In my IT investment research work (see link to the right), I am a big fan of the open source software (OSS) development model because it has restructured and lowered R&D expense for most of the leading software suppliers I cover, while making their customers happier. I enjoy opining about the OSS community and culture here on ebizQ because it reminds me of user groups like DECUS, NADGUG and others that were so important during the minicomputer era when the minicomputer companies basically supplied only what is called today “bare metal” (presumably because nothing is made out of “iron” anymore). And I am a fan of Red Hat because I like the underdog; it is the only one of a few small software suppliers we follow at Research 2.0.
That being said, Red Hat chairman Matthew Szulik on December 20 (in what might be his swansong as Red Hat CEO at a quarterly conference call because Red Hat also elected a new CEO on December 20) misrepresents the benefits of OSS. In doing so, I fear he threatens the leading software suppliers’ new cost structure, many OSS communities’ expectations, and maybe even the chance that Red Hat can become one of those leading software suppliers some day. He announced that Red Hat continued to grow at about a 30% trailing-12-month rate, meaning about twice as fast as software market leaders Microsoft and Oracle. He credits the company’s “strong financial performance” to the fact that Red Hat’s “business model actually requires us to deliver value in order for the company to be successful.”
I believe that is true. I just don’t believe the Red Hat's success has anything fundamentally to do with OSS. Szulik says “Open Source opens the opportunity to reduce the cost and delays associated with (big software projects because it involves) developing software in small, easily digestible increment...” That’s RAD 101 and not at all unique to OSS.
He goes onto say, “In Open Source software, innovation happens every day to produce a more highly reliable and higher quality product.” Our research produces no direct evidence that OSS-licensed code is more reliable than closed-source code. I believe that because OSS-licensed code is basically “newer” in design philosophy, that it is better built. But I can’t demonstrate that statistically. And because most OSS is also literally new I do not believe that it has been “exercised” enough yet to discover all the inevitable bugs. Software development using a RAD philosophy is more than ever a cottage industry, totally dependent on the old ladies at the spinning wheels not missing a beat or a thread.
Szulik says Red Hat “pioneered the subscription model… (which) has been a highly disruptive approach, not just in the delivery of the product and pricing, but in the fundamental approach of how the supply chain of computing software has been built.” There is no one-to-one relationship between OSS and the subscription business model. In fact it is just a variation of the systems rental and service bureau models that predated the minicomputer/independent-software-vendor (ISV) era, and the perpetual-license-plus-subscription-maintenance-fee model associated with most ISVs products today. Red Hat just executes it well.
Szulik talks about the joint collaboration with a customer that led to the MRG technology recently released to beta as an example of OSS. Ah, how about GE/BOA/MICR—1956? Or IBM, its Midwest utility customers and a Type II (sort of OSS but who would want the source) program called CICS—1968? And on and on.
So hats off to Red Hat for another good quarter and best wishes to Mr. Szulik in this new role as Chairman only. But let’s not credit OSS. And let’s not blame OSS when the inevitable bad quarter arrives for Red Hat, which the investment community might define as when Red Hat is growing only as fast as Microsoft and Oracle. OSS is basically about terms and conditions from a business perspective and a culture from a personal perspective. It’s not about higher customer loyalty than IBM or Oracle, more frequent conversions from free sample to paying customer, or better growth rates and profits.
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