Red Hat's revenue glass ceiling is its own making

Red Hat suggests reaching $5 billion in revenue requires displacing $50 billion in existing user spending -- I disagree

Red Hat is, without a doubt, the poster child for an open source subscription-based business model. This business model has come under scrutiny of late, stemming from a recent interview in which Red Hat's CEO explains that reaching $5 billion in revenue requires replacing $50 billion in revenue currently flowing to other computer companies.

After joining Red Hat in December 2007, Whitehurst was quoted:

When I look at the quality of our existing technology, and the incredible brand that we have and the markets we play in, we should be a $5 billion company or more. If you just look at operating systems and middleware--that's nearly a $100 billion business. We're a $500 million business. We have barely scratched the surface.

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Whitehurst and team grew Red Hat's annual revenue to nearly $750 million in their most recent fiscal year. Computerworld UK columnist Glyn Moody asked Whitehurst whether Red Hat would reach the $5 billion revenue mark he had originally aspired to. Moody details Whitehurst's response:

His answer was a good one. He said that he did think that Red Hat could get to $5 billion in due course, but that this entailed "replacing $50 billion of revenue" currently enjoyed by other computer companies. What he meant was that to attain that $5 billion of revenue Red Hat would have to displace software that currently costs $50 billion. Selling $50 billion-worth of software -- even if it only costs $5 billion -- is somewhat hard, which is why it will take a while to achieve.

Before I go on, let me explicitly state that I have a lot of respect for Red Hat and its people. In my role at IBM, I compete with JBoss, a division of Red Hat -- but this post isn't about JBoss. It's about Red Hat's business model choices.

I don't accept Whitehurst's explanation as to why reaching $5 billion will take longer than he may have originally anticipated.

Whitehurst seems to be saying that every $1 made by Red Hat results in $10 of existing revenue loss to established vendors. I won't question the 1-to-10 ratio, as I have no data to offer.