Observations on the Future of Red Hat from Red Hat Analyst Day

On November 8th, 2018, Amalgam Insights analysts Tom Petrocelli and Hyoun Park attended the Red Hat Analyst Day in Boston, MA. We had the opportunity to visit Red Hat’s Boston office in the rapidly-growing Innovation District, which has become a key tech center for enterprise technology companies. In attending this event, my goal was to learn more about the Red Hat culture that is being acquired as well as to see how Red Hat was taking on the challenges of multi-cloud management.

Throughout Red Hat’s presentations throughout the day, there was a constant theme of effective cross-selling, growing deal sizes including a record 73 deals of over $1 million in the last quarter, over 600 accounts with over $1 million in business in the last year, and increased wallet share year-over-year for top clients with 24 out of 25 of the largest clients increasing spend by an average of 15%. The current health of Red Hat is undeniable, regardless of the foibles of the public market. And the consistency of Red Hat’s focus on Open Source was undeniable across infrastructure, integration, application development, IT automation, IT optimization, and partner solutions, which demonstrated how synchronized and focused the entire Red Hat executive team presenters were, including

• Vice President of Communications, Stephanie Wonderlick
• Senior Vice President of Engineering, Matt Hicks
• Senior Vice President of Application Platforms Business, Craig Muzilla
• Vice President and General Manager of Cloud Platforms, Ashesh Badani
• Vice President and General Manager of Middleware, Mike Piech
• Chief Technical Officer, Chris Wright
• Vice President and General Manager of (IT) Management, Joe Fitzgerald
• Vice President of Global Services, John Allessio

The Analyst Day came in the shadow of IBM’s announcement of its intent to acquire Red Hat for $34 billion, which is almost 12x Red Hat’s 2018 revenues. A number of analyst firms have incorrectly stated that the proposed IBM-Red Hat acquisition is brilliant or doomed based on a specific product line, such as Red Hat Enterprise Linux. However, this acquisition is ultimately the largest acqui-hire, or acquisition built to bring in talent and culture, in the history of enterprise technology. The acquisition at this scale is necessary because IBM needs to acquire both products and a culture devoted to perpetual support, innovation, and evolution.

Behind those buzzwords is a lot of hard work that Red Hat has put into continuously changing their own business models, internal collaboration, and product lines. The hidden work that Red Hat has conducted over the past decade in growing at roughly 20% per year from $500 million in annual revenue to its current $3 billion+ run rate and maintaining a consistent culture devoted to Open Source is an impressive accomplishment.
One of my concerns about IBM’s proposed acquisition of Red Hat is whether this culture of continuous improvement, launch, and experimentation is scalable and transferrable. At the start of the Analyst Day, Paul Cormier stated that the plan for the IBM acquisition of Red Hat was to “supersize” the Red Hat strategy. I believe that IBM is sincere in its intentions to both sell Red Hat solutions going forward and to do its best to keep Red Hat going as an independent unit post-acquisition. IBM is already very invested in Open Source as an important part of its future. Because of that, it is hard to imagine any short-term challenges for Red Hat customers through 2020.

But what happens after that? Currently, Red Hat executives insist that “Big Blue” + “Red Hat” will not result in a “Purple Hat” and that Red Hat needs to be a separate company to succeed. One of Red Hat’s most important proof points to support this perspective is based on Red Hat’s ability to double the number of companies using a variety of services on a year-over-year basis.

The ability to consistently launch new products that are rapidly adopted by current customers is an obvious Red Hat strength that IBM has struggled with in recent years. Amalgam Insights does not believe that this challenge has been due to a lack of effort. IBM has made great strides towards supporting Open Source, design thinking, and innovation, including a massive effort to both codify and scale design throughout their organization. However, this effort has also been challenged in balancing these imperatives with the financial structuring needed to keep public investors satisfied. For IBM to get $34 billion in value from Red Hat and maximize the value of its current investments in design, machine learning, artificial intelligence, blockchain, and beyond, Amalgam Insights believes that IBM must go beyond simply leaving Red Hat alone to flourish under its existing management and service structure. Red Hat’s product and customer-centric culture focused on perpetual innovation needs to not only be left alone, but become the dominant culture for IBM going forward.

This Analyst Day was ultimately helpful in showing how Red Hat’s current approach to Open Source, Cloud, DevOps, and Middleware is both pervasive and extremely successful in servicing both the needs of individual developers and supporting massive projects at scale. The ability to continuously improve products, build new products when necessary, and to stay devoted to Open Source has made Red Hat a true unicorn in the enterprise software world. Amalgam Insights’ key recommendation is for IBM to be humble enough to learn from Red Hat as this acquisition takes place. If that happens, product portfolio duplication, potential service conflicts, and other business challenges will solve themselves as they are all seen through the customer’s eyes first rather than as internal political issues.

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