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Red Hat CEO predicts $1 billion revenues within the year

Linux giant turns increasingly competitive to protect profits. Rory MacDonald investigates...

Enterprise Linux champion Red Hat announced record fourth-quarter earnings this month following the launch of Red Hat Enterprise Linux 6 (RHEL 6). As many companies closed up their financial year, the world’s most profitable open source company announced that its revenues for the financial year (FY) 2011 were up 22 percent at $909.3 million.

“We are on a clear path to becoming the first pure-play open source company to achieve $1 billion in revenue during our next fiscal year, a milestone achievement for Red Hat and the open source community,” Red Hat CEO Jim Whitehurst told journalists on the company’s earnings call.

Red Hat CEO Jim Whitehurst: “We are on a clear path to becoming the first pure-play open source company to achieve $1 billion”

The results will come as an unwelcome shock for some, since JP Morgan analyst John DiFucci downgraded Red Hat’s stock in late February. DiFucci advised investors to “reduce their exposure to this name”, predicting the company’s value may fall to as low as $27 per share. Explaining his predictions, JP Morgan’s guru in open source economics cited Red Hat’s unrealistic growth predictions in the cloud computing and virtualisation business, and worries that the company was not well set to compete in this area against VMware and looming threats from Microsoft, Citrix Systems and Oracle.

DiFucci’s followers must have felt that the banker had really earned this month’s bonus, then, as Red Hat stock rose by
over 19 per cent to $47.81 in the immediate period after the company announced its results.

Whitehurst also addressed DiFucci’s concerns indirectly on the earnings call, explaining that Red Hat expects the predicted uptake of its Red Hat Enterprise Virtualisation (RHEV) products to come from ‘greenfield users’ from inside the company’s existing RHEL user base, rather than stemming from a battle with VMware and other enterprise vendors.

“Users of RHEL are very confident in and capable with a KVM or Linux-based hypervisor,” Whitehurst said. “So we see a lot of interest and a lot of proof of concepts within our existing install base.”

But despite the impressive figures, not all is serene in the world of Red Hat. The company is exhibiting increasingly protectionist behaviour towards its intellectual property surrounding Linux.

“Red Hat Enterprise 6.0 is shipping the linux‑2.6 2.6.32 in obfuscated form. They released their linux-2.6 as one big tarball, clashing with the spirit of the GPL. One can only mildly guess from the changelog which patches get applied,” commented Debian kernel team member Maximilian Attems. “This is in sharp contrast to any previous Red Hat release and has not yet generated the sharp and snide comments in press it deserves. Red Hat should really step back and not make such stupid management moves.”

Kernel hacker Jonathan Corbet: Red Hat is “obfuscating” its source code

Renowned Linux kernel hacker and LWN editor Jonathan Corbet also accused Red Hat of “obfuscating” its kernel source code:
“Distribution in this [new] form should satisfy the GPL, but it makes life hard for anybody else wanting to see what has been done with this kernel. Hopefully it is simply a mistake which will be corrected soon,” he explained.

Corbet’s criticism drew a direct response from Red Hat’s chief technical officer and VP of engineering, Brian Stevens. Stevens reiterated Red Hat’s firm commitment to open source development and highlighted how Red Hat has a policy of contributing kernel changes upstream first.

“We know the value of getting code open from day one, debating it in the public forum, and letting it mature through a cycle long before it reaches our customers’ data centres,” argued Stevens.

“To speak bluntly, the competitive landscape has changed. Our competitors in the Enterprise Linux market have changed their commercial approach from building and competing on their own customised Linux distributions, to one where they directly approach our customers offering to support RHEL,” continued Stevens, justifying Red Hat’s move. “Frankly, our response is to compete. Essential knowledge that our customers have relied on to support their RHEL environments will increasingly only be available under subscription. The itemisation of kernel patches that correlate with articles in our knowledge base is no longer available to our competitors, but rather only to our customers.”

But while Red Hat’s new tactics of obfuscation may, perhaps justifiably, target Oracle, Novell and other corporates competing to support Linux in the enterprise market, some have argued that they will damage community support, especially for the CentOS distribution which delivers a free version of the RHEL codebase. Certainly, Red Hat customers that had previously reduced their costs by using a combination of paid RHEL and free CentOS server licences may need to look at another option.
What seems clear is that, as Red Hat strives to reach its billion dollar earnings target, it is losing some of the open source moral high-ground against its proprietary competitors when it comes to talk of vendor lock-in for ongoing service and support.