Analysis: Lack of Channel Program Hurts Red Hat's Software Ambitions

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That's the consensus of analysts, channel partners and sources close to the Raleigh, N.C.-based Linux distributor. Like Microsoft, Red Hat is expanding its application portfolio and integrating the software stack on top of its Linux operating system. The suite includes the Red Hat Application Server, Global File Server, Cluster Suite, Developer Suite and Network Services.

At its first summit this week in New Orleans, Red Hat introduced the latest addition to its family, the Red Hat Directory Server. Also being prepped for release is the Red Hat Certificate Management System.

Still, Red Hat lacks a key ingredient that both Microsoft and Novell enjoy--a strong base of channel partners--and that is becoming a bigger vulnerability for the Linux leader as the market matures, industry observers say.

"Without a strong systems integration channel and strong channel of partners for medium enterprises, Red Hat will be limited in what they can do," said analyst George Weiss of research firm Gartner. "They will run more into Microsoft and their software applications. Those in the SMB space that deal with Microsoft need to see a Red Hat reseller who is well-tuned to the Red Hat strategy. If they don't have any channel at all, if Red Hat doesn't have close proximity to resellers, including training and certifying them, it will cost them."

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Interest in Red Hat's services capabilities is growing as customers move out of initial infrastructure deployments and into phase-three deployments that are more strategic, expanding workloads such as ERP, supply-chain and CRM applications on Linux, Weiss said.

Although last year Red Hat said it planned to launch a channel program, nothing has been announced publicly so far, and it remains unclear how the company's services strategy will play out in its 2006 fiscal year. In its 2005 fiscal year, Red Hat hired more sales staff to grow its business, said one source close to the company. For example, in the Red Hat's last earnings call in late March, the company said it increased its head count by 15 percent during its fiscal 2005 fourth quarter to about 950 employees. In the previous two quarters, it had increased head count by 5 percent to 10 percent.

"Building a channel is absolutely something they need to do. The sales force knows the products, but I don't know if they can build solutions," said the source, who requested anonymity. "In order to build a channel, Red Hat has to dedicate people in seats, and that costs them money."

Red Hat couldn't be reached for comment.

Robert Owen, a solutions architect for Eastern Computer Exchange, a New York-based storage integrator who attended the Red Hat summit this week, said the Linux distributor is making a big mistake by snubbing the channel. The integrator recently joined Novell's Linux partner program, he said.

"All the big vendors have a channel programs now. By not having a partner program, Red Hat is cutting itself out of a lot of business," Owens said. "Partners can get Red Hat into accounts they cannot get into themselves."

Bob Gett, CEO of Optaros, a Cambridge, Mass., professional services firm that focuses on open-source enterprise applications, said Red Hat rebuffed his company's attempts to reach out and form a partnership.

"We have not had partner discussions with them because they're not interested," said Gett, the former CEO of Viant and president of Cambridge Technology Partners North America, now part of Novell. "So far, we have gravitated to Novell for discussions because we see synergies. Red Hat thinks they have consulting and SI capabilities of their own. Novell sees the value we bring to the table."

During its last fiscal quarter, Red Hat said 56 percent of its quarterly bookings came from indirect "channel" sources--that is, IBM, Hewlett-Packard and Dell--up from 43 percent a year earlier. Yet observers say Red Hat can't rely on OEMs exclusively, particularly as it runs into conflicts with those partners on the software stack.

For instance, IBM recently acquired Gluecode Software, which has an open-source infrastructure based on the Apache Geronimo application server that will compete against JBoss and the Red Hat Application Server. And last October, Dell expanded its partnership with Red Hat Linux nemesis Novell.

"There is a cost to build a channel to have leverage in the SMB space. HP and IBM can sell the distribution, but they don't give enough breathing room for Red Hat to add value," Gartner's Weiss said. "If Red Hat continues to depend on HP and IBM to move into new markets, they will be limited in what they can do."

During a keynote address Wednesday at the Red Hat summit, HP Vice President Of Linux Martin Fink said the next big focus for the industry centers on the integration of the open-source stack and applications such as MySQL, JBoss, Jonas and SugarCRM into a solution. "The challenge is the integration of all that software," Fink said. "We're shifting from the software component to the integration of those components. That's where we see the next value piece."

To that end, open-source startups such as SourceLabs and SpikeSource have stepped in to provide tested and certified software stacks based on the popular LAMP (Linux Apache MySQL and PHP-Perl) stacks to run in customer environments. And Optaros, which was launched last August, is partnering with SpikeSource and SourceLabs and using their certified LAMP stacks to design customers' open-source applications.

"Red Hat has the advantage of the brand name in the distribution market but not in all other parts of the stack," said Gett. "I think companies out there like SpikeSource and SourceLabs will eat into Red Hat's market because they back open, standardized open-source stacks. Red Hat seems more like Microsoft than a company providing support for standard open-source stacks."

The unnamed source said Red Hat should have embraced JBoss instead of marketing its own application server, but the Linux distributor could change its mind if business doesn't pick up. Red Hat dumped its Red Hat Database and recently embraced MySQL as a partner. Novell has forged close ties with MySQL and JBoss.

Some observers also say Red Hat's professional services organization isn't as well-equipped as other vendors' service arms to handle the scope of customer projects coming down the pike. "I've rarely seen the company's professional services called in, except for tech-support help," the unnamed source said.

Summit attendee James Mularadelis, a senior Unix engineer at Bristol-Myers Squibb Co., said many enterprises have well-staffed IT departments to handle planning and deployment of Linux software, but Red Hat should consider establishing a stronger, specialized services army akin to Sun Professional Services in order to grow into new markets.

Red Hat was able to unseat its Unix rival fairly easily, but it will have a tougher time facing off against Microsoft and Novell without a partner network, systems integrators noted. "Without a channel, Red Hat's really going to get hurt," Eastern Computer Exchange's Owen said.