Red Hat is boring -- and more open source companies should emulate it

Brick by brick, Red Hat has built itself into a powerhouse without raising piles of VC money. Today's open source upstarts could learn from it

 Red Hat is boring -- and more open source companies should emulate it
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Most open source companies no longer aspire to be the “Red Hat of” this or that market. But guess what? Those same open source companies still have something to learn from Red Hat -- namely, how to be boring.

Not boring in the sense of “these products put me to sleep,” but boring in the sense of thoughtful, consistent growth. While Red Hat can’t boast the GDP-sized profits of an Apple or the still-eye-popping growth of a Facebook, Red Hat has a P/E multiple (75) that suggests investors believe it has high-growth potential, even as it delivers a seemingly pedestrian rate of 15 to 17 percent.

Reliable ol’ Uncle George sort of growth

Red Hat’s growth has never been all that exciting, even when its stock was partying like it was 1999 (coincidentally, when the company went public). Though Red Hat’s shares tripled on their public debut, revenue growth between FY 1999 (ending Feb. 28, 1999) stood at 28 percent, a modest bump to $42.4 million (FY 2000) from the $33 million it did in 1999.

The numbers dipped in 2002, when total revenue decreased 3.3 percent to $78.9 million for the year ended Feb. 28, 2002, from $81.6 million in the year ended Feb. 28, 2001.

But by 2003, Red Hat was back to growth mode, climbing 15 percent to $90.9 million, which is more or less where it’s at today.

Sure, there have been bigger growth years (for example, 42 percent in 2006, 44 percent in 2007), but since 2007 the company’s revenue growth has slid, then settled into a comfortable range of 15 to 25 percent.

The stock, however, has increasingly looked like a growth stock:

Red Hat stock

Especially when compared to traditional bellwethers of enterprise IT like HP and IBM, Red Hat’s revenue and market valuation growth are somewhat remarkable.

However, it's still boring -- which is precisely what Red Hat’s open source children need to learn to be: consistent, steady, boring.

Learning from Uncle George

Sure, we’ve seen open source companies acquired for heady valuations: JBoss, XenSource, MySQL, SpringSource, and Zimbra all come to mind. Each was acquired for more than $300 million on revenue that was modest (JBoss was on a $65 million run-rate when acquired for $420 million) or mediocre (XenSource was doing less than $10 million when it was acquired for $500 million). None of these companies was able to prove itself to be a long-term enterprise vendor.

More recently, we have a host of open source unicorns like Cloudera, Hortonworks (now public), MongoDB, and DataStax raising gargantuan piles of cash even as they spend gargantuan piles of cash, chasing massive returns for their investors.

This isn’t the Red Hat way. Arguably, it’s not the open source way, either.

Maybe that’s OK. After all, most “open source companies” no longer style themselves as such, preferring to market the business value they provide instead of sloganeering around “open source freedom.” Even Red Hat no longer wears its open source heart on its sleeve. (Take a look at its early annual reports and compare them to more recent reports: night and day.) Fair enough.

But whether such companies like it or not, the minute they base their success on an open source project, their revenue potential is hampered compared to a proprietary competitor. Sure, companies like Cloudera, MongoDB, and DataStax sell proprietary value around an open source project, but most are still somewhat constrained by their need to compete with the free project they sponsor.

None of which is to suggest these companies will hurt for revenue. Rather, it’s a reminder that the best way for an open source company to grow is like Red Hat: steady, consistent, boring.

Instead of chasing venture capital dollars, companies competing around open source projects should instead take a more measured approach to earning customer dollars by selling enterprise value. It’s boring but, if Red Hat is any indication, it works.

This story, " Red Hat is boring -- and more open source companies should emulate it" was originally published by InfoWorld.

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