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During a Seismic Week for Open Source, Take a Lesson from Red Hat

This post from ZDNet and this one from Matt Asay provide some good angles on the momentous changes we've seen on the open source front this week. The fallout and immense industry changes that we're likely to see as Oracle digests Sun Microsystems are staggering to consider. As Dana Blankenhorn says, Oracle is going to control three "crown jewels of open source" in the form of Java, OpenOffice, and MySQL--among the most widely used projects and "among those with the largest developer communities outside Linux itself." Meanwhile Matt points out that only Red Hat is thriving as a public, pure open source company, which I would agree with. So what has Red Hat done right?

Matt writes:

"To both Sun's and Novell's 'burdens' we could add 'saddled with legacy, proprietary businesses.' This is Novell's albatross, one that weighs down every effort it makes to find a renewed brand and resurrected corporate fortunes."

Burdensome, legacy proprietary product lines have indeed weighed Sun and Novell down in recent times, while Red Hat has continued to deliver sterling financial results even during the economic downturn. It is indeed the only pure, public open source company and it is winning. I think there are two primary reasons why Red Hat's open source business model has proven so good:

1) The company has kept unwavering focus on its model for offering support and services for free, open source software. Unwavering is the key word there. Consider the quote from Red Hat CEO Jim Whitehurst that we ran here: “Our biggest competitor is not Microsoft, it’s not Novell, it’s people stopping paying us for support.” Boom, that's focus. Give people useful software for free, charge reasonable prices for the support they'll need, and grow the business. Novell and Sun, by contrast, have both engaged in many murky, messy business strategies that have nowhere near the simple elegance of Red Hat's model.

2) I'm also a firm believer, especially during these economic times, in Red Hat's practice of investing its considerable cash conservatively, outside of its software business. We discussed this here, and here, following an excellent piece of analysis from Savio Rodrigues called "Is Red Hat a Software Firm or Financial Institution?" There, Rodrigues showed that Red Hat gets nearly half of its earnings from an "Other Income" category on its income statements, where the other income comes from interest-bearing and other types of investments. By contrast, Microsoft, IBM and Oracle get less than 10 percent of their earnings from these types of investments. Red Hat's support business is strong, but its successful, conservative investing has kept its ship steady, strong, and--most importantly--safely diversified. I'm also betting that if interest rates rise, which they have to do at some point, Red Hat's investments will benefit.

There are other, newer companies with promising open source business strategies that bear strong similarities to Red Hat's. We wrote about Cloudera's here. The company offers commercial support for the open source Hadoop project, which facilitates cluster-based uber-searches at many organizations, including Yahoo!. Likewise, Acquia offers a commercially supported version of the open source Drupal content management system. As the platelets shift in the commercial open source arena, I'm betting that these types of support-focused models will emerge victorious, as Red Hat's has.
 

• mysql
• OpenOffice
• Sun Microsystems
• Acquia
• Red Hat
• novell
• Cloudera

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