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Is Red Hat's Whitehurst Right? Open Source Thrives In Downturn?

CEO Jim Whitehurst says Red Hat will perform robustly through a recession. Is that true or is he engaged in wishful thinking? InformationWeek's cover story this week, "The Open Source Enterprise," concludes that open source code gets taken more seriously in a time of IT budget cutbacks. Will that help Red Hat?

My editor, Chris Murphy, has pointed out that Red Hat revenue actually declined from $80.8 million in 2001 to $78.9 million in 2002, then recovered to $90.9 million in 2003 and $124.7 million in 2004, even though those years were still part of a slow and painful recovery for the technology industry.

In other words, if the recession is severe enough, even open source company revenue declines, at least momentarily. After a decline in 2002, Red Hat's showed remarkable resilience. Whitehurst's prediction seems largely borne out by recent experience.

What about a young and promising open source code company, Terracotta? It faces uncertain prospects in the current downturn. "This jitteriness in the economy is a two-edged sword," says CEO Amit Pandey. "Big deals are being put on hold and large deployments are being slowed down." At the same time Terracotta's Web site and customer information lines are showing a doubling of requests for pricing and implementation information, and Terracotta continues to experience a torrid download rate (50,000 a month) for a complex piece of software.

So the need to save on the software infrastructure spurs interest in open source, which may, or may not, spur revenue.

One of the things in Red Hat's favor is that its subscription model has taken hold, its rate of subscription renewals is very high, and renewals of subscriptions on its most expensive version of Linux, Red Hat Advanced Platform, are above 100%. Advanced Platform contains integrations that are not found in RHEL 5. For example, Red Hat Cluster Suite and Global File System are part of Advanced Platform. To get them with Red Hat Enterprise Linux, you will need to go back to versions 3 or 4; they were not included with RHEL 5, according to information on the Red Hat site.

Steven Ashley, analyst with Robert W. Baird & Co., said in a Monday research note that Red Hat is experiencing a 120% renewal rate on its Advanced Platform subscriptions in recent quarters, compared with 111% in 2007. In other words, Red Hat is finding a way to monetize the work it does on Enterprise Linux by producing a higher-end, integrated -- not bundled -- product.

One can debate the merits of high-end products from open source companies. Doesn't it diminish the company to have a high-end, feature-laden product that's not generally available to its community? But I for one want Red Hat, Novell, and Ubuntu to survive the downturn and succeed as Linux suppliers, and I suspect more and more open source companies are going to save their best products for paying customers. MySQL, for example, is moving in this direction. In this fashion, open source companies are starting to more resemble the commercial companies from which they were once so distinct.

To the customer who gets a break from freely downloadable open source code, gains dependence on it, subscribes to it, and eventually graduates to a high-end product, the differences will still be evident enough.

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