Red Hat And The Power Of Infinite Goods

from the economics-of-free dept

The New York Times has a great write-up of the continued rapid growth of Red Hat. Despite the looming recession, Red Hat is predicting 30 percent revenue growth in the coming year, to more than half a billion dollars. For a few years, Mike has been talking about how to make money while giving away infinite goods, and Red Hat could probably be the poster child for his argument. Despite the fact that virtually all of its "products" are available for free on the Internet, Red Hat is still convincing companies to pay it hundreds of millions of dollars. Of course, the reason this works is that Red Hat's product isn't its operating system or other software. Red Hat's product is access to the time and expertise of its employees, and to Red Hat's extensive ecosystem of developers, hardware vendors, and others who have built atop the Red Hat platform. Because Red Hat stands at the center of this tight-knit web of relationships, their employees are better-positioned than anyone else to quickly solve customer problems. And it turns out that companies are willing to pay hundreds of millions of dollars for that assistance.

The most interesting part of the article is where it talks about Oracle's effort to undercut Red Hat by offering the same software at a lower cost. Apparently, as we predicted, it hasn't been going too well. And it's not too hard to see why: Larry Ellison doesn't seem to understand Red Hat's business model. What Red Hat is selling isn't software, but support. And the value of a support contract is a function of the expertise of the company providing it. Not only does Red Hat have a number of key Red Hat developers on staff, but it also has a ton of strong working relationships with developers and vendors elsewhere in the Linux community. That means that if a customer encounters a bug in its Red Hat Enterprise Linux installation, Red Hat will either have an engineer on staff who can fix it, or it will have a strong relationship with the outside developer who developed that piece of software or the firm that manufactured the hardware. That makes it more likely that it will be able to address the issue quickly and incorporate the fix into the software for future releases.

Oracle has made comparatively little effort to either hire Linux developers or foster strong relationships with the broader free software community. As a result, Oracle isn't able to provide the same kind of value that Red Hat can. Yes, Oracle tech support can fix straightforward problems, but if they need to make changes to the code, they'll often need to go to a Red Hat engineer for help getting it fixed. And not surprisingly, most customers would rather cut out the middleman and go to Red Hat directly, even if it costs a little more.

Timothy Lee is an expert at the Insight Community. To get insight and analysis from Timothy Lee and other experts on challenges your company faces, click here.

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Surprise, Surprise, Social Networking Ads Suck

from the as-expected dept

One of the questions that came up last week in Edinburgh was whether or not social networking sites were really the big moneymakers they claimed to be. In the discussion, what we agreed on, was that the social networking sites had done a good job in doing an "upfront" monetization, with MySpace getting a guaranteed ad deal from Google and Facebook getting a guaranteed deal from Microsoft. However, all the details suggested that on the backend things were pretty ugly. It's not hard to figure out why. Ads work on Google because people are looking for information. They do a search, and if the advertisement shows information that helps with the query, that makes everyone happy. However, when it comes to a social network, usage is quite different. People aren't looking for information about products -- they're looking to communicate with friends. In that environment, ads are seen as an intrusion -- which is the exact opposite of ads in a search world. That explains why Facebook was so focused on its Beacon offering, which was designed to try (rather unsuccessfully so far) to make an advertisement about communicating with your friends.

With all that said, I estimated that within a year, advertisers would begin to back away from social network advertising, unless some new, more effective, mechanism was found. I figured it would take about a year, because the mindset of advertisers would still be focused on just getting ads on these "hot properties" and it would take some time before they realized that no one looked at the ads. Apparently, my estimate was wrong. Brands are already staying away. At least, that was a major point behind Google missing its earnings estimates. It seems unlikely that this situation will get much better, unless social networks really do come up with a different form of advertising. They need to recognize that simply throwing up ads doesn't work any more. An advertisement can't be intrusive. It can't be annoying. It needs to be relevant and wanted.

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Details Needed On Novell's Allegedly Soaring Linux Sales

from the fuzzy-math dept

Slashdot is linking to a story supposedly showing that Novell's Linux business has seen amazing growth in the nine months since they signed a controversial patent deal with Microsoft. "The affect on sales year over year, for Novell's first three quarters of our fiscal year, which ends Oct. 31 -- our Linux business was up 243 percent year over year," said Novell exec Justin Steinman. But so far, at least, this growth doesn't appear to be reflected in Novell's financial results. If my math is right, Novell's revenue for "Linux platform products" totaled $32 million in the first three quarters of 2006, while the total for the first three quarters of 2007 is $53 million. That's a healthy 65 percent growth rate, but it's a long ways from 243 percent. (Novell's Open Enterprise Server is also based on a Linux kernel, but revenues from that product line have been flat at about $45 million a quarter, which would make Novell's overall Linux growth rate even smaller). What accounts for the growth we are seeing? Steinman says that customers are beating a path to his door because people want to "pick the Linux that works with Windows." But a more likely explanation is that customers are just redeeming the tens of millions of dollars in vouchers that Novell sold to Microsoft as part of last year's patent deal. Novell says it has gotten $100 million in business through its Microsoft partnership. That's more than twice as much revenue as Novell received from "Linux platform products" for all of 2006, suggesting that almost all the growth we've seen so far is probably a result of customers redeeming those vouchers—and it's not clear whether Microsoft is selling the vouchers at full price or at a steep discount. Maybe we'll finally see spectacular financial growth when Novell releases its its fourth quarter results later this year, but it would have been helpful if Novell or PC World had been clearer about how they're measuring that 243 percent sales increase.

Timothy Lee is an expert at the Insight Community. To get insight and analysis from Timothy Lee and other experts on challenges your company faces, click here.

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Infosys Still Humming, Despite Pressures

from the pushing-on dept

There have been a lot of questions raised about the business prospects for Indian IT outsourcing firms, particularly due to wage pressure, the strength of the rupee against the dollar and a shortage of talented workers. One of the big ones in this group, Infosys, has reported earnings that should help allay people's fears, at least to some extent. While the Rupee is predicted to be a drag going forward, the core business, as measured in dollars, remains quite healthy. In other words, labor and currency concerns aren't stopping the company from profitably carrying out its business, at least not yet. The fact that Infosys continues to thrive in spite of theheadwinds is likely a reflection of its recognition that it's not just an "Indian" outsourcing firm, as they're typically perceived as, but a global firm, with a range of value-added offerings that happens to have a large base in India.

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