How Red Hat is monetizing JBoss

A little more than a year ago Red Hat acquired JBoss to enter the open source middleware market and the financial results thus far have been mixed. But now analysts are becoming more upbeat about JBoss and what it can contribute to Red Hat.

In an analyst note, Credit Suisse analyst Jason Maynard upgraded shares of Red Hat (RHT) to an outperform from a neutral and outlined many of the items we already knew: Oracle's unbreakable Linux effort hasn't been a threat; Red Hat Enterprise Linux 5 has been well received and business overall is solid.

But what caught my eye was Maynard's optimism around JBoss. JBoss had its sales issues in prior quarters, but Maynard said that Red Hat may have figured out a licensing model that works.

Maynard argues that JBoss is likely to show improvement on sales in fiscal 2007. Here's why:

In particular, we think the new licensing model is a promising move by Red Hat to monetize the JBoss installed base. JBoss as a stand-alone company was very successful at getting customers to adopt and use the technology, however getting them to pay for subscriptions was the challenge. A couple months after the Red Hat acquisition, JBoss founder Marc Fleury disclosed that, “on average we only monetize 3% of our user base for JBoss”. Red Hat is attempting to remedy that issue by employing a similar RHEL-Fedora licensing strategy that it successfully used to build its Linux business. In short, Red Hat will make cutting-edge but untested versions of the code available for download at no cost (jboss.org), while requiring support contracts for customers to use “certified”, tested versions. We have already heard some good initial field sales feedback about this approach even though the company is just a month into the process. JBoss accounts for less than 10% of revenue but could finally prove to be a more meaningful contributor if this new model gets the traction we expect.

The JBoss licensing makes sense on many levels. For starters, Red Hat customers are already used to that setup. And given that Red Hat's business is already doing well Red Hat's model for JBoss could provide a lot of extra gravy. If successful,  Red Hat could use the same licensing scheme for future acquisitions.

The big question is whether JBoss' existing customers--the 97 percent that aren't used to paying for anything--will go along with Red Hat's monetization efforts. Any JBoss customers want to comment?