open source software. In 2016, the company consolidated its leadership by reporting on the achievement of two billion dollars in revenue, and by the end of 2017, it is striving to take the new bar - three billion dollars.

Having acquired RHEL, the company began an active expansion and soon began to outperform competitors such as Novell, which, after a long and slow fading, was sold to Attachmate in 2010. Red Hat has long been no longer limited to operating systems, and today it offers almost all types of software that may be required in the data center when deploying and running applications, including solutions such as middleware, storage systems, security tools, virtualization systems, and management tools. Red Hat’s total revenue for the three quarters of this reporting year was $ 2,148 million (net profit of $ 271 million), and Red Hat is expected to break the $ 3 billion mark by the end of the year (the results will be officially announced at the end of March).

Just ten years ago, Red Hat's annual revenue was $ 523 million, reaching a billion by 2012. At the same time, the bulk of the money comes from subscriptions to software, the rest of the money the company earns on training and services.

“This is just another, one of many, evidence that open source software is a fundamental part of IT infrastructures,” said Jim Zemlin, head of the Linux Foundation. “Red Hat has proven that it’s a viable business model, that it’s the best way to distribute software, and that you can make good money from it.”

Red Hat does not think to stop. In 2006, the company made a major purchase by acquiring the development company JBoss Middleware. In November 2010, Red Hat bought Paara's PaaS solutions provider Makara, in October 2011 - Gluster, a software storage system developer, and in June 2017, Codenvy, a Ukrainian-based company that provides online development tools for modern container and cloud applications.

VMware “significantly ahead” of Red Hat in virtualization

Red Hat solutions for data centers are in no way inferior to Microsoft's offerings, and at the same time they do not have the restrictions typical for proprietary software. However, Red Hat management believes that the main rival of the company is not in Redmond.

“We barely run into Microsoft,” says Whitehurst, noting that Red Hat mainly deals with those who have migrated or are transitioning from Unix to Linux, and its main competitors in this field are Oracle and IBM. In the future, according to Whitehurst, Red Hat will grow due to IT infrastructures for public and private cloud environments, as well as for solution providers of the “Software as a Service” class . And here, first of all, there is a struggle with VMware virtualization systems.

Many people think that Red Hat is too much for it. VMware dominates the server virtualization market, and now its main rival is Microsoft Hyper-V. Citrix closes the top three with its open-source hypervisor Xen, while Red Hat and Oracle are still struggling for fourth place.

The Red Hat virtualization platform is based on the KVM hypervisor, which today occupies less than one percent of the market, said Gartner analyst Chris Wolf. In his opinion, Red Hat has good technology, but "first, it will have to bypass Oracle, which today takes virtualization very seriously."

Red Hat Launches a Brand New Specialized Virtualization Product called Red Hat Virtualization (RHV) , which offers many new features and is finally equipped with a management system that is not tied to Windows Server, which is important for those who want to use only open source software such as Java, JBoss and RHEL. But according to Wolf, Red Hat is far inferior to VMware in integrating its virtualization tools with third-party backup, security, and disaster recovery solutions.

Whitehurst looks at things more optimistic: “They are significantly ahead of us in virtualization, and we are ahead of them in operating systems and middleware. And when it comes to application portability between enterprise data centers and cloud environments, all three factors are important. "They came off a lot in one of them, but we have a huge advantage over the other two."

Disputes about terms and fidelity to principles

Not everyone agrees to call Red Hat the first ever open source company to break the $ 1 billion mark. As Linux developer Greg Kroah-Hartman points out, the Google, Facebook, and Amazon businesses are also open source, and Linux has already brought IBM billions of dollars.

“There are many large companies that rely only on open source software and are actively involved in Open Source projects,” he says. “And they have long gone beyond the billion dollar mark.”

Yet Red Hat is truly unique in that it makes almost all of its money from developing and selling open source software. Red Hat is also the largest contributor to the Linux kernel development project. As Croa-Hartmann admires, “they are doing a great job, allowing their employees to make a big contribution to open source projects. I really like everything that they have already achieved and continue to do. ”

However, Croa-Hartman points out that Red Hat “has proprietary software and it sells it,” which raises debates about whether Red Hat can be called an open source company.

I must say that, acquiring proprietary technologies, Red Hat eventually translates them into open source software, as was done with the JBoss Middleware line.

In 2011, Red Hat itself fueled debate about its loyalty to Open Source principles, when it stepped back from generally accepted source code practices in an attempt to protect RHEL sales from attack from Oracle.

Oracle has released its Linux distribution, which, like the CentOS distribution, is built on RHEL source code, and has begun to actively lure Red Hat customers by offering technical support at lower prices. In response, Red Hat decided to make it difficult to create third-party distributions based on its code and began to provide it in an already final, integrated form, without a generally accepted division into the canonical Linux kernel and additional patches for it.

Croa-Hartman argues that this did not pose the slightest problem for distribution developers. This move of Red Hat did not affect the release of new versions of CentOS, but it fits well with Red Hat's long-standing desire to make money on open source code without violating the GPL license.

“To be honest, Oracle said plainly:“ This is a complete copy of Red Hat, and we offer it cheaper than Red Hat, ”says Whitehurst. “We had to protect our business model, because if we were not successful, Oracle would hardly begin to distribute its source codes as we distribute them, to the same CentOS and everyone else.”

Can Red Hat be a success again?

According to Whitehurst, the market is full of space for those wishing to repeat the success of Red Hat. Annual sales of enterprise software are more than $ 180-200 billion, of which only $ 30-40 billion falls on the segments in which Red Hat is present.

“There are huge sectors where we are not present in any form,” says Whitehurst. “The same DBMS.”

Jim Zemlin, the head of the Linux Foundation, has many examples of the fact that today the innovations are created by young companies, among which he distinguishes the developer of Hadoop-solutions Cloudera, as well as SugarCRM. Zemlin believes that there will be more than one Red Hat company in the world, noting that the success of the Open Source movement depends on both those who create innovative products based on open source software, and those who, like Red Hat, develop and sell open source software products .

According to Zemlin, without open source (Red Hat client), Google, Amazon, and Facebook would not be what they became.

“I think there will be more companies such as Red Hat , but such a question narrows the scope of such a concept as success using open source software,” says Zemlin. “In fact, you need to look at hundreds and hundreds of companies that take open source and achieve tremendous success in business, using this code in a variety of ways.”