Feature Article By Jeff Gould
Copyright © 2007, Peerstone Research Inc, All rights reserved.

January 19, 2007

Larry Ellison took his best shot at Red Hat and after three months the first results are in: he missed the target by a country mile. Not only is Red Hat still standing, its stock is worth about $2 more per share than it was the day before Larry made his move.

The reason is simple. Hardly anyone is buying Larry's discounted Oracle Linux, but large numbers of customers continue to pay premium prices for Red Hat Enterprise Linux (RHEL). During its quarterly conference call a few days before Christmas Red Hat reported a string of impressive results. Billings were up 50% year-over-year, quarterly revenues for the first time exceeded $100 million, and 12,000 new customers signed on between September and November.

Red Hat also managed to retain most of its existing customers. Of the 25 largest subscription contracts up for renewal during the quarter, 24 were renewed. When asked who the 25th company was and why it didn't renew, CEO Matthew Szulik declined to provide a name, but slyly observed that the customer in question had "decided to become a competitor during the quarter". In other words, the only big Red Hat customer who failed to renew was Oracle itself! And in the final indignity for Larry, Szulik let slip that 60% of the quarter's sales were actually booked during the last month – in other words, after the Oracle announcement.

So Red Hat is continuing to do well despite the fact that customers can buy a nearly identical set of bits for less money from a much larger and more established competitor. Yes, Red Hat's web site piously proclaims that Oracle's Linux isn't really identical to RHEL but is actually that most dreaded of open source creations, a fork. But for now that argument seems to be largely religious. Right now Oracle Linux looks more like a clone than a fork. The plain truth is that, by the rules of the GPL open source license game, anyone can take Red Hat's source code, strip out the protected trademarks and logos (which of course add nothing to the product's functionality), compile what's left into a binary, and then distribute that code to whomever they please.

Furthermore, if the anyone in question happens to one of the world's largest and most committed proponents of Linux in enterprise environments – and who can doubt that this is true for Oracle? – with a deep bench of in-house kernel-level programmers and a huge worldwide support organization, well then they're perfectly entitled to offer their own patches for their Red Hat clone.

In other words, the competitor can copy every important detail of Red Hat's product and business model and still be perfectly legal. True, if Oracle's patches end up looking very different from Red Hat's own patches, its clone might end up drifting far enough away from the RHEL original to be called a fork. But Oracle has promised that it will keep its distribution synced up with Red Hat's patches, and it's honestly hard to believe that an issue like this could defeat a software development organization with Oracle's resources.

All the same, despite Oracle's undoubted technical credibility as a Linux supplier, it seems that very few customers actually want its version of Red Hat's bits. During Oracle's December conference call Ellison lieutenant Charles Phillips confided that only 9,000 copies of its version of RHEL had been downloaded during the first 30 days. Oracle isn't saying how many of these downloads converted into actual paying customers, but that number is certainly much smaller. According to former JBoss CEO Marc Fleury, only about 10% of Red Hat's total user base actually pays for the certified and stabilized RHEL version, while the rest prefer the racier but free Fedora distribution. When you consider that a fair number of Oracle's early downloaders are likely to have been tire kickers only, we can conclude that probably only a few hundred actually signed up as paying Oracle Linux customers.

In short, Larry's RHEL killer might have the technical chops, but it doesn't have the customers lining up at the door. Y

You can lead a horse to water, as the saying goes, but you can't make it drink.

UPDATE: Yesterday Red Hat's stock lost almost 7% based on Sun's announcement that it was making prices for Solaris more competitive, especially for web tier applications. It sounds like Wall Street is overreacting again. But even if this is so, the reaction shows that there is a tremendous amount of distrust and skepticism toward Red Hat in the investor community. In the next post I'll take a longer look at some troubling issues in Red Hat's fundamental business model that might be feeding this investor angst.

http://informationweek.com/software/linuxexperts/blog/archives/2007/01/larry_whiffs_it.html