Death of a shadowman

Oracle announced last week that it will start providing subscription-based support contracts for “enterprise” Linux, triggering a massive hemorrhage in Red Hat’s stock price not seen since the company restated its earnings a few years ago.

This shouldn’t come as much of a surprise. It was only a matter of time before a company with deep pockets like Oracle slapped together a viable business on Red Hat’s back. Red Hat has had an easy ride for years now in the enterprise Linux business and hasn’t proactively positioned itself into a sustainable business model. So I won’t shed too many tears for you, old friend. Red Hat has been banking on its well-known brand and lock-in strategies more suited to proprietary business models: Red Hat hardware and ISV certifications, the proprietary Red Hat Network, and the Red Hat Application Stack are all designed to narcotize enterprise software consumers into a vertically-integrated, single-provider platform. It’s not a bad model, really, but unfortunately it only works if you’re the single provider enjoying massive market share. Last week Oracle became a new provider of a vertically-integrated Linux platform with its Validated Configurations products.

Red Hat’s response to Oracle’s announcement was really pretty lame. It’s like the two people in marketing phoned up some product managers and they slapped together a few quips about maintaining binary compatibility, blah blah, let’s make sure we put in something about patches, blah blah, oh and indemnification because SCO is still out there, blah. So much for “choice” as Red Hat’s moral and business motto. Clearly, new messaging is needed.

Is this the end of Red Hat? Probably not. Red Hat has a very strong brand with a premium image, but its business model is busted now. Other companies will most definitely follow Oracle’s lead by beginning their own support offerings and they’ll be able to do it at a fraction of Red Hat’s costs. Oracle has already begun a penetrative pricing campaign by offering 50% off support contracts to new customers. Red Hat is operating like a software engineering company (and paying all of the associated R&D expenses) although its entire revenue base comes from open source support contracts, not proprietary licenses. This worked well when Red Hat was the only shop in town because the company could essentially emulate the business model of a proprietary software company. Meanwhile, through the virtues of open source licenses, other companies can ride on Red Hat’s shoulders and sell the same support without the engineering costs. If you ask me, Red Hat will have to shed some fat (engineering fat) and refocus itself as a predominantly service-oriented company.

Bon chance, le Chapeau Rouge.