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.