Red Hat has a choice to make: focus on its profitable but dull Linux business or disrupt the industry through JBoss and applications.
Red Hat has announced its 2009 Innovation Awards, with some impressive finalists making the list. From Whole Foods to Harvard Business School Publishing, major organizations are doing impressive things with Red Hat technology. Interestingly, however, the real "innovation" revealed by these awards is just how much more money Red Hat makes in its JBoss deals than in its Red Hat Enterprise Linux (RHEL) deals.
I reported earlier this year that Red Hat's JBoss business is growing at twice the rate of its RHEL business. This isn't surprising: JBoss is still relatively small change compared to RHEL, growing from a smaller base.
But that's not the whole story. JBoss drives $10 in services revenue for every $1 in subscription revenue, which makes JBoss much more interesting to Red Hat's channel partners than RHEL. JBoss and the solutions that run on it are also much more interesting to CIOs, who tactically choose RHEL to save money but strategically choose JBoss to help make money.
RHEL is effectively just a commodity business, which means the best way to juice the business is to grow the volume of transactions through the channel, because it's difficult to grow the size of those transactions.
RHEL is all about "selling boxes" (i.e., servers), in other words. It's tactical, not deeply strategic.
If you look at Red Hat's Innovation Awards finalists, the RHEL innovation leaders are those that are saving money on the operating system but still spending plenty on applications like SAP, because applications drive their business value. At Whole Foods Markets, for example, "innovation" means "use of Red Hat Satellite to manage its Red Hat Enterprise Linux systems that resulted in reduced costs, reallocated resources and the ability of the Whole Foods IT department to focus on strategic business initiatives."
Moving to RHEL, in short, was tactical: it allowed Whole Foods to innovate ("focus on strategic business initiatives") elsewhere. RHEL wasn't the innovation. It enabled the innovation.
JBoss is different. JBoss enables the Red Hat sales team to focus on the strategic initiatives within enterprises, because JBoss gets Red Hat closer to the applications that power these companies. An operating system lays the foundation for innovation. An application server and, critically, the applications that run on it, serves up the innovation itself, and makes Red Hat much more interesting to CIOs.
Red Hat has a decision to make moving forward. It can move up the software stack and sell JBoss-based solutions that get it a seat at the CIO's table with Oracle, Microsoft, IBM, SAP, and others. Or it can continue its tactical push by focusing on increased volume of RHEL-based servers into the market.
There is plenty of value (and money) in either the tactical (RHEL) or strategic (JBoss) approach, but Red Hat becomes a truly disruptive, game-changing company through enhanced focus on middleware and applications. As a (mostly) Linux vendor, Red Hat can make plenty of money but will never make waves.
Today, Red Hat is a big (but little) company. Big in its sales as it approaches $1 billion in revenues. But little in its ambition to disrupt the industry through open source by giving CIOs a true choice in the area that matters most to their businesses: applications.