Is Red Hat Just Like IBM, Microsoft, Oracle, Salesforce and SAP?

| About: Red Hat, (RHT)

James Whitehurst, Red Hat (NYSE:RHT) CEO, received a lot of IDG-based press during the week of October 18 about a trade-show keynote speech in which he reportedly said:

The business models between customer and vendors are fundamentally broken" when it comes to enterprise software.

I did not attend the conference so I’m depending on these IDG press reports for the following opinion. (Truth in advertising: I am a former IDG employee so I trust the reports completely. This is an exception to the rule of not believing what you read in the newspaper, or at least the technical press.)

I think Whitehurst’s opinion is important more because of his former role as COO of Delta (NYSE:DAL) than for his current role at Red Hat. In particular, this quote rings true based on my demand-side research:

Vendors have to guess at what [customers] want, and there is a mismatch of what customers want and what they get. Creating feature wars is not what the customer is looking for.

On the other hand, some of Whitehurst’s reported logic (possibly reported incorrectly) is shaky based on my supply-side research. The press says his opinion about a broken business model is based on the fact that Red Hat is an “open-source software” company, and that others sell "commercial" software or have a different “software sales model.”

I reject “open source” as an enterprise-software business model or sales model category. But if it is, isn’t Red Hat the only company in it?

Whitehurst’s logic flaw, if reported accurately by IDG, is that Red Hat’s business and sales model is the same as every other leading enterprise software company.

  • The very largest enterprise software companies -- IBM (NYSE:IBM), Microsoft (NASDAQ:MSFT), Oracle (NASDAQ:ORCL) and SAP in alphabetical order -- have multiple-revenue-stream business models:
    • perpetual and various types of limited license revenues
    • subscription maintenance revenues (remember: software maintenance is about content not fixing things)
    • revenues from services that combine the license and maintenance with administrative support and the necessary hardware horsepower (so-called SaaS but increasingly also mislabeled as cloud computing)
    • revenue from services that combine SaaS with outright business-process services such as administering human resource benefits programs (so-called BPO)
  • Large suppliers such as (NYSE:CRM) license and sell only via the SaaS method while suppliers such as Automatic Data Processing (ADP) use the BPO approach almost totally.
  • Red Hat – last time I checked – makes its numbers via the first two methods (perpetual license with subscription maintenance), with the gotcha that its licenses are almost 100% made up of open source terms and conditions (Ts&Cs). But, oh by the way, IBM, Microsoft, Oracle and SAP also license some of their software with open source Ts&Cs.
  • All of the above software suppliers -- and thousands of others -- also provide professional services such as training or implementation support for a fee.

If Red Hat and Mr. Whitehurst have something against these multiple revenue-stream or software-sales models – plural – it sure isn’t doing anything about it.

And there is an even bigger logic flaw in the press reports I saw (I only linked to one above but there were dozens). Whitehurst supposedly said

“"Why are costs of IT going up when the underlying costs to deliver those services halves (sic) every 18 months?" The cost of computing should come down, he reasoned, thanks to improving processing speeds and storage capacities. New, more powerful development tools and frameworks should also ease the cost of deployment. Yet IT expenditures continue to go up by about 3 percent to 5 percent a year.”

Unless Red Hat and the other leading enterprise software suppliers and his and their customers and clients are cutting their employees salaries in half every 18 months, processing speeds and storage capacities are not going to make much of a difference. Unless the taxes on the buildings they own or the rent they pay is being cut in half every 18 months, all the programming frameworks and “lower bug density” in computer-science nirvana doesn’t matter. Along with software spend, hardware and storage costs add up to the $1.4 trillion IT spend mentioned elsewhere in the press reports. 50%-60% of that is annual subscription maintenance on hardware, software and storage and another 20%-30% is user add-on and functionality upgrades (so someone must like the feature lists).

But that entire $1.4 trillion number only accounts for about 10% of the cost of deploying IT in support of business processes. If you really want to cut costs, license and sell software that administers itself and runs on abaci.

Disclosure: No positions

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