Red Hat looks to mainstream markets for growth

Expanding Linux adoption beyond key vertical markets is an important driver for Red Hat's growth, which remains steady even as one of its strongest customer sectors, financial services, is getting hit hard by the U.S. crisis, the company's CEO, Jim Whitehurst, said Tuesday.

At a Red Hat analyst event in New York, which was available via webcast, Whitehurst said that while Red Hat does well with "companies that use technology for competitive advantage," mainstream companies that don't care about being on the leading edge of technology adoption are still largely an untapped market for the vendor.

Red Hat has a high market share among companies that focus on technology to drive their businesses, such as financial services companies and major movie studios, he said.

However, this is just a small part of the enterprise IT market, and Red Hat needs to "make sure that we are delivering the commercial capabilities required for the expansion into the mainstream," Whitehurst said.

These capabilities include continuing to partner with independent software vendors and major systems integrators, such as Accenture and EDS, to help Red Hat Enterprise Linux (RHEL) compete more effectively against Microsoft Windows.

Whitehurst said that while the entire market opportunity for IT infrastructure, which is where Red Hat plays, is worth about US$200 billion according to IDC, Red Hat is still a "small-share player" in about $50 billion of that market.

One of the sectors that was early to adopt Red Hat Enterprise Linux (RHEL) was the financial services sector, which is currently being pummeled by a massive economic crisis in the U.S. However, Red Hat hasn't yet felt serious ramifications from that, something Whitehurst attributed to the subscription-based, open-source business model the company employs.

"What we do is clearly an economically superior development model, making that consumable to the enterprise," he said. "It's something we’ve done for years and something that someone else hasn't been able to duplicate."

Having a subscription model also means that Red Hat already has revenue on the books going into a new fiscal year, so it can forecast accordingly and realistically for growth, Whitehurst said.

Tuesday marked the first time Whitehurst spoke to Red Hat analysts en masse, as he only took over for longtime Red Hat leader Matt Szulik last December when Szulik left the company for health reasons. Whitehurst came to Red Hat from Delta Airlines, where he was chief operating officer.

Another customer segment Whitehurst said is an opportunity for Red Hat is people who are using the free community version of Red Hat Linux, called Fedora.

"Community to enterprise is a big opportunity," he said, adding that with the cost of deploying and maintaining Fedora, it would be more cost-effective for some of those customers to purchase a subscription from Red Hat. It is up to the company to get that message out, Whitehurst said.

Some customers also are stretching their RHEL subscriptions and deploying the OS beyond what the company permits according to its license, he noted, which is another opportunity for Red Hat to educate customers about its business model and derive new revenue.

"There are people who have one copy [of RHEL] and call us 100 times a year, which means they probably [are running] more than one instance," Whitehurst said. "We have to make sure we're out driving our value propositions and letting people know it doesn't mean it's freely copyable just because it's open source."

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