Open Source Revenue Models: Red Hat’s Tactics and Strategies

Red Hat recently disclosed publicly a change in the way they distribute kernel patches, explaining that such decision came out in reaction to third parties (competitively) supporting RHEL.

Red Hat’s decision might be ‘debatable’ for some, while others are ok with that. The whole point to me seems to be a completely different question, though. Tactic decisions to prevent others from appropriating returns from the (Red Hat) commons are not a substitute to a (long-term) strategy focused on renewal rates, an area where Red Hat is using effective business strategies.

Dave Kellog wrote an excellent post exploring the math of software annuities, explaining in plain English the importance of the renewal rate for open source vendors selling subscription services.

If that rate [renewal rate] drops to 65% because many people feel they can get by with the community version, then the value drops to 75 units – a difference that could decimate a company.

To get deeper into financial details see his spreadsheet, comparing perpetual licenses, SaaS and OSS subscriptions. Customers using open source software – differently from proprietary or SaaS customers – could not renewing by downgrading to unsupported open source version or buying competitive support.

Red Hat’s move is actually tailored to reduce the latter risk, but not the former.

Red Hat’s Subscription Services are designed to reduce the former, though (emphasis is mine).

Any unauthorized use of the  Subscription Services is a material breach of the Agreement, such as (a) only purchasing or renewing Subscription Services based on  some, but not all, of the total number of Units of Red Hat Software or other Red Hat Product that you deploy, install, use or execute, (b)  providing Software Access or Software Maintenance (each defined below) to third parties, (c) using Production Support or Development  Support (each defined below) to provide support to third parties, (d) using Subscription Services in connection with any redistribution of  Software, or (e) using Subscription Services to support or maintain any non-Red Hat Software products.