
Why There Will Never Be Another RedHat: The Economics Of Open Source - kanche
http://techcrunch.com/2014/02/13/please-dont-tell-me-you-want-to-be-the-next-red-hat
======
hdevalence
It's an interesting worldview where growing a company to an $11bn market cap
counts as only a 'lukewarm success'.

It's not super clear why Red Hat's market cap of "only" $11bn means that their
business model doesn't work. It would seem to me that it works pretty well --
to the tune of $11bn.

~~~
mattzito
I think it's more that the economics of RHT are skewed compared with the
marketshare that they've got.

That is, Red Hat has basically won the enterprise datacenter Linux war. It's
Red Hat Linux and Windows, at the cost of Solaris, AIX, HP-UX, SLES, and
others.

And despite that crushing success, and having no worlds left to conquer in the
OS space, their market cap is only $11b. Salesforce.com has a 12% market
share, and they have a $38b market cap.

EDIT: just cleaned up "Linux" vs. "Red Hat Linux"

~~~
cortesoft
Most people I know running servers don't use RH... they use debian or ubuntu.

My company (15k+ servers) uses ubuntu.

~~~
mattzito
Tends to be the circles one runs in. For comparison, I don't have a single
customer that I know personally that runs Ubuntu as a platform strategy,
though I'm sure there's pockets of Ubuntu in many of them.

Our customers are big traditional enteprises, by and large. Banks, telcos,
manufacturing, oil and gas, etc. They love RHT, or if they don't love it, they
at least appreciate the stability and ISV support.

------
adwf
So many shaky premises here that I barely know where to start.

1) Canonical. You could have made the exact same argument as this article 10
years ago and said that there wasn't room for another RedHat. Canonical
arrived and proved that yes, there is room for another profitable Linux
vendor. I know I use Ubuntu server and am considering support contracts, so
there is definitely a market.

2a) So Redhat doesn't have the resources for development that Microsoft has
and therefore will produce an inferior product? Have you seen Windows 8?
Vista? Money does not guarantee success.

2b) Even without the same resources, the main Linux kernel has an enormous
number of top-talent developers working _for free_. This is a serious economic
advantage over traditional closed source companies.

3) Why on earth is the article comparing RedHat to Amazon? One is a Linux
distribution vendor, the other is a global internet shopping mall.

I'm sure others can provide more reasons. Or even counterpoints; feel free to
rebut ;)

~~~
Edmond
>2b) Even without the same resources, the main Linux kernel has an enormous
number of top-talent developers working for free. This is a serious economic
advantage over traditional closed source companies.

I am not familiar with the actual org structure of Linux kernel contributors
besides Linus being the leader but isn't it the case that most of the major
contributors are in fact employed by companies (including Red Hat)?

In other words not devoting their time working for free...or am I off?

~~~
adwf
For RedHat it's free.

[http://arstechnica.com/information-
technology/2013/09/google...](http://arstechnica.com/information-
technology/2013/09/google-and-samsung-soar-into-list-of-top-10-linux-
contributors/)

If 10% are paid by RedHat, 90% aren't - therefore count as free to RedHat.
Even then, the single largest group are non-aligned developers.

~~~
Edmond
I agree Red Hat and pretty much every other contributor's result is a net
gain. The point I was making is that the overall contribution isn't free. ie
the folks working on it are paid by various companies. I believe all the major
tech companies have a few devs that they basically loan out to the kernel
development effort.

~~~
adwf
Yes, there's potential for a Tragedy of the Commons style problem to happen
with kernel development, where each corporate developer suddenly decides to
save money and not contribute, whilst letting everyone else pay. Eventually
everyone would follow suit and nothing would get done.

Not exactly the same as the Tragedy of the Commons, but similar in the sense
that it works best when everyone works together.

NB: It's also important to note that some kernel work is actually on drivers
for specific products. eg. Intel's contributions are largely making sure that
all their hardware will work in a Linux server/desktop, not necessarily the
kind of general Linux ecosystem development that Canonical might do.

~~~
gizmo686
I don't see the tragedy of the commons concern here. Presumably, each company
is contributing because they need/want something with the kernel that is not
already being provided. Instead of keeping the development in house, which
would involve maintaining a fork and almost certainty breaking copyright, they
decide to contribute it back to the mainline kernel. At the point where no one
wants to contribute, I would expect that the expected value for some companies
of having a single employee work on the kernel is greater than the That this
happens to benifit everyone else is just a side effect.

------
arca_vorago
Please, don't start pushing SaaS into FOSS under the guise of profitability.
Sure, I'll admit that the support model (RedHat) has it's issues and probably
keeps profits lower than competing proprietary solutions, but lets not forget
the third model: up front sales.

Here's a problem I run into frequently: I have a problem, but as a look for a
software solution to that problem, I find 3 potential solutions. Of those
solutions, one is a random sourceforge mish-mash that hasn't been maintained
in years, and the other two are proprietary closed source solutions (which I
try to avoid whenever possible. Why should I trust some random small company
I've never dealt with to not be malicious or incompetent?)

What I really want is a good, up to date software that I can pay for, but is
still open source. I think too many people have forgotten that open source
doesn't mean that you have to release the code in public for all to see on
github et al, it just simply means that you have to provide the source.

So unless you are a customer, you don't get access to the source (unless the
customer then shares it... this is probably one of the few areas I think that
needs more debate in the GPL vs MIT war.)

With all of the revelations of the NSA, I think any business that deals with
sensitive information in any way has a responsibility to 1) move away from
SaaS and cloud computing, and 2) move away from proprietary whenever it is
possible to do so without negatively impacting business operations.

We need to reclaim control of our data, as users personally and in business,
and the only way we reliably do that is with decentralized, locally controlled
FOSS.

------
wmf
I have a small disagreement with the market cap/revenue argument: "its key
point of failure is that the business model simply does not enable adequate
funding of ongoing investments." Red Hat never intended to become as big as MS
(they've repeatedly claimed their goal was to actually shrink the OS market by
selling Linux cheaper) because they don't have to fund the entire development
of Linux themselves.

~~~
dredmorbius
_they 've repeatedly claimed their goal was to actually shrink the OS market
by selling Linux cheaper_

And they shrunk Sun right out of it (along with the other legacy Unix vendors
for the most part).

I'd argue that it's Microsoft which is the anomaly.

Your post really ought to be more widely recognized.

------
davidw
The economics of open source software is fascinating.

I think the best model for open source is to be the "base of the pyramid",
with companies adding a little bit of proprietary stuff that differentiates
them at the top, and collaborating on the infrastructure below. Stuff like
Ruby on Rails works this way, with Basecamp being the point of the pyramid,
and Rails, Ruby, Linux, Mysql etc... being all the stuff it's built on.

~~~
dTal
If you start with GPL stuff (and in my experience most of the really good open
source software is GPL), it's very difficult to sell the resulting proprietary
product, as you must provide the source on request and you cannot prevent it
from being shared; thus, anyone can build it themselves (some projects I've
seen that use this model deliberately make their build process tricky, I
suppose to encourage sales-by-laziness - Apple is the king of this with their
essentially-unbuildable releases of Darwin).

No, I rather think the best model is the one where software is treated like a
public resource; the knowledge commons. A lot more companies are interested in
using software internally than in selling it, and many will already have in-
house software developers to build their business-specific systems. It makes a
lot of sense for companies to pool their resources on common software problems
that they all need to be solved and aren't their core focus.

In a sense, your "base of the pyramid" is something of a special case for this
model. Basecamp is software-as-a-service, and Ruby on Rails is utility
software designed for the express purpose of creating software-as-a-services.
It's to be expected that, as free software gains momentum, the first companies
to benefit will be the ones that build applications that need to run on
reliable, non-locked-in stacks, because a reliable, non-locked in stack is the
first thing that free software needed to build. In the long term, though, I
hope that really substantial "user-facing" software gains enough critical mass
to become the de-facto standard - for example, Blender or GIMP. In such a
scenario, any business that needed an off-the-shelf 3D editor or image editor
but also developed in-house software (for example, Pixar) would find it in
their interest to patch bugs and generally improve the software that they use,
even though they don't sell it.

~~~
Edmond
>In the long term, though, I hope that really substantial "user-facing"
software gains enough critical mass to become the de-facto standard - for
example, Blender or GIMP. In such a scenario, any business that needed an off-
the-shelf 3D editor or image editor but also developed in-house software (for
example, Pixar) would find it in their interest to patch bugs and generally
improve the software that they use, even though they don't sell it.

I think this is the Achilles heel of free software. It works well for
infrastructure software such as OS and middle-ware solutions but doesn't and
cannot work well for end-user applications.

When you are working on the Linux kernel you only need to concern yourself
with the correctness of your solution. When you build end-user applications it
is an entirely different concern, you can have the best technical solution and
still fail to address users needs. The moment you decide user needs are a
priority, your cost is going to go up and more importantly the community
strength is likely to falter because a good chunk are going to feel
unrepresented.

Whether we like to admit it or not, software developers tend to build products
for other developers, no matter how much they try the end result will end up
appealing more to developers than the general population. This is illustrated
by the weak show of Linux on the desktop, for years they've tried but not much
has changed.

This also happened with smart phones, some might not remember but one of the
first truly exciting mobile devices where the Nokia 770 & N800 internet
tablets, they were awesome devices but alas were quickly supplanted once the
iPhone made its debut. I think this shows that while those devices were
awesome (full linux in your pocket, which geek wouldn't love that?)to us as
developer they failed to address the general population's needs.

The most successful end-user open source application so far is Firefox and
that is because Mozilla is basically a quasi business organization and are
able to approach developing Firefox like a commercial product.

~~~
zanny
> Whether we like to admit it or not, software developers tend to build
> products for other developers, no matter how much they try the end result
> will end up appealing more to developers than the general population. This
> is illustrated by the weak show of Linux on the desktop, for years they've
> tried but not much has changed.

I'd like to think if we ever got a sizable enough install base on an open
technology, the raw user base would sustain development through bug bounties
and feature sponsoring. I still believe the most pure form of software
development is someone paying you to fix their problems on a public codebase.
They want it fixed, they pay to see it happen, and everyone benefits.

The problem, though, is that almost all consumer facing software doesn't see
fundage through its user base - Photoshop, for example, is probably one of the
most pirated pieces of software in history. It makes money through businesses
buying business contracts for tens of thousands or millions of dollars to
deploy it in the enterprise because they can't risk the gray space in buying
one copy and sharing it around the office.

And businesses aren't going to be charitable to fund the development of their
tools, even if they would be saving tons of money over paying out corporate
contracts to the likes of Adobe.

------
jlawer
The redhat model is really an outgrowth of the open source consulting model.
If you look at smaller companies there are hundreds of projects that have
spawned companies doing consulting, custom development and professional
services.

Red Hat is unique mostly because they have been able to grow to this massive
size. Part of this was initial capitalisation, part of it was right time,
right place and mostly the fact that they have been able to add value to end
customers more then their competitors.

XenSource had the problem of many other providers taking their output and
repackaging it into a better product for customers (Amazon takes Xen, makes
AWS. Other companies build their own virt products around it. If Xensource was
the best virtualization platform and people had flocked for it, they would
have been able to build a solid revenue from enterprise customers who required
the guarantee of support for their mission critical workloads. Unfortunately
there are lots of virtualization platforms around and I never found anything
compelling in XenSource's Offering. VMware & HyperV have all the 3rd party
support, oVirt / RHEV / OpenStack fill the cheap end.

I accept that with what the market wants Open Source companies of the size of
Red Hat are rare, mostly because investors want larger returns, however this
doesn't mean a open source company can't be profitable and grow to this size,
it will just be significantly slower. Companies in the space typically will
have a slow but solid growth pattern when firing on all cylinders, Not the
'hockey stick' growth curve many investors are looking for.

------
anon4
I've been wondering for a while if a company can work on purely open-source
software and profit from the software itself, rather than only from the stuff
that happens around it. The idea that I've been thinking over is a
subscription for voting on features. That is, a user of the software will pay
some monthly amount and get some number of votes for directing what new
features will be implemented. Making sure that votes work properly and oft-
requested features by people with low voting power still get implemented
timely is one problem. Another is for companies that just want one bug fixed
or feature added and aren't interested in long-term contribution. They could
be easily outvoted by long-term contributors.

Has something like this ever been tried and how did it work or fail?

~~~
bpowell
Unicon Inc, [http://www.unicon.net/](http://www.unicon.net/), partly does
this. They cater to higher education with software like uPortal, CAS, and
uMobile. All of these software products are open source, but they make money
off of a support model like this. Universities that pay them for support can
vote on features that they want worked on. I do not work for them, but my
employer does use them for our student portal.

------
cwyers
What a ridiculous comparison of apples and oranges and peaches and pears and
plums and bananas. Amazon isn't even remotely in the same business as Red Hat.
Microsoft is in the business of providing enterprise operating systems, but
that's far from it's only line of business. Using Oracle as an example of how
"selling support for open source software" isn't a repeatable business model
ignores how Oracle is copying Red Hat's model, and in fact some of Red Hat's
source code.

Is it true that Red Hat doesn't have the money to invest in improving RHEL? I
don't know (although I suspect it's not true), but the article spends zero
time on anything that would demonstrate that.

------
jfasi
What prevents RedHat itself from transitioning to the open source platform
model this article touts? They've put out OpenShift, which is a Heroku-style
deployment clone, so they're at least making steps in this direction.

------
Uhhrrr
There are other RedHats already, SUSE and Canonical among them. So the article
is flawed halfway through the title.

------
dredmorbius
You could apply logic similarly to why there will never be another Microsoft.

If you look at it, Microsoft was a tremendous outlier. Not only was it the
biggest licensed software giant, it was the _only_ licensed software giant. By
profit margin, until Apple and Google came along, nobody could compare.
Cranking out CALs is literally printing money. And by revenues, the only
companies which _could_ compare were principally large integrated service
providers: Oracle, IBM, SAP, PeopleSoft and Big N consulting firms' software
divisions, producing custom software solutions selling brains by the bucketful
(a notoriously difficult business to scale).

As wmf notes here, Red Hat's stated aim was to take the money out of the OS
market (and put it in users' pockets), a task with which they were eminently
successful -- they de-monetized Sun right out of existence, along with most of
the proprietary UNIX market and much of Microsoft's server side.

The real value of free software is in enablement, which is why I see Google,
Yahoo, Amazon, Facebook, and other companies built on the back of free
software as its true legacy.

Of the companies Levine compares RH to, Microsoft is stumbling badly and
Oracle has pretty much proven itself the place free software projects go to
fork. VMWare is based on services to the free software (and proprietary)
world, Amazon I've already defined as being build _on top of_ free software.

This article is sorely nearsighted.

~~~
dredmorbius
I thought I'd written about this elsewhere. Turns out I had:

[http://np.reddit.com/r/dredmorbius/comments/1wsc0q/microsoft...](http://np.reddit.com/r/dredmorbius/comments/1wsc0q/microsoft_isnt_just_the_most_successful/)

------
mindcrime
Oh golly, gee whizz, I guess we should just close our doors and shut down
then. Peter Levine thinks you can't make money as an Open Source company...
well, that sums it all up.

Wait a minute.

Fuck that.

I know Peter Levine is smart and well-respected and all that, but this is so
much bullshit. For starters, all he really said, for using all those words, is
"it's hard to build a business to the size of Oracle or Amazon or Microsoft,
around a core of Open Source".

No. Fucking. Shit.

Really?

It's hard to build a business like Microsoft, Amazon or Oracle??? You're
kidding me, right? I mean, it's _not_ like any of those companies are atypical
outliers in any way, right?

So, if we just take all our source, close it, and move to a proprietary
business model, then we should have no problem building "the next Microsoft"
right?

Also, am I wrong in thinking that Amazon is hardly even in the same business
as Red Hat? What are they even doing in this comparison?

I dunno, color me biased (I am) but isn't Peter _really_ just arguing that an
"open source" company isn't going to generate the returns necessary, in the
required timeframe, to justify investment by Andreesen-Horowitz? Because
honestly, that's all I'm hearing. Nobody says you have to become "the next
Microsoft" to be successful... well, nobody except Peter Levine, I guess.

Meanwhile, SugarCRM, Alfresco, Red Hat, Cloudera, BonitaSoft, JasperSoft,
Pentaho and a whole laundry list of companies are making money "selling open
source". Are any of them going to IPO? I don't know, but from where I'm
sitting, that isn't the point.

All of that said, where I wholeheartedly agree with Peter, is the bit about
adding a SaaS element with the underlying technology as a platform. At
Fogbeam, I expect we'll have a traditional "support subscription" (ala Red
Hat) model going for a long-time to come, but we are definitely starting to
move in the direction of building purpose-specific / vertical aligned solution
on top of our base stack, and delivering those as SaaS offerings. Personally,
I see those as complementary strategies, and not mutually exclusive.

------
cdooh
I don't really see why this may be a bad thing, the open source community
continues to grow just fine and code contributions and stuff still happen.
When I first read the title thought he'd be talking about how it's impossible
to make money off opesource but that wasn't the case

------
pessimizer
Who cares about revenues? Of course the revenue is going to be higher at
companies that sell software and hardware rather than support it. Costs are
going to be higher too, for a company that has to write all of their software
without help.

------
na85
I started reading this article waiting jadedly for the inevitable call to move
to "X as a service!!!!1oneone".

Sure enough, the article did not disappoint.

XAAS pretty much requires a cloud-based system, and public trust in the cloud
is rapidly diminishing.

------
mindcrime
I just realized that there is another point that Peter totally skips over in
this analysis... the value of community good-will, and the effect that has on
the economics. For example, I'd bet money that a far larger percentage of Red
Hat's customer base fundamentally _like_ Red Hat, than the corresponding
percentage of customers who _like_ Oracle or Microsoft. Maybe I'm wrong, but I
suspect that RH have lower customer acquisition costs and don't have to spend
as much on advertising, since their product itself (in open-source form) _is_
advertising for the company.

------
brudgers
Joel Spolsky talked about building a free platform and living off the exhaust
fumes here:

[https://news.ycombinator.com/item?id=6462430](https://news.ycombinator.com/item?id=6462430)

That's really the RedHat model. They just happened to get in early in an area
that scaled well.

------
sounds
I agree with Levine's conclusions, but the reason Red Hat is successful in
spite of "selling a slightly better road" is simple. (The car analogy really
helps this.)

Unlike the other open source efforts Levine lists, Red Hat sells Free
Software. Now, hang on just a second and hear this out: it's not that Red Hat
is _evangelizing_ like the FSF does.

Red Hat has simply capitalized on the model that GPL Linux is better than
_any_ proprietary server OS. I know I've never seen anything come close to it.
Feel free to point out a server OS that competes successfully with Linux –
gratis!

Red Hat can't charge for the razors but they make up for it by charging for
blades: stuff your company _shouldn't_ be doing in-house. You can outsource it
all to Red Hat: installation, maintenance, QA, everything. They're basically
an early freemium model.

Levine is correct that the market potential has not exploded for Red Hat (yet)
but he concludes that nobody else should try what they're doing. I think he
doesn't understand exactly what Red Hat is doing.

Due to the unique pricing structure caused by Free Software, a "differentiated
service on top of the platform" model would fail. For Red Hat, that would be
something like selling proprietary system management software on top of Linux,
and assuming it was sufficient.

If Red Hat were evangelizing Free Software they might be content with a sub-
par product "because freedom!" Take laptops, for example: System76, ZaReason,
and laclinux.com remain small. Their product does not represent a tier 1
product, even though they make a differentiated laptop on top of the same base
of laptop ODMs.

Levine correctly concludes that Red Hat will not grow as rapidly as a Google
or Amazon. It's not an apples-to-apples comparison. Instead, compare Red Hat
to Microsoft, CA, or Oracle who compete directly in the "razors & blades"
market of enterprise IT support. (Those companies do have other markets as
well.)

~~~
nl
Levine clearly understand's RedHat's business model: Most of their money comes
from support contracts.

He also understands that selling support isn't as profitable as selling
software, simply because the businesses scale differently. With software your
costs are basically fixed (you sell the same thing many times), while with
support your costs grow as the business grows (you need to hire more & more
people).

 _Instead, compare Red Hat to Microsoft, CA, or Oracle who compete directly in
the "razors & blades" market of enterprise IT support. (Those companies do
have other markets as well.)_

The numbers on those businesses make a good example. Microsoft makes almost
all it's money from selling products, not support. Oracle has a very
aggressive service division, and yet still makes more than 50% of it's money
from selling software (and now hardware).

~~~
mindcrime
_Most of their money comes from support contracts._

In my experience that's true of proprietary vendors as well. They just usually
call it "maintenance" instead of "support".

 _He also understands that selling support isn 't as profitable as selling
software, simply because the businesses scale differently. With software your
costs are basically fixed (you sell the same thing many times), while with
support your costs grow as the business grows (you need to hire more & more
people)._

That dichotomy is nowhere near as clear cut as you're making it seem. You
think proprietary software vendors aren't also selling support? And don't need
to hire more people as they grow? Bunk... I've worked for a few proprietary
ISV's and from what I've seen, what they are doing is _almost_ exactly the
same thing as what Red Hat are doing. With Red Hat you pay for a
"subscription" and with most other companies you pay for a license +
"maintenance"... and the maintenance bit is, in essence, exactly what Red Hat
are selling. The structure is just a bit different in that you don't, for
example, pay for version upgrades in the RH model.

Nonetheless, even a proprietary vendor has their costs go up as they acquire
more customers unless they refuse to support their software at all, in which
case I doubt they are getting a lot of customers.

~~~
nl
_In my experience that 's true of proprietary vendors as well. They just
usually call it "maintenance" instead of "support"._

Of course. This isn't an open source vs proprietary thing, and every company
has to include a certain amount of support in the software they sell.

 _That dichotomy is nowhere near as clear cut as you 're making it seem._

Agreed - I didn't mean to make is seem an "either/or" thing.

 _Nonetheless, even a proprietary vendor has their costs go up as they acquire
more customers_

Yes. But if your business is _selling software_ your support costs
(hopefully!) don't increase as quickly as your revenue. Eg, I don't know how
many people Microsoft has as support staff, but I'll bet that number didn't
increase linearly as revenue grew.

In the support business you will almost alway have a fixed number of people
per license - or at least per customer.

------
vain
The article isn't very well thought through. mongodb is doing very well just
selling support

------
tonydiv
What about Cloudera?

