The Lure Of Open Source

President Tom Tucker says Akibia may not be making a boatload of money from Linux just yet, but customers are definitely now moving applicationseven some mission-critical onesto Linux. "Everyone has Linux initiatives going on," said Tucker.

Vendor partner Novell helped drive Akibia's entry into the Linux services business, said Tucker. Then, a few months ago, Akibia also became a Red Hat partner, looking to the unquestioned market leader to help the company move into deeper fishing waters. "It's important to our customers and it's a way to differentiate ourselves from our competitors," said Tucker.

To partners like Akibia, the open-source VAR channel's time has arrived. It's been a long time coming.

In October 1998, Red Hat unveiled a major distribution agreement with Ingram Micro and its first authorized reseller program. That program eventually folded. In 2003, Red Hat told CRN it was developing a two-pronged channel program to enlist more support from hardware partners as well as VARs and resellers. Since then, Red Hat has focused on distributing its Linux software and middleware primarily through the OEM channel and select resellers.

At LinuxWorld Expo and Open Source Solutions last week, Red Hat unveiled a global solutions accelerator program with Santa Clara, Calif.-based Intel, designed to help customers and partners accelerate deployment of Linux and Xen virtualization features in Red Hat Enterprise Linux 5, due later this year.

At the conference, Red Hat also confirmed it is stepping up its channel development efforts and has in place a program for VARs operating out of its sales organization.

"We have a partner program," said Bret Hunter, director of partner marketing at Red Hat, during a meeting with CRN at the Boston show.

When pressed for more details, Hunter declined to elaborate on the structure of the program or incentives for partners. But he acknowledged that last month the company held its "first annual partner event" to seek feedback and share strategic goals.

Sources said the Raleigh, N.C.-based Linux leader has been in stealth mode trying to recruit an army of new resellers and service partners. Red Hat invited Akibia, Adeara, Forsythe Solutions Group, Vicom Computer Services, Enterico and Expert Servergroup to the recent event as it prepares to face off against Novell's formidable channel in the enterprise and SMB markets.

THE WAR IS ON
Novell and Red Hat, the top two commercial Linux players, both have strong partnerships with IBM and Hewlett-Packard and can tap into those vendors' partner channels, such as the HP Linux Elite partner program. But as Linux and open- source opportunities expand, the two giants are battling for the hearts and minds of channel partners, observers say.

At the Intel Solutions Summit recently, shortly after Novell launched its SUSE Linux Enterprise Desktop 10, Red Hat said it would provide a "channel enablement" model for system builders to push a new Red Hat Linux desktop offering for SMB customers, coming out this summer. And Red Hat's ramped-up partner activity signifies a sea change in the business of Linux and open source, partners say.

For its part, Novell, Waltham, Mass., holds an advantage with its global support organization, 3,200 PartnerNet members, more than 10,000 partners worldwide and a large installed base of NetWare customers looking for a migration path.

Yet when it comes to Linux, Red Hat has a stronger brand name and deeper market share than Novell. However, solution providers say Red Hat needs to build trust in the channel as it moves to extend its footprint into the growing enterprise and SMB feeding ground. "Red Hat is new to the channel environment, and they are making a serious effort to build a program that supports what we need from them. They don't have many feet on the street, but they see a large growth opportunity coming," said Matthew Lerzak, director of systems solutions at Forsythe Solutions, Skokie, Ill. "Novell is used to that environment. They have a strong channel legacy and know how to support that kind of program."

Both vendors have to make their case against the Microsoft platform.

According to an IDC study commissioned by Microsoft that was completed last month, partner profitability on the Linux platform is not as lucrative as pundits say. According to the survey's results, Linux fared 16 percent better than Windows in gross profit margin but only 1 percentage point better in net profit margin. So Microsoft asserts that overall partner profitability between a similar Windows and Linux deployment is basically a wash when one considers 14 different metrics of performance. Microsoft claims that partner profit margins are much higher on both Linux and Windows for partners that earn the company's Advanced Infrastructure competency.

Several partners interviewed for this story said the net profit margin is roughly similar on both platforms, but they insist that the elimination of software licensing costs pays off for the customer and the channel in many ways. They say, for example, the cost savings enable customers to devote more IT funds to business process management, application development, virtualization and other high-end services that carry higher margins for partners. They also say the software savings invite customers to invest in storage hardware, security appliances and networking equipment that often translate into better profits for the channel.

Sean Canavaro, CEO of Novell partner KIS Systems, Fremont, Calif., predicted that customers will migrate to Linux because the maintenance costs are lower than Windows. He also said the software savings will motivate customers to spend more on services and translate into more storage and hardware purchases from customers, thus generating more profits for the channel.

CONVERGING FORCES
There are several forces coming together to account for the rising tide of Linux and open-source business for vendors and channel partners. At LinuxWorld Expo, several top executives said all the piecesfrom a technology and business standpointhave finally fallen into place. The completion of a mature Linux operating system as well as robust open-source middleware and open-source applications software has eliminated the obvious gaps that previously rendered Linux/open-source inferior to Microsoft's stack, they said.

In addition, the availability of precertified middleware stacks for select Linux distributions is helping to dispel Microsoft's argument that Windows and its sibling applications are less expensive and easier to install and deploy because they are tightly integrated and from one vendor.

SpikeSource, for example, unveiled a partnership with Novell that guarantees a fully tested, certified stack on top of SUSE that is supported by both vendors. Such out-of-the-box solutions may eliminate the need for some integration services. But SpikeSource, Redwood City, Calif., maintains the channel will benefit from the increasing customer adoption of Linux and open source that results from integration. It will also enable it to focus on advanced, higher-margin open-source CRM, business intelligence and systems management solutions.

Customers will pay for services but they don't want consultants camped out at their offices in sleeping bags, said Stuart Cohen, CEO of Open Source Development Labs. He said channel partners won't make much in the way of software margins, but they canand aremaking money higher up the stack.

"The cost of hardware is going down, so the business opportunity is to get much richer solutions," said Cohen. "The channel does what the channel does well: dealing with a set of customers the big vendors can't cover or don't cover."

And, say open-source application executives, the opportunities for channel partners extend well beyond the Linux operating system and LAMP (Linux, Apache, MySQL and Pfor PHP, Perl and Python) middleware stack. At LinuxWorld Expo, these executives said increasing adoption of commercial open-source middleware on Windows as well as Linux is a major area of opportunity for traditional solution providers.

ActiveGrid, for example, has a lightweight service-oriented architecture (SOA) LAMP stack and has successfully enlisted service partners such as Optaros, Cambridge; Cignex, Santa Clara; Momentum, Austin, Texas; and OpenCrowd, New York. Peter Yared, founder and CEO of San Francisco-based ActiveGrid, said the company teamed with OpenCrowd on a pilot for pharmaceutical giant Pfizer. ActiveGrid also partnered with Momentum on a "major implementation" of its solution for a large telecommunications company. Business also continues to grow for JBoss and SugarCRM, as well as leading open-source consulting firms such as Optaros and Olliance Consulting. Many popular open-source middleware and application suppliers have launched partner programs and unique partnerships with Redmond, Wash.-based Microsoft to serve their Windows customers.

One Sun Microsystems partner said the shift to open source has impacted IT spending, budget allocations and partner profitability. It has driven costs out of the network and Web-facing tiers and allowed customers to spend more on the data-facing side of the organization, which tend to be higher-margin opportunities for partners, he said.

"It shifts the dynamics of how people are spending money," said Mark Teter, CTO of Advanced Systems Group, a Denver-based partner of both IBM and Sun. "Linux has driven out the proprietary nature of the application stack and given IT organizations more budget allocations for other infrastructure components like storage and data management."

Data management, for example, represents 40 percent of total revenue for Advanced Systems Group but nearly 60 percent of its profits. "It allows us to do projects and new businesses that were not economical two years ago, like video archiving. From a partner standpoint, we have to evolve and we have evolved from being focused on the infrastructure to the applications stack and other IT areas such as storage," Teter said.

Although some partners bemoan the fact that many SMB applications are not yet available on Linux, the emergence of a new class of cost-effective open- source applications is leading to some wholesale migrations.

Open Country is an open-source management software company that recently released OCM Universal Management Suite 3.0, a universal systems management platform for Linux that includes a core manager, provisioning, backup, Web-based administration and support for both physical and virtual servers. The company has both a direct sales model and a reseller model, but its solution is built to be channel-ready: one person, a customer or a partner, can manage up to 50 Linux servers from a single console, said Michael Grove, CEO of Open Country, Belmont, Calif. The company has signed on a number of OEMs and smaller VAR partners and is targeting MSPs including systems integrators and VARs.

Grove said VARs can deploy these managed services to many customers. "This enables channel partners to acquire new high-margin revenue sources," he said. "They solve the problem once and pass it on to 25 different companies."

THE PROFITABILITY QUESTION
Yet, it is clear the channel model for Linux and open source is still evolving. Microsoft is quick to caution partners that the Linux and open-source ecosystem is tiny next to the Windows and Office franchises, so they should look twice before they leap.

"There's a fundamental profitability question. Where are the real marginsit is really unclear," said Bill Hilf, director of platform technology strategy at Microsoft. "Red Hat has shown that its business is still really, really small next to Microsoft's. Partners are betting on the hope that this stuff takes off."

HP's Linux chief agreed and said vendors are not trying to cut partners out of the services game. "We'll leverage our channel partners' expertise," said Christine Martino, recently appointed vice president of HP's Open Source and Linux Organization. "Service partners must build open-source capabilities."

Novell, for example, recognized just $56 million in revenue for all open platform solutions during its first quarter ended Jan. 31. Only $13 million of that flowed from SUSE Linux and other open platform products designed for Linux, it said. For its part, Red Hat generated $79 million for its fourth quarter ended Feb. 28 vs. $57.5 million in the same quarter a year ago.

And there are still some partners that say the open-source vendors have a lot to learn about the channel. "In terms of the channel friendliness of the Linux players? For me, at least, they've been persona non grata," said Daniel Haurey, managing partner at Exigent Technologies, Morristown, N.J., which runs Red Hat Linux on VMware. "I think we had one visit from a Novell rep awhile ago and no contact from Red Hat," said Haurey. "I'd like to see the Linux players make a resolute effort to reach out to us and really prove their willingness to work the channel for mutual benefit."

No one expects an overnight tidal wave of service deals. But those beginning to ride the wave say the future looks bright. "It's still evolving, clearly," said Akibia's Tucker. "Novell and Red Hat have different strategies in driving their business, and they're looking to experiment with channel partners to see what model will work."