It looks like it’s time again to ponder on Red Hat’s ability to (nearly) make $1bn in annual revenue and wonder why open source has not produced more billion dollar success stories.

Matt Asay doubts whether there will ever be another pure play open source company with $1bn in revenues. I would go further and state categorically that there will not be.

I have already discussed why that might be the case, in terms of the diverging strategies of pure-play open source and hybrid source, so I won’t go into that again in this post.

Instead I wanted to look specifically at Red Hat and how it was able, and was allowed, to grow to the point where it is on the brink of that $1bn revenue barrier. Red Hat’s strategy was covered extensively in our recent Control and Community report. Some excerpts from that report:

“Red Hat’s position has been achieved thanks to its ability to dominate the market for Linux subscriptions by virtue of its brand status. This in turn has been achieved by having a strong product, good customer support and a commitment to community-led development that has enabled the company to balance its own economic interests with the diverse interests of its community of users and developers…

“Clearly Red Hat has made enough impact among revenue-influencing users to generate significant profits from Linux, as well as its other open source software assets, but maintaining that influence is another factor for open source distributors. Even in those cases where a user does feel the need for a support contract or subscription, the longer they use the software, the less likely they are to require support for non-mission-critical deployments…

“The answer, for open source distributors, is to ensure that they are delivering more value than simply saving time, and Red Hat has led the field in delivering additional ongoing value in its RHEL subscriptions, including the Red Hat Network systems management software…

“Perhaps the biggest problem facing open source distributors, however, is the commoditizing impact of open source software, and the fact that they are attempting to generate revenue at a stage of the value chain that has been commoditized with that very product. Red Hat’s Whitehurst put this into perspective when he described how in order to generate $5bn in revenue, Red Hat would need to displace software that currently costs $50bn…

“That the open source distributor approach will survive is not in dispute. We also do not doubt that Red Hat will be able to maintain its position as the leading open source distributor for as long as it remains independent.”

The point about Red Hat’s independence is a critical one, and explains why I stated above that Red Hat “was allowed” to grow to its current position. Clearly avoiding being acquired is integral to that (and it remains the case that Red Hat could be acquired before it even hits $1bn).

What is particularly interesting about Red Hat is how important its independence was to other companies that have also generated significant revenue from Linux. Returning to Control and Community:

“In his 2003 book The Innovator’s Solution, Clayton Christensen noted that when one stage of the value chain becomes commoditized, the ability to earn attractive profits from proprietary products emerges at an adjacent stage in the value chain. In that context, it can be observed that the biggest beneficiaries of the adoption of Linux were not the Linux distributors, but rather server vendors including IBM, Hewlett-Packard and Dell, which exploited interest in Linux and industry-standard server and processor architectures to rapidly displace Sun Microsystems’ more expensive Unix and Sparc machines.”

The fact is that it was in the best interests of IBM, Hewlett-Packard, Dell and others – including software vendors such as Oracle – *not* to acquire Red Hat. Nobody wanted to repeat the mistake of having multiple competing flavours of Unix. The fact that Red Hat was independent was part of what enabled IBM et al to be successful in positioning their Linux-based products as (to borrow a phrase) “not Unix”.

It was Red Hat’s innovative business strategy that made it the leading Linux distributor, but it was the rest of the industry’s need for an independent commercial Linux partner that elevated it to another level.

Could we see another open source vendor elevated to a similar level of importance in the future? It is entirely possible, but unless is there is a repeat of the requirement to keep the vendor in question independent any successful OSS pure-play will simply be acquired.

The success of Red Hat is based on the conflation of such a large number of factors (not all which have been addressed here), that I don’t think it will happen again.

It’s also worth thinking about whether that requirement to keep Red Hat independent still exists today. But that’s another matter…