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Some vendors do well in a down economy as well as when it's booming

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November 22, 2012

There's a few Linux and SaaS software vendors that do well when the economy is down, and even when it's booming. You could say that they enjoy the best of both worlds.

Take Red Hat for example. It becomes more compelling when you compare the company's performance against its peers in enterprise software, including such large IT firms as Oracle, Microsoft, HP, IBM and even EMC.

Here are the words of Red Hat chief financial officer Charlie Peters himself: "When times are good, Red Hat underscores the real value of its software and its many benefits. When in a down cycle, Red Hat talks about the cost savings, a message that resonates very well with enterprise customers whose budgets have been cut dreastically."

Those are compelling value propositions, and they work in both good and bad times. But perhaps particularly more in a down economy.

But it's not just Red Hat, either. Look at what happens when we add in a SaaS (Software as a Service) company like We suspect that what we're seeing is a flight to subscription-based business models, and away from traditional, proprietary models that depend upon an upfront license fee and then are fed by ongoing maintenance fees, where maintenance provides little value to customers and maximum profit to vendors. And Red Hat is in the same boat, make no mistake.

The contrast between the broader technology market and subscription-based businesses like Salesforce and Red Hat, is pretty big to say the least.

But if anything, it's about to get worse. Or better, depending on how you look at it. Let us explain...

In a November 20th research note we got, Cowen & Co. analyst Peter Goldmacher disclosed a serious threat to SAP's maintenance revenue. He writes: "We recently spent time talking with a handful of large SAP customers that have received roughly 50 percent discounts on maintenance renewals. The original contracts were in the $5 to $10 million range."

While all of our contacts had different stories, in all, there were consistent themes nevertheless. All those customers were looking to reduce IT expenditures, they felt like SAP maintenance wasn't good value for the money, and they were actively evaluating lower cost alternatives.

When those customers informed SAP of their intentions to cancel maintenance, SAP initially offered modest discounts, only to follow up with significantly larger discounts when the customers pushed back. All of that happened in August of this year.

Given that there was executive level engagement in these discounts, we infer that senior management at SAP is aware of the problem. If SAP institutionalizes discounts on maintenance renewals, it will put significant pressure on its margin profile.

And if you think that SAP is alone in this, think again... Just three short years ago, when the recession was in full swing, The Wall Street Journal reported that the weak economy in the U.S. was putting pressure on Oracle's ability to renew maintenance contracts at full price, as customers looked to lower costs and increase value received from their vendors.

That article quoted Forrester analyst Ray Wang, who argued-- "There's going to be a breaking point soon where customers say they're spending too much on maintenance and not getting enough value."

The article hit the nail right on its head. And ZD-Net's Dennis Howlett has proposed different methods to make maintenance fees provide better value for customers, but enterprise customers may have already found a winning answer: subscriptions.

As Dave Dargo, a former Oracle executive told us in 2006-- "Proprietary software puts the risk of acquisition firmly on the customer, whereas open source puts the risk of acquisition firmly on the vendor."

And Dargo's point is generally true of all subscription businesses. Selling subscriptions forces the vendor into providing continual value to their customers.

Just as we saw in the last downturn, when the industry invested heavily in terms of stock and sales in subscription-based businesses like Red Hat, we suspect we're about to see more pain in the market and more gain for a select few vendors who marry their revenue models to the interests of their customers.

Recent earnings reports from tech heavyweights Apple, Google, IBM, Dell and especially HP this week have disappointed, as profit margins have slimmed down. The worse of all was HP that came out with a $8.8 billion writedown this week.

And forecasts for the near-term future are even worse. In other words, happy days may be here again. That is, if you're a subscription-based SaaS or open-source company like Red Hat or

In other Linux and open source news

Here's a piece of news that will make most system admins happy-- we've just learned that the Linux kernel finally supports network address translation (NAT) for IPv6.

Other new features also include server-side support for Google's TCP Fast Open (TFO) acceleration and a tethering driver for Apple's popular iPhone 5 smartphone.

The Linux kernel developers have merged the support for network address translation (NAT) with IPv6 into the Linux kernel (1, 2 and the others). A number of Linux developers have also previously questioned the utility of doing so, since NAT is unnecessary with the much larger address space offered by IPv6.

With its much broader address segment and other features, IPv6 renders many of the reasons why NAT was much used with IPv4 but is now considered by most in the Linux community as moot and unecessary.

But despite all that, developers have now merged this feature just the same, since the specification for NAT with IPv6 avoids some of the issues which dogged the IPv4 system in the first place, and it turns out that there are some use cases in which NAT for IPv6 can still prove useful, nevertheless.

Some Linux users and institutions, for example, would like to use NAT to keep their internal network topology completely opaque to the outside world. Also, hosting companies that use the BGP protocol and a multiple of internet connections from a number of different providers to improve availability also justify another reason for supporting NAT on IPv6, as it makes it easier to switch between the different connections when one of the ISPs is down.

As in almost every Linux kernel version, some drivers have been extended to support additional hardware-- for example, the iPhone's tethering driver 'ipheth' now fully supports the iPhone 5. And Atheros' ath9k wireless driver now supports the AR9565 Wi-Fi chip (1, 2, 3, 4 and others).

The Broadcom fullmac driver 'brcmfmac' has added support for the 43242 and 43143 USB wireless chips. In conjunction with hostap, the driver can now set hardware up as an access point (master mode).

Intel's e1000e Ethernet driver now supports the network component offered by the low power (LP) version of the Lynx Point platform controller hub (PCH).

On Saturday, Linus Torvalds released the sixth release candidate for the Linux 3.7 kernel and mentioned that he would go on vacation on Sunday.

Torvalds added that "things have continued to be pretty calm" and mentions that he plans to do an RC7 – "but considering how calm things have been, I suspect that's the last -rc. Unless something dramatic happens".

So just to recap, if Torvalds sticks to his usual pace, a final release of the 3.7 kernel is likely to arrive at the end of November or in the first few days of December.

The tunnelling protocol GRE (generic routing encapsulation) can now tunnel other protocols over IPv6. Also, kernel developers have merged the server-side code for TCP Fast Open (TFO) (1, 2, 3 and others).

Linux 3.6 already contains client-side support for this experimental TCP extension developed by Google, which seeks to accelerate HTTP connection handshaking by combining the first two steps in the three-way handshake normally employed by TCP.

Also new in this release is the support for Virtual eXtensible Local Area Networking (VXLAN), a draft tunnelling protocol submitted to the Internet Engineering Task Force (IETF), which, according to the kernel documentation, is able to get around the 4096 limit for the number of VLANs.

The Team driver now supports non-Ethernet hardware. Also, the bonding driver supports IPv6 transmit hashing. The subsystem maintainer discusses a number of other changes in the network subsystem as well.

In other Linux and open source development news

Let's set the record straight here: Linux currently enjoys about a 72 percent global market share of the server and enterprise segment of the IT industry, but when it comes to its share of the desktop market, things are very different, and this doesn't surprise most people in the Linux and open source community.

And that trend doesn't seem to vary too much in large business either. But in contrast to Linux's market share in desktop operating systems, the operating system started by Linus Torvalds still claims a considerably larger market share when it comes to operating systems used by enterprises.

This article presents some latest numbers depicting where does Linux stand as an operating system for business. It also details some large businesses that rely on Linux for their everyday IT chores.

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But unfortunately, when it comes to desktops, the enterprise segment is still mainly dominated by Windows, with Windows 7 now being the main contender.

But trends do change, particularly if we take into account the last three to four years. And those same trends favor Linux and open source software on a fairly large scale, however. Small to medium sized businesses are adopting Linux as their primary operating system mainly to reduce costs.

As reported by Jeffrey Hammond, the principal analyst at Forrester Research “Linux has crossed the steep ravine to mainstream adoption.” That declaration was based on Forrester’s survey numbers which deducted that a large number of enterprises have moved over to open source technology in early 2009 and mid-2010 primarily as a way to reduce costs.

Forrester's survey further demonstrated that by the end of 2009, some large businesses were increasingly looking to open source software as a driver for growth.

The survey published by Hubspan in May of this year further details the usage numbers of operating system utilized by enterprises during last year. Despite the fact that Linux only claims about 9.2 percent of the total enterprise operating system segment, it’s still encouraging nevertheless to note that all big organizations and enterprises use Linux in their day-to-day activities.

For example, Google’s huge search infrastructure comprises of Google Web Servers (GWS) which is Custom Linux-based Web servers that the company uses for its massively popular online search services.

In the car manufacturing industry, popular car makers Audi and BMW use Linux for most of their design and engineering tasks. Lets investigate this in more detail.

Audi, an actual subsidiary of the Volkswagen Group is known for producing mostly luxurious cars around the world. The company produces and sells more than 829,000 vehicles annually under the Audi brand. The German car maker has completely migrated its engineering systems over to Linux in the past few years.

The overall bulk of its servers and many workstations are now running 64-bit Linux. Note that Linux isn't only being used on server-side but also on their many workstations. Now that you know this, Audi’s luxury cars are engineered on Linux.

For its part, BMW is also one of the leading luxury car brands known for producing some of the best luxury cars. In the past nine years, the Bavarian car maker has used Linux for mission critical systems such as its large servers and and is still using the operating system since 2003.

In 2011, BMW also showed its intentions to use Linux for in-car entertainment. The company also created a TV advertising campaign-- IBM supports Linux at 100 percent.

Speaking of Big Blue, the IT giant is among the Linux foundation Platinum Members along with Fujitsu, Intel, NEC Corp., Oracle, Qualcomm, Samsung and Hewlett-Packard, who each donate US $500,000 per year for the development of Linux. Additionally, IBM uses Linux locally to support its extensive computing demands.

And the most extensively used social media that uses Linux is Twitter. The social site uses it on its servers to support huge data centers. Twitter receives as much as about 2.8 billion tweets per day with millions of users using the network from various devices and locations every single second.

In such a mission critical environment, Linux provides reliable computation services, as it does in just about any other industry you can think of today.

And Amazon is yet another American large business that uses Linux extensively to support its large data infrastructure.

And if you need more examples, DreamWorks Animation is also using Linux for the past eleven-plus years. The Hollywood movie producing company reportedly owns over one-thousand Linux desktops and over 3,000 Linux servers for their complex computation tasks.

For its part, The London Stock Exchange also deploys Linux-based Millennium IT Exchange software for its trading platform, while The New York Stock Exchange uses Linux as well for its complex trading applications. Additionally, Union Bank of California has also standardized its IT infrastructure on Red Hat Enterprise Linux.

Big business and large organizations are currently taking full advantage of the many customization features that Linux offers and are optimizing them according to their own specific requirements.

Source: L&OSN.

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