Red Hat needs to get real about the cloud

Serving enterprise datacenters won't sustain Red Hat. OpenShift and what it represents may be crucial to the company's long-term survival

Red Hat needs to get real about the cloud
StockSnap (CC0)

Red Hat ended 2016 with a precipitous 12 percent drop in its stock price, courtesy of its CFO's departure and lighter-than-expected revenues. Losing a CFO to a grass-is-greener CEO spot isn't a big deal, but the revenue outlook is because it points to an ever-shrinking addressable market for the on-premise infrastructure software that has made Red Hat the only billion-dollar open source company in existence.

Not that the lights will go out on Red Hat's business anytime soon. Indeed, as CEO Jim Whitehurst highlighted on the company's most recent earnings calls, Red Hat now has hundreds of OpenStack customers, along with thousands of customers for its storage, operating system, and middleware offerings. This represents customers holding steady on existing infrastructure and upgrading to open source offerings.

The real growth, however, is in the cloud, as AWS continues to prove. To manage this existential crisis, Red Hat needs to double down on its cloudiest technology: its OpenShift PaaS offering.

The good news is that the OpenShift business is growing. The bad news is that it needs to grow a heck of a lot faster.

Sticking with datacenters

Cloud used to be for early adopters No more: Cloud -- increasingly public cloud -- is the default deployment model for new workloads that, as Gartner analyst Thomas Bittman indicates, "[are] simply growing faster" than on-prem/private cloud applications.

Yes, companies still buy on-prem software, and, yes, there are still OpenStack adherents to make them feel better about this choice. OpenStack executive director Jonathan Bryce argues that some applications benefit from private datacenter-driven flexibility and cost savings, and plenty of enterprises are piling on, as a Red Hat-sponsored survey suggests. Beyond survey data, on each earnings call Red Hat has touted a growing tally of OpenStack customers.

Such success, however, may be preventing Red Hat from focusing on a better, cloudier future.

An enterprise made of clouds

Amazon, not Red Hat (or even Microsoft), is defining the future of enterprise computing. Already past $10 billion in annual revenue, AWS keeps growing at a torrid pace. More important, AWS is innovating at a pace that no one else seems to be able to match. Recently, AWS has been moving to render the idea of a server obsolete with an aggressive push into Lambda functions and serverless computing.

Think about this from Red Hat's position. The company makes more than $2 billion each year selling software that primarily runs in private datacenters (whether dressed up as "private cloud" or correctly called "datacenters"). Red Hat has tried to broaden this focus by making Red Hat Enterprise Linux run anywhere, from AWS to on-prem to wherever. But more is needed, and that "more" may be OpenShift.

OpenShift is Red Hat's answer to containers. Built on Kubernetes, OpenShift makes it easy for enterprises to embrace the container revolution (even as AWS seeks to leapfrog that same revolution with Lambda). It can be run on-prem, as a public cloud service on AWS or Google Cloud Platform, or in a dedicated hosting environment.

Today, most of Red Hat's big OpenShift deals run on-prem, with "over 50 OpenShift deals alone that were six or seven figures," according to Whitehurst in the latest earnings call, with two OpenShift deals more than $10 million and one in the quarter more than $5 million.

For the most part, I suspect these are enterprises looking to Red Hat to help them baby-step their way into the cloud, starting with on-prem OpenShift. But for Red Hat to hope to keep pace with AWS, it needs to do more to push companies to the cloud, faster. After all, I'd hazard a guess that the same companies spending on OpenShift employ developers that are shifting their infrastructure to AWS or Microsoft Azure. To win in the long term, Red Hat must do more than placate IT dinosaurs: it needs to make it easier for them to aggressively move into cloud computing.

OpenShift, not OpenStack, is the key part of this story. By itself, a PaaS offering isn't the be-all and end-all, but it's critical to helping Red Hat think beyond on-prem software. Red Hat needs to disrupt itself and turn that corner. It's a far smarter bet than praying for an OpenStack future that will never come.

Copyright © 2017 IDG Communications, Inc.

How to choose a low-code development platform