Red Hat announced its numbers, and as one Street report said, “the streak is broken”. The company was light on revenue and net income, considerably below both the average of its performance over time and its prior year. The result was that the Street has bumped them after hours, but the Street’s judgment may in this case be hasty and incorrect.
Known (or maybe even renown) for its open-source-professional-services business model based on Linux, Red Hat has been a poster child for the open-source evolution of platform software, a trend that’s surely not on the wane. Most recently, it’s JBOSS application server has been looking like a very viable alternative to expensive platforms like IBM’s WebSphere, and that’s especially true given that IBM’s strategic marketing has been weakening, which makes it harder to push IBM’s platforms to new customers. It may be that we have a bit of a market timing glitch that will pass.
But there’s a problem with the “it’ll all come out in the wash” view, and that problem is the cloud. Today the cloud is the most-recognized technology driver of change in the market. Red Hat actually has a very decent set of cloud-related components, including of course the Red Hat Cloud and OpenShift PaaS framework and OpenForm hybrid strategy. The problem is that it’s presentation of its cloud capability is confusing and our survey base reports that it’s not even promoted well by Red Hat sales personnel. Compared to players like HP, IBM, and Microsoft, Red Hat is a cloud wannabe. Their strategic influence score is HALF that of these three key players, lower even than OpenStack, a technology Red Hat supports!
Red Hat’s success depends on its ability to promote its software as the framework for cloud-specific applications, which means it needs to be a leader in the conceptualization of the cloud as that universal virtual computer I’m always talking about. Given that Red Hat is unabashedly a PaaS promoter and that it has the software tools needed to build such a cloud vision, it’s hard to understand why the company doesn’t get out there and push on it more aggressively. What seems to be happening is that Red Hat is surrendering strategic high ground to pursue tactical sales, perhaps to prevent the very kind of slippage it showed in the latest quarter. That never works; push a problem downhill and it gets bigger.
One thing I think would help is to escape from “open-ness”. Open source, open standards…all this open stuff is good in a market where buyers are afraid of being locked in by a given vendor. Who thinks they’re going to be locked in to OpenStack? The cloud is in fact the most open thing that’s come along in IT in ages, and likely the biggest strategic success for open source of all time. “Open” is table stakes, so to brand all your stuff with the term is to throw away the opportunity to brand your stuff with something that actually differentiates. Think about it, Red Hat.
A JP Morgan CIO survey just released shows that IT execs believe their spending will be down in 2012 and will show a modest improvement in 2013. Hardware was where the largest expected y/y declines are found, but application software was the runaway priority winner in the survey. That matches our own work, which has consistently shown that it’s applications that impact worker productivity and business operations, and therefore software is a focus where improvements in those areas are mandated by senior management. None of the stuff that Red Hat touts on its site make the cut in terms of high priority opportunities to drive sales.
The cloud doesn’t make the JPM cut either, and that we think reflects the fact that the market still sees “cloud computing” as public hosting and not as a new IT architecture. For Red Hat, that blind spot is critical, not only because it offers the company a way to get itself in the strategic forefront of the world’s biggest IT trend, but because Red Hat is already trying to push things like PaaS and hybridization. Absent a holistic cloud vision that ties public cloud to private IT change, CIO engagement is going to be a tough slog. Since service investment is expected to be up a bit for 2013, this may be Red Hat’s big chance.