The Open Source Battle
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
These days it’s not hard to find headlines about companies trying different ways to cut their operational expenses. Also it’s a well known fact that most companies today are not as profitable as they used to be during the golden days, before the sub-prime crisis. The reason I used the term “most companies”, and not “all companies”, is because some organizations were able to capitalize on the world’s need to cut expenses.
Capitalizing on the economic turmoil
Red Hat (NYSE: RHT) is the world’s leading provider of open source software. Most companies operate with 40-60% of their IT budgets reserved for maintenance and operations of their software, and open source proves to be a cheaper and flexible solution which cuts the needless expenses. World over the margins have slipped, companies affected are not able to meet up with their expenses, and to continue functioning they have the choice of either downsizing their operations, or they could use cheaper but effective substitutes like the open source software solutions offered by the likes of Red Hat.
Red Hat derives its profits from the software subscriptions and training and services. Software subscriptions includes the setting up and troubleshooting of the company’s software, and accounts up to 85% of the total revenues, while training and services constitutes the remaining 15%. Red Hat currently has a market share of 60% in Linux related software, and the company sees the global economic turmoil as an opportunity to expand its profits.
The Industry and its Competition
Red Hat has Linux based software offerings, and the biggest competition it faces is from Microsoft (NASDAQ: MSFT). Most SME’s have Windows platform on their systems, and their ERP’s are also Windows based. According to the IDC, Linux users are expected to increase at the rate of 21% every year, till 2015, compared to the 7% addition to Windows users. The reason for such a stellar increase is the cheaper and more flexible open source software of Red Hat compared to the more expensive solutions on Microsoft Windows.
Oracle (NASDAQ: ORCL) is another competitor that Red Hat has to share the market with. Oracle specializes in UNIX based services. The user base of UNIX on the contrary is expected to contract 5% every year till 2015, which reduces the potential threat to Red Hat’s market share.
VMware (NYSE: VMW) proves to be a competition in the virtualization segment for the company. The company takes up the market share by providing the windows users, the functionality of Linux. The restraint here is that the user has to purchase a windows license to operate open source software. Since Red Hat has its own operating system that’s open source, costing becomes an issue for anyone setting up a new business, and Red Hat is preferred over virtualization offered by VMware. Tables have also turned in Red Hat’s way when on 26th of June, the company announced that it has tied up with SAP (NYSE: SAP). Red Hat would now be deploying SAP applications over Red Hat’s virtualized cloud environment. This would support added workload, which would provide the users, the functionality of SAP’s applications along with the flexibility of Red Hat’s environment. This could very well turn out to be a nightmare for VMware.
The company made headlines when it acquired Fuse Source from the parent company Progress Software. According to the management the acquisition is supposed to ease the process of integrating existing software of companies with the enterprise offerings of Red Hat. This will not only save time and money but the application integration would get more flexible. Application integration is the fastest growing segment in the enterprise software market, and the acquisition is expected to increase the existing user base of the company. The developers would now be also able to offer better and faster applications, thus presenting a better value of money to the users.
On 29th August, 2012, Red Hat announced that it has acquired Business Process Management (BPM) technology from Polymita Technologies S.L. The acquisition is expected to add to offerings of JBoss Enterprise Middleware Integration Software. The BPM platform helps companies to improve on their productivity and increase control over day to day operations. The platform is user friendly and is easy to operate and the demand for such software is expected to pick up steadily. Red Hat expects financial advantages of the acquisition only after February 2013.
The Foolish Takeaway
Red Hat with its recent acquisitions is extending its reach to the software integration market as well as adding to the offerings to its existing middleware software offerings. The company already controls 60% of the Linux market and is looking to increase its share in the market. Coupled with the spurt of migration of users to the Linux platform, Red Hat looks well equipped to take advantage of the growth opportunities of the industry. The company also looks comfortable in taking on the competition, and thus a Foolish buy rating for Red Hat.
PiyushArora has no positions in the stocks mentioned above. The Motley Fool owns shares of Microsoft, Oracle, and VMware. Motley Fool newsletter services recommend VMware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.