Red Hat Confuses the Linux Message on Cost

Red Hat has disavowed the goal of its Linux Operating System (OS) being cheaper than Windows, creating opportunities for IBM, Novell, and Microsoft to improve their positioning on Linux.

The Bottom Line: Red Hat’s disinterest in underpricing Windows hands Microsoft a short-term marketing victory and paves the way for IBM and Novell to articulate a clearer message on cost.

What It Means: Red Hat CFO Kevin Thompson recently told analysts:

• The difference in OS costs between Red Hat Enterprise Linux and Microsoft is “not that significant” and isn’t as big as it’s perceived to be.
• “It has not been our goal to be cheaper,” and “We’ve never believed we have to be less expensive” than Microsoft.
• Microsoft’s OS prices “probably...put a ceiling on our price point.”

Thompson went on to say during the discussion sponsored by Prudential Equity Group, that while customers may balk at paying Red Hat more than Microsoft, “they don’t necessarily believe they should pay us less.” Red Hat is ignoring an important opportunity.

One of the most disruptive elements of Linux has been the clarity of its message on cost. Linux, if not free, was at least supposed to be cheaper. Microsoft has been fighting an uphill battle to convince companies that the cost of a Linux platform is less compelling--and more complex--than they think.

While Red Hat may still claim that the overall Total Cost of Ownership (TCO) of Linux is better, it now apparently agrees with Microsoft on a major point: There’s no immediate cost advantage to the OS itself, so you have to look to the bigger picture. The Takeaway: Having renounced the goal for Enterprise Linux to be cheaper than Windows, Red Hat has blurred what once seemed clear, handing Microsoft a minor victory.

Red Hat inches toward the traditional

Red Hat would argue that for the money, companies get better functionality from Enterprise Linux than from Windows. Thompson said that Red Hat’s open architecture, scalability, security, and performance will translate into “a lower cost--over time.”

However, a pricing stalemate cancels much of the Red Hat advantage for those that only need the functionality that Microsoft already provides.

For a company extolling the virtues of open source, Red Hat’s messaging sounds more like business as usual. In general, when a vendor sets its prices more or less in line with a competitor:

• Comparisons become subjective--TCO becomes more indirect and vague, leaving functionality as the only basis for direct comparison.
• Upselling becomes important--A vendor is more likely to selectively introduce new features into different versions, compelling companies to upgrade as their needs evolve.

IBM and Novell will benefit

Red Hat’s statements also splash cold water on a lingering question: When a software vendor tries to make a complex open source project ready for the enterprise, will it sell it at a significant cost advantage over closed source competitors? Although Red Hat seems to say no, others have the opportunity to say yes.

Novell offers another prominent Linux distribution, SuSE, and emphasizes professional services and an integrated suite of its own applications. It now has the opportunity to make a clearer and more compelling TCO argument than Red Hat.

And of course, the two-ton blue elephant in the corner is none other than IBM itself, which currently relies on the Linux distributions of others. The open question is whether IBM will mint its own brand of Linux to avoid vendor dependencies that appear increasingly restrictive. The Takeaway: The Red Hat trend makes a “Blue Linux” more likely.

Conclusion: Red Hat is missing a chance to encourage the momentum of Linux in the enterprise. While this gives IBM and Novell an edge, Red Hat should begin to articulate a clear message on direct cost savings over Windows. Those considering Linux over Windows should assess the TCO of each by contrasting the value of needed functionality with the costs for hardware, license and support fees, hiring and training personnel, professional services, and other intangibles.

AMR Research originally published this article on 9 April 2004.