CRN: What is the status of the Red Hat channel program?
Evans: In the last year and a half, I took over channel efforts and a couple of things have happened in that period of time. We expanded the number of people working with channel partners globally. In last quarter, over 40 percent of revenues was through indirect channels and that has been a growing percentage every quarter. In the U.S, we had growth from sales through distributors--VARs and corporate resellers--and we saw 65 percent growth during the last four quarters through those channels. So, the traditional two-tiered channel has made a very strong contribution to revenues. We don't have a formal reseller program in the same vein that other giants in the industry have, but we do have people to support resellers.
CRN: What are you doing to help grow your reseller base?
Evans: What we recently did in the last quarter is incentivize our sales team to support and work with resellers. And they were incented to push business to resellers. So we're seeing a lot of revenue growth and we appreciate the efforts they're giving, and we continue to look at ways to grow the business for us and for them. As far as a formal traditional program, we're considering a bunch of scenarios where we look through larger partners but, also equally important, is regional [systems integrators] and VARs who have driven that growth through distribution. But we do have people and infrastructure in place [to help channel partners], and we've never restricted what product anyone can buy and resell. We're continually expanding our product range at the highest level to make Linux widely available.
CRN: [Red Hat CEO] Matthew Szulik told CRN last Monday that the company is not going to have a traditional channel program like Microsoft's or Novell's.
Evans: It's true that it's mostly larger [systems integrators Red Hat partners with], but a significant part of our business today is through regional [systems integrators] and VARs already. It's not visible because what's more visible is revenues driven by the larger guys. But the business is driven by a broad range of partners. Everyone believes in the solution sell, and our main offering is an operating system and that always requires people to add hardware, software and services because service around an operating system isn't that lucrative. The OS is only about 4 percent [of the overall revenue] of a Linux solution. We don't compete with regional [systems integrators] and VARs in custom apps, databases and services for solutions, and that's the lucrative part of the business. If you look at the services for an OS, it's small compared to the solution-selling opportunity and the opportunity Linux and open-source offers for enabling migration from less secure platforms or new deployments. It's a great catalyst for new business for a lot of resellers, and it's a great catalyst for new business.
CRN: Why hasn't Red Hat launched a channel program?
Evans: We created a different business model than companies that have been around for 25 years. We had to because of Linux and open source. It's a hard balance sometimes because people want a program that looks like Novell's, but we're a different company and we have something that is changing the industry. We don't put limitations [on partnering], and we want people to make money on sales and support. The lack of a channel program isn't necessarily holding business back as far as we can see because people can still get Red Hat product, become Red Hat certified and get technical training. Our Red Hat Enterprise and Red Hat Network and training are also available through distribution to VARs and corporate resellers. There are a lot of thing we're enabling and we continue to look at it. Maybe someday we will have a traditional channel program--who knows--but it's Red Hat DNA a little bit to try and think fresh in everything we do.
CRN: At Novell's BrainShare last month, CRN heard complaints from solution providers that Red Hat's channel strategy was bad and that Red Hat services were moving in on their deals.
Evans: It's a very tiny force of people. I can't imagine our consulting services doing that.
CRN: Perhaps they were referring to the sales force. Basically, partners were saying that they would make a Red Hat deal and then Red Hat would move in on them and try to take the account.
Evans: I look at the big picture of services around a sale, and for partners it's servicing the solutions. Our basic offering is an operating system, our basic offering that most of these people resell. It's a solutions sell. The majority of the services business [for Linux] is the solution, and of that solution we're only 4 to 7 percent of that. I like to think we're enabling a larger pie for a lot of people.
CRN: You said earlier that regional VARs sell Red Hat. Who are your top regional VARs?
Evans: Major corporate resellers and VARs buy through distribution. We don't have a lot of direct close relationships with regional VARs today. They have been strong contributors to Red Hat revenues, and we continue to look for ways we can provide more service to corporate VARs and resellers.
CRN: Red Hat reported gross margins of more than 90 percent.
Evans: That's on subscriptions, which is maintenance, updates and tech support, and that's not services. Only the original software vendor provides maintenance. ... We have a very small professional consulting force, and we have no intention of having a large one.
CRN: When will Red Hat have a channel program for SMB partners?
Evans: We're a different company that started at a distinct point in time, and we're at a different stage of our development. We'll continue to expand our offerings, and we will always apply fresh thinking.
CRN: Does the open-source model make it more difficult to have a channel? Szulik indicated that it enables strong partnerships with big systems integrators but does not lend itself well to the traditional channel.
Evans: It doesn't make it more difficult. [Szulik] may be alluding to the fact that there are higher profit margins in the proprietary software world historically--Microsoft, Novell and SCO--so there's a lot more money and profit from that, and they have more resources [for the channel].
CRN: Novell will bring its ample army of channel partners from the NetWare world to convert people to Linux. What is Red Hat going to do to deal with that channel challenge?
Evans: They have a different history and they've been around 10-plus years and have a wide range of proprietary software offerings. They're in a different position ... but [our channel business] will continue to grow. We've seen growth in the last 12 months. Twelve months ago there were credibility issues around Linux, and in the last 12 to 24 months we had to prove we were a viable and sustainable company and we weren't yet in mainstream computing. Now it's more mainstream and credible, and in the last quarter we expected to sell 40,000 enterprise subscriptions and we sold 87,000, which was a dramatic increase and that's a sign of mainstream adoption. We're at an earlier stage of our company than many companies.
CRN: But Red Hat is a Linux leader and you can parlay that to generate a lot of channel interest. Some solution providers may prefer to do business with Red Hat, but they have no choice but to go with Novell and SUSE. Why give the business away?
Evans: We have people to provide help to the channel and we have resellers. We are enabling a bigger pie of solutions for Oracle VARs and resellers, or BEA's VARs and resellers, on much bigger ticket products and supporting and deploying applications rather than the OS. We'll continue to grow and evolve it. Now that we have good [business] traction,and the company is getting stronger, we're maturing and our products [are becoming] more mainstream. Today our offering is between 4 and 7 percent, maybe 10 percent, of the total solution sale. We're helping to drive new business [to the channel], to help service and support and we're not trying to cut [solution providers] out of the action; we're not hiring a massive consulting force to be like [IBM Global Services]. That's not in the cards. The other one is the stage of evolution. We've only been profitable for a couple of quarters now so our ability to invest ahead of revenues has been limited. But things are looking brighter by the day, though.
CRN: How many SMB partners does Red Hat have now?
Evans: The VARs and corporate resellers and integrators are into the thousands, if you look around the world. There are at least 2,000. We don't have a traditional channel where we track every one of those. We have some relations with regional VARs, but it's not like we have Microsoft solution provider categorizations with thousands of registered partners.
CRN: Going forward, do you expect to do any special promotions or incentives to get channel partners to help your company migrate customers to Linux?
Evans: Every quarter we analyze our entire business and all of the channels and our budgets and profit and where we can invest to grow business. The number of systems integrators and VARs is getting to be more exciting by the month, and so I'd expect us to add incentives and offerings to partners because we're not doing dramatic growth in Red Hat's direct-sales force.