On Friday I opened a position in Red Hat (NYSE:RHT). I've followed this company for a long time, always liked it, always thought that it was way overpriced.
What changed? One word: cloud.
I had an opportunity to look at enterprise IT from inside. Saw how it's organized in different big and medium companies. I see the trend. And this trend is plain suicidal. Corporate IT, the way it's managed now, has no right to exist.
For a long time, corporate IT was managed by IT professionals. Such management had a lot of drawbacks. IT professionals are not easy people to get along with, they have strong opinions, talk to other people like children who don't understand simple things. Unfortunately, they are usually right. Their strong opinions are based on knowledge and experience. And other people really don't understand how IT works.
Starting around 2000, things started to change. People in charge of corporations thought that the Y2K problem was invented by IT people (the problem was real). CEOs and shareholders decided to change IT culture. At the same time there emerged the whole new class of corporate management people, who are professional managers. We all know that they are called MBAs. MBAs were charged with changing many things in corporations, including IT.
First sign of that change I saw in one big company, when at one meeting in 2003 a decision was made to call another meeting to discuss allocation of 200 MB of disk space for some project. I couldn't believe my ears. At that time 200 MB of disk space in enterprise environment cost something around $200. A meeting including at least half a dozen people would cost at least the same money! Next came change management. For people who are not IT professionals, change management is a way to ensure stability in things they don't understand. For IT professionals, it looks like this: you propose an absolutely trivial and necessary change and then defend this change in front of at least half a dozen people who don't understand what are you talking about. For me, the picture became clear: MBAs in charge of IT don't know what they are managing, so they approach the problem on their own terms. To make a career, you need to make yourself valuable. To make yourself valuable, you need to take over some resources (whether it's hardware, people, software development or updates), make these resources scarce and distribute them. Welcome to Soviet Union economy at the enterprise level.
This wasn't the end of it. Outsourcing was an attempt to reduce costs. But the cost of Indian programmers quickly reached almost US levels. We are costly because only about 20% of people can do our work. The other 80% leave this high paying profession because they just can't do it. And you don't know who would leave until they tried it. So you can roughly estimate that the cost of educating an IT professional is about 5 times the cost of education. No way around it. Next came outsourcing of parts of IT. Many big corporations hired other companies to take over parts of their IT. Network, server farms, software installation and maintenance are often managed by other companies. You'd think those specialized companies would do a good job here. Wrong! They don't care about anything but money. It's even harder to make necessary changes, to ensure proper system and network management. There is no feedback, because companies managing server farms or network are not responsible to local IT department. They are only responsible to your corporate management.
This is not sustainable. Corporate IT costs huge money, it's inefficient, and getting more expensive.
I can only see one way out of this corporate IT nightmare: cloud. You don't have any server farms. You don't bother with software installation, system and network management, security, availability. Feedback is easy, because you can see the real picture. IT services either perform or not. Easy to understand, even for MBAs.
Clouds in most cases use Linux operating system. In enterprise environment, Linux means Red Hat.
That's why I opened a position in Red Hat. I expect a much bigger installed base than most analysts expect, sooner than they expect.
Disclosure: I am long RHT.
Additional disclosure: Positions can change any time