Tuesday, August 21, 2007

Making money The Redhat way

We all believe that open source is associated with free, as in free speech, software. Any open source software can be downloaded free of cost and without paying any money and we have plenty of those softwares; I believe the most commonly used free open source software is Firefox browser. The span of open source softwares covers the entire spectrum of possible softwares, let me list a few.
  1. Linux operating system. Do I need to say more about it?
  2. JBoss and Apache - Application and Web Servers.
  3. GNU Compiler collection (GCC) - perhaps the most commonly used compilers in open source world.
  4. MySQL - RDBMS
  5. GIMP - image manipulation software like Adobe photoshop.
  6. OpenOffice - Office suite like MS Office.
  7. Azureus and eMule - peer to peer torrent tools
Well the list goes on...
As a layman, I started thinking about the sanity of people who work so hard to produce such
quality software products and then allow anyone to simply download and use them for free. What the heck!! Where the hell do they make money ?? How can so many people simply be doing charity ??
I did a little check on the popular open source companies, to find out their source of income, and it turned out that these open source zealots have a very sane mind in their heads. Open source companies are indeed making huge money. In this article I'll give a brief of the money Redhat is making.
I started with checking the financial results of Redhat ; I quote

"Total revenue for the quarter was $118.9 million, an increase of 42% from the year ago quarter and 7% from the prior quarter. Subscription revenue was $103.0 million, up 44% year-over-year and 7% sequentially."

Revenues of $118.9 million in a Quarter !!! Holy god. Now this is real big money, do people actually pay even for free software ? Looking further, a 42% increase in revenue -- thats simply incredible. How many traditional companies can boast of such a huge increase in revenue. I can almost bet that even Microsoft cannot.
Reading further on I found that Net income for the quarter was $16.2 million against $13.8 million a year ago. Actually these guys are making money and they are getting better at it. But how ? Who gives them the money ? and for what ? I know the software they deal in is "Free and open source".
Redhat does not charge for the software, instead it charges for the services it provides on top of it. Open source provides technically savvy customers with a challenging opportunity to try their hands at the new and emerging technology. Redhat ropes in the value that if things go wrong in their software implementation, Redhat will provide the required support. Redhat also provides its customized bug fixes and performance enhanced code and all of it open source, hence if the customer wants they can have their technical team evaluate it.
Quoting from Redhat business model site
"Red Hat subscriptions give you access to the latest technology as it's tested and released. This includes upgrades to newer releases at no additional charge for as long as your subscription is active. Your subscription also includes access to Red Hat Network, an efficient solution for managing, updating, and supporting your systems. And finally, you get the reassurance that Red Hat will stand behind and support each product version for seven years."

This subscription based strategy seems to be working, and working bloody well.
To complement their paid subscription based product, they also have a free and community driven Fedora project. Sometimes the customers simply evaluate Redhat software on Fedora and when they are very comfortable, they go ahead and buy the official support to have peace of mind. The latest example of this is Virgin America's migration from Fedora to RHEL. The tech department of Virgin America thought that its time to scaleup their operations and for that they wanted a software solution for which they can get enterprise level support and Redhat perfectly fits the bill. Quoting again from Redhat site
"Fedora was a fantastic solution for us as we began our journey with open source," said Ravi Simhambhatla, director of architecture and integration at Virgin America. "As our need for fine-grained control and scalability grew, we decided to migrate to Red Hat Enterprise Linux for its reputation as a resilient, secure and scalable platform as well as for its incredible support. Red Hat has the best kernel engineers in the world and when I'm in a real bind, it's priceless to have the ability to call someone who has the knowledge to get us on track quickly."

Redhat also employs another very important technique of providing a whole suit of applications.
They offer a huge list of products including JBoss, Redhat Exchange, Directory Server, Cluster solutions etc. and customers love the one stop shop for all their needs. As pointed by Dafflon of Swisscom IT Services
"The acquisition of JBoss by Red Hat was a stroke of luck for us," said Dafflon. "This way we profit from the same outstanding price-performance ratio at the middleware layer as well as on the operating system level."

I see Redhat further consolidating its position in times to come.
One way or the other Redhat has proved that there is money in open source software, lets see more companies capitalizing on it.

15 comments:

Ravi Kumar said...

Interesting read. I too tried to do my own research on tracking the origins of open source. Do visit..

Tracking the origins of open source

-Ravi

Abhay said...

Hey Ravi,
You have done decent research.
Definitely a nice read.

superm401 said...

Interesting read. What you may not know (not sure here) is that free software as in free speech refers to software that grants certain freedoms (http://www.gnu.org/philosophy/free-sw.html), not to zero-cost software

startoy said...

ajaxflakes - Read all about the latest developments on web design 2.0 and ajax + lots of tips. TOP 100+ best Free Opensource Software for windows XP and Vista. Thought i should add it might be helpful to others… http://ajaxflakes.com

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