Just how strong is Red Hat's open-source business?

Red Hat stands alone as the only significant public open-source company. Is this a testament to its execution, or is it a hint that open source is not well-suited to big business?

While I believe that open source will increasingly be the heart of many big technology businesses, it will almost certainly feed new entrants to markets, not incumbent vendors.

Looking at Red Hat's report on its most recent fiscal year (FY 2009), however, suggests that for these new entrants, open source can be a very profitable business indeed. I've already reported on the high-level financial results.

What is particularly intriguing is the data behind those results:

• Red Hat is forecasting $720 million to $735 million in FY 2010, an annual growth rate of 10 percent to 13 percent over 2009.
• 40,000 new Red Hat Enterprise Linux customers in FY 2009, the "vast majority of which are...customers that are starting off small." Lots of room to grow, in other words.
• Nearly half of Red Hat's top-100 renewal customers upgraded to or increased the number of RHEL advanced platform servers in their Data Centers. (In its fiscal Q4 2009, Red Hat renewed each of its top-25 contracts up for renewal at 132 percent of the prior year's value.)
• 30 percent of Red Hat's largest 30 deals included a Middleware (JBoss, usually) component.
• Average contract lasts 23 to 24 months, with pricing remaining "consistent for the last several years."
• Channel bookings grew 23 percent in FY 2009, while Red Hat more than doubled its number of partners to 4,500.
• In fiscal Q4 2009, Red Hat closed two large deals, one of which was a multi-year, multi-million dollar deal that represented its largest conversion from free-to-paid (a key initiative for FY 2010) as well as a six-figure conversion deal with another customer.
• 57 percent of bookings came from the Americas, 28 percent from EMEA, and 15 percent from APAC.
• The recession has not "changed the length of [Red Hat's] sales cycle in any meaningful way."
• Subscription gross margin improved 60 basis points over the year to approximately 94 percent while training and services gross margin improved approximately 280 basis points from Q4 last year, driven mainly by better utilization and higher gross margins from the Amentra business.
• Red Hat ended its fiscal year with $846 million in cash and investments and is now debt free.
  

One of Red Hat's big initiatives for FY 2010 is to increase the rate of adoption of its for-fee products from prospects still using for-free versions of its software (Fedora, CentOS, etc.), a process it only started in late 2008. As Red Hat CEO Jim Whitehurst notes in the earnings call, enterprises often find it "very expensive" to support themselves. As the data above suggests, Red Hat is getting better at convincing them to move to Red Hat's subscription offerings.

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Oracle faces culture shock in Sun's open source world

Larry Ellison is a famously activist exponent of competitive strategy. An avowed student of Sun Tzu's Art of War, the Oracle chief executive has long followed an approach that sets Oracle's interests against those of its main rivals, with Microsoft, IBM and SAP cast as the enemy.

With the acquisition of Sun Microsystems, however, he is about to walk on to new terrain where some of the methods that defined Oracle's traditional approach to strategy no longer apply.

Sun's main software assets - and the jewels for which Mr Ellison said this week that he had agreed to pay $7.4bn for the company - are all closely tied to the open source world: the Java programming language and development tools, which are partly open source, as well as the Solaris operating system and MySQL database.

That makes them unlike the roughly 200 software properties that Mr Ellison has acquired in the past. They are made freely available, and rely partly on the efforts of a wider group of developers to extend and support them. Their future success, in fact, relies on a technology community that stretches well beyond Oracle - and includes companies such as IBM, which also relies on Java as a core technology

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Red Hat, Synnex Enlist Open-Source ISVs for Midmarket Channel Push

Red Hat wants a bigger piece of the midmarket, and it's enlisting the channel expertise of Synnex (NYSE:SNX) to help open-source software to gain more traction in this lucrative market segment.

On Tuesday, Red Hat introduced the Open Source Channel Alliance, a group of 9 open-source ISVs that have signed distribution deals with Synnex to bring a wide range of applications to market through the distributor's network of VARs and integrators.

Roger Egan, vice president of North American Channels for Red Hat, said the goal of the alliance is to extend the flexibility and cost savings of open-source software to a broader audience, as well as to move from a point-product focus to one more attuned with what he defined as "solution stacks."

Founding members of the Open Source Channel Alliance include: Alfresco (content management), EnterpriseDB (database), Ingres (database), Jaspersoft (business intelligence), Likewise (identity management), Pentaho (business intelligence), Zmanda (backup and recovery), Zenoss (network and systems monitoring) and Zimbra (e-mail and calendar groupware).

"We've come to learn that we have jewels in the relationships we've nurtured with open-source ISVs," Egan said. "We're trying to take our relationships and knowledge of channel and extend that to them."

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