Why Red Hat can take over the cloud sooner than you think Watch Now

In 1994, if you wanted to make money from Linux, you were selling Linux CDs for $39.95. By 2016, Red Hat became the first $2 billion Linux company. But, in the same year, Red Hat was shifting its long-term focus from Linux to the cloud.

Here's how Red Hat got from mail-order CDs to the top Linux company and a major cloud player. And, now that Red Hat is owned by IBM, where it will go from here.

Red Hat Linux Beginnings

Marc Ewing was a happy hacker spinning his distribution of Linux on CDs from his Raleigh, N.C., home. He called it Red Hat after his grandfather's red Cornell University lacrosse cap, which he wore as a tech assistant at Carnegie Mellon University.

Red Hat Linux was not the first Linux distribution. That honor goes to 1992's Manchester Computing Center (MCC) Linux. It was followed in quick succession by Softlanding Linux System (SLS), and then Slackware, the oldest surviving Linux distribution, and Debian Linux.

Except for Debian, unless you're a dyed-in-the-wool Linux fan, you probably haven't heard of these, and, if you know Debian, you know it's never been a commercial program. That might've been the fate for Red Hat Linux as well -- except Ewing met Bob Young, a young entrepreneur with big, albeit unformed, dreams.

From CDs to servers and services: Young had started a business selling Slackware CDs, but he wanted more. So, starting from Young's wife's sewing closet, they launched Red Hat Linux. The early years were hard.

Young admitted, "I knew how to sell hardware, not software, and we were selling a concept that no one was buying." First, they sold CDs and then servers and services. "We would literally go and visit them one customer at a time. There was no magic bullet. We did a lot of hard work staying up with our customers."

But Young also realized that while he couldn't sell Linux as being better, faster, or having more features than Unix, he could sell one benefit: Users could tune it to meet their needs. That turned out to be Linux's selling point.

Inspired by IBM: They also found inspiration in Lou Gerstner's reinvention of IBM. "Even when Marc and I weren't making enough to pay the rent, IBM inspired us. IBM was the very definition of a company going out of business, but Lou Gerstner turned it around in three years. He did it by going out and talking to the customers and finding out that no one really liked IBM's products."

Red Hat

So, why did people keep buying IBM? Gerstner was told, "You're the only company with offices everywhere. Gerstner got that what IBM was really selling was a service, not products." And that's how Young saw Red Hat's path, too. Today, Red Hat makes its money not from selling any "product," but by selling services.

Open source, a radical notion: Young also realized that Red Hat would need to work with other companies for long-term success. Today, everyone uses open source to work together. In the 90s, it was a radical notion. Red Hat was one of the first to realize that technology was not a zero-sum game. That, in fact, by making the pie bigger, rather than fighting for a larger slice of the pie, you could become more profitable.

Red Hat has stayed true to that idea to the present day. Earlier this year, Jim Whitehurst, Red Hat's current CEO and president, said, "Open source is the driving force behind much of the technology innovation." It's not just sharing code. It's "how organizations and individuals now work. Open source -- and the open-source ethos of contribution, collaboration, and agility -- plays a critical role in enabling individuals to act. ... Through the collective action of extraordinary people willing to take risks and try new things, we're seeing organizations achieve the innovative breakthroughs everyone is always chasing."

So, it is that Red Hat is working with rivals and partners in such powerful open-source projects as OpenStack, Infrastructure-as-a-Service (IaaS) cloud; Docker, containers; and Kubernetes, container management.

To Enterprise Linux and Beyond

Young also realized early on that Linux would not be just for rebellious users who didn't want to use Windows or Unix. His revelation came when he visited Goddard Space Flight Center, and Don Becker invited him to see a neat project he was working on: Beowulf, the first Linux supercomputer. It wasn't so much supercomputing, which made Young think. It was that Linux could be used for powerful computers, not merely desktops. Today, Linux utterly dominates supercomputing. And Red Hat Linux was on its way to becoming Red Hat Enterprise Linux (RHEL).

Subscription success: Today, RHEL subscriptions is Red Hat's leading income source. When Red Hat made this move from personal Linux distributions to business Linux distributions in 2003 and 2004, people hated it. They screamed, "Red Hat has betrayed Linux" and "Red Hat wants to be the next Microsoft!"

Paul Cormier, then Red Hat's vice president of engineering, now Red Hat's president of products and technologies, spearheaded the decision to leave behind its inexpensive distribution to move to a full business play. The last stable release, Red Hat 9, arrived in 2003, while RHEL made its first appearance.

Cormier said later, many "engineers at the time didn't care about a business model. They wanted to work on Red Hat Linux. We had some level of turmoil inside the company with going to this new model. Some engineers left, but more stayed."

Red Hat, despite the fears of both internal and external critics, remained true to Linux. Today, Red Hat leads Linux technology development and often is the first to deliver security patches.

Critics were right about the second one. In 2002, after Red Hat's successful 1999 IPO, Ewing said, "We really don't worry too much about a lot of these other Linux players, and we wish a lot of them well. Microsoft is the competitor, not SuSE and Caldera Systems and TurboLinux."

Not a desktop Windows rival: That's not to say Red Hat was interested in competing with Windows on the desktop. It wasn't. In 2002, then Red Hat CEO Matthew Szulik said home users should stick with Windows: "I would say that for the consumer market place, Windows probably continues to be the right product line."

The company has also continued to support the Linux desktop with its forward-looking community Fedora Linux distribution. Fedora also became RHEL's testbed.

At the same time, if you need to use an enterprise-level Linux, but you don't need Red Hat's support, the company acquired the "free to use" CentOS, RHEL clone. So, whether you want a cutting-edge Linux desktop (Fedora), a solid business Linux distribution without support (CentOS), or an enterprise Linux with full support (RHEL), Red Hat has what you need for all your Linux needs.

But Red Hat has not been content to be the leading business Linux company. Its goals remain higher than that.

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Red Hat aims for the clouds

The first sign of that came in 2006, when Red Hat bought JBoss. JBoss, a leading Java-based middleware company, is all about server-based corporate software. Red Hat was on its way to giving customers not just a Linux distribution, but an enterprise software stack.

Looking into the future, Red Hat saw early on that the cloud was going to displace traditional IT. So, Red Hat started moving into the cloud. It wasn't an easy journey.

Its first move was not, as some might think, Red Hat CloudForms. This is a virtual machine (VM) manager for VMware vSphere, Red Hat Enterprise Virtualization, Microsoft Hyper-V, OpenStack, and Amazon EC2. So, yes, it can work with VMs on cloud, but it's not a cloud program per se.

By 2008, RHEL was available on EC2. Red Hat wanted its own cloud platform, or at least an open, standardized interface that can be used to manage all clouds. That effort, Deltacloud, didn't work out.

OpenStack traction: Red Hat finally got traction in the clouds when it started working with OpenStack. In 2012, Red Hat committed to the open-source OpenStack.

In its announcement, Red Hat played on the same themes it had when its only concern was Linux -- working with others and focusing on business:

"Collaborating through upstream projects is at the heart of the economic and business model that makes open source such an effective way to develop software. Red Hat leverages the work done by vibrant open-source communities such as OpenStack, thereby allowing our customers to take advantage of the work done by hundreds of companies and individual developers, not just Red Hat."

Red Hat, the OpenStack Cloud, and Public Clouds

Since then, Red Hat has made it clear that OpenStack would be the foundation of its IaaS cloud, Red Hat OpenStack Platform (RHOP). But OpenStack would not become the be-all and end-all of Red Hat's cloud plans by any means.

Rather than just betting on the crowded IaaS market, Red Hat moved into the far more open Platform-as-a-Service (PaaS) market with OpenShift. This cloud platform, which began in 2011, has seen a significant rewrite. This revision happened because of the rise of Docker containers and the subsequent emergence of Kubernetes as the top container orchestration program.

On to containers: Today's OpenShift, OpenShift Container 3.5, is all about developing applications on containers. As Steve Pousty, Red Hat's lead developer advocate for OpenShift, explained at the Linux Foundation's Open Source Summit, Kubernetes acts "common operating plane for cloud-native computing using containers."

True, you can also use OpenShift for Jboss or other legacy software languages, such as PHP, Node.js, Python, and Ruby, but it's also a bridge to new cloud-native programs. For instance, Red Hat recently acquired Codenvy, a container and cloud-native development tool company.

Red Hat has also been investing in other technologies to strengthen its cloud moves. For example, Red Hat bought Ansible. This gives Red Hat a strong DevOps offering, which can compete with Chef, SaltStack, and Puppet. Curiously, except for Canonical, Red Hat's main Linux cloud competitor with Ubuntu, and its Juju DevOps program, no other would-be cloud power has invested in obtaining a DevOps program.

The Raleigh, N.C., Linux powerhouse also bought InkTank, the parent company of Ceph, a software-defined storage program for object and block storage.

Here, too, Red Hat has shown that it believes sharing intellectual property is the way to business victory. In 2015, Red Hat opened Ceph's plans to partners and frenemies. As Tim Burke, then Red Hat's VP of infrastructure engineering development explained, "Red Hat is all about collaboratively working among communities to accomplish vastly more than any single company could do alone."

Speaking of collaboratively working with others, just because Red Hat has its cloud platforms doesn't mean it won't work and play well with others. You can run RHEL and related programs on AWS, Microsoft Azure, Google Cloud, and on and on. You name a cloud, and you'll find RHEL on it.

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Red Hat goes IBM

Red Hat's growth had not gone unnoticed. For years, there were rumors that IBM, Oracle, or even Microsoft, might buy Red Hat. Then, in October 2018, the rumors became a reality. IBM announced it would be buying Red Hat for $190 per share in cash. The total value of the deal is approximately $34 billion, making it the most prominent software acquisition in history.

Red Hat had gone full circle. Red Hat stepped up from its rivals in the 90s by embracing Lou Gerstner's reinvention of IBM. Now, IBM is seeking to revive itself by investing in Red Hat.

And, make no mistake about it. This is not a normal buyout. IBM may be buying Red Hat, but Red Hat will stay independent. Red Hat will operate as a distinct unit within IBM and keep its existing facilities, brands, and unique open organization leadership style.

The last thing IBM wants is to transform Red Hat into just another IBM brand. As Arvind Krishna, IBM's senior vice president of hybrid cloud, said when the deal was announced: "Red Hat must, and will, remain independent."

Why? Because Red Hat has the open-source vision needed to revive IBM. In specific, IBM wants Red Hat's open-source savvy to make it a major hybrid-cloud player. As IBM CEO Ginni Rometty explained, customers want IBM to help its existing customers to their corporate data "across multiple cloud environments with no lock-in." Together, "that's what the two of us will do."

IBM/Red Hat isn't just about keeping IBM's customers. The partnership -- and it is more of a partnership than a merger -- seeks new customers who want a Kubernetes-based hybrid cloud. Almost every cloud-company is pursuing this path, but IBM/Red Hat is uniquely placed to deliver the high-quality hybrid cloud needed for the cloud-based business world.

Conclusion

Red Hat is no longer focused on Linux. It's a long way from a sewing closet to the Fortune 50. But first Red Hat made the hard choice to move from a popular, but unsustainable, hobby business model to a then-radically different support subscription one, which brought the company billions. Then, Red Hat didn't stay with what they knew best. Instead, it moved on to the cloud. Now, with IBM, Red Hat plans on becoming the hybrid cloud company.

There's a great deal of competition in the cloud market. Some of it comes from companies far more massive than Red Hat. Even so, I wouldn't bet against Red Hat. It's beat the odds time after time. I won't be surprised if it beats them again.