Services will drive Red Hat's success going forward, according to new CEO James Whitehurst in comments that are drawing attention to the benefits of open source software in the channel.
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Open source software comprises less than 1% of the worldwide software market, but sales will increase from $1.8 billion in 2006 to $5.8 billion in 2011, according to IDC. Solution providers hoping to reap the benefits of open source software market growth will have opportunities to provide new and potentially more profitable services if they can make the necessary adjustments, according to experts.
"The open source model gives you a lot of flexibility in structuring your business model," said Michael Goulde, senior application development analyst for Forrester Research Inc. "It gives you a lot more options than if you were designing services around a company's predetermined products."
Whitehurst, a former Delta Air Lines executive who became Red Hat's chief executive in December, told Reuters earlier this month that Red Hat will remain the open source software market leader by "providing better service and better value." Perhaps ironically, solution providers will see the biggest benefits of open source software if they make it "look, taste and feel like proprietary software" to their customers, Goulde said.
"Red Hat has nailed an important value proposition," Lawton said. "That is the value of having a stable, packaged, certified release that is not inherently available in a wide-open, open source project."
When a business or organization is considering open source software, the biggest concern is getting the same levels of protection, accountability and security expected from proprietary software. Open source software vendors provide some, but it's up to the channel to fill in the gaps in customer service, testing and patching, Goulde said. And because the source code is open, value-added resellers (VARs) and systems integrators (SIs) have more freedom to create customized solutions, he said -- and to sell them under their own brand names.
"It gives you a lot more options than if you were designing services around a company's predetermined products," he added.
MNX Solutions, a Unix consulting and server management firm in Monroe, Mich., has been a partner with Red Hat for about a year. The biggest benefits of open source software are cost savings for customers and easier testing and implementations for solution providers, MNX president Nick Wilkens said.
"Our customers can adapt more quickly, using open source tools such as Red Hat versus proprietary systems," he said. "It's a huge advantage."
MNX also partners with IBM, and Wilkens said doing business in open source is "very similar" to working with proprietary vendors. There are some differences, however. For one, open source software vendors often offer the software itself for free but charge for maintenance, support and service to keep that software up to date and working properly -- and the companies can be pretty aggressive about pushing those services. This subscription model means that the vendors and partners must both get used to an annuity sales model rather than big upfront dollars, which can affect partners' financing.
"That has an economic impact on their business in the short term," Lawton said.
Most channel partners realize the same margins for services, regardless of whether they are working on proprietary or open source platforms. But another benefit of open source software is that some VARs and SIs have been able to charge a premium.
"It's pretty complicated, so some people have been able to squeeze some additional profitability out of it." Goulde said.
Some open source adherents in the channel maintain that margins can actually be richer on the open source side, where the various LAMP (Linux, Apache, MySQL, PHP) platform components may need to be stitched together, versus Microsoft's integrated software stack.
Both Goulde and Lawton predicted that the open source channel will grow as the open source share of the software market increases.
"Partners typically are not ones to take a lot of risks," Lawton said. "They're going to go where the customer demand is, and they're starting to see demand revolving around open source software."