UPDATE: Red Hat CEO Matthew Szulik Speaks Out On Channel Plans

At the Red Hat Summit on Thursday, Senior Writer Paula Rooney met with Red Hat CEO Matthew Szulik to discuss the company's channel, services, product and market plans.

Szulik took exception to a CRN article on Thursday that said the lack of a channel program is hurting Red Hat's business. Red Hat has signed up more than 140 systems integrators and is committed to launching a channel program when the company and the market are ready. Below are excerpts from the discussion.

CRN: Last year, CRN talked to Red Hat Vice President of Partner Development Mike Evans and he said Red Hat would launch a channel program. Will Red Hat still have its own program, or will it use OEM channels and business partners of those OEMs?

Szulik: No, [it won't be outsourced]. I think the approach companies often take is they run out with a channel program, and Red Hat has matured to the point where we want to make sure we understand about delivery of services to customers, and we work with partners to see the readiness of the channel and address certification, demand creation and margins, as compared to running out with a 'great' channel program that's not economically viable, or not executed well, or margins are bad, or there conflicts with sales. But we are making great strides that perhaps are not visible.

CRN: So the development of the Red Hat channel is still in process? Szulik: Absolutely. Don't get on the wrong side about our channel strategy. We've told investors that 70 percent of the business will be indirect. What we're trying to do is make sure we understand what we'll do on a sustained basis.

CRN: What is the status of the development of the Red Hat channel?

Szulik: Yes, we've been doing training and education of the partner channel. All of our business is indirect in Europe [and] Asia, and [the] federal government is all through resellers. I don't think we should do something reckless by making a bold announcement when we need to be patient and take it day by day and identify resellers in each vertical, like Landmark Graphics in the oil and gas industry. I want to make sure we have technically qualified partners and we deliver value. It's an evolution.

CRN: Where do you see the most growth?

Szulik: The next wave of markets we're witnessing growth in are regulated markets, because of the [compliance] pressures: banking, pharmaceuticals, government.

CRN: So Red Hat is expanding its footprint into verticals. Can you talk about SMB?

Szulik: It's happening naturally, a technical labor force is available and reseller network and ISV community and IBM HP ecosystem and third-party application availability continues to improve. It's evolutionary.

CRN: How many customers do you have in SMB market? Szulik: We generated 10,000 new customers in the last quarter. SMB is a growing presence. ... I was surprised about the number of smaller businesses [in that number].

CRN: How are these customers being served?

Szulik: Through IBM's channel, HP's channel, Dell [and] through Tech Data's and Ingram Micro's two-tiered distribution network. While all this is going on, we have to train, educate and have resellers now selling SCO or HP UX or Solaris--educate them and demystify Linux and open source. That takes time. We've been in the process for 18 months. It's not like you can snap your fingers and 40 of the most productive resellers show up in North Carolina [where Red Hat is based]. It's about making it economically viable for them.

CRN: What is the biggest challenge involved?

Szulik: The biggest challenge is education, demystifying open source, and we have to see if they can make a financial commitment. IBM and HP have been great. They bring together 5,000 resellers we have begun to educate. Intel also had a number of channel relationships [where] we can educate.

CRN: How many systems integration partners do you have now? Earlier, a Red Hat spokeswoman said more than 140.

Szulik: I don't know, but she knows the number.

CRN: Does the Red Hat channel include any large systems integrators?

Szulik: There is interest there. I have not sensed to date. They are a large financial community. It has nothing to do with Red Hat but whether [these firms] see economic opportunity.

CRN: Many enterprise customers here at the summit say they have large internal IT staffs. Do you think as Linux moves downstream we'll start to see development of channel?

Szulik: We just rolled out the Red Hat Directory Server yesterday, and you're starting to see we have all the critical components the OS, global file system and directory. That now gives us the credibility to go to regional integrators and regional resellers with a robust a robust set of offerings beyond the Linux OS on which they can build value add. What we're trying to do is make sure we understand what we'll do on a sustained basis. Guys talk about having a great channel strategy and then you write about how poorly implemented it is, [about] conflicts with direct.

CRN: But there have been successful channel models Red Hat can mimic. How about Microsoft's channel model?

Szulik: It's a different society. It's a different world. It's a Web based world, and we need a new set of services. We're not selling products where they can make margins.

CRN: What has Red Hat learned about the emerging open-source model to date?

Szulik: It's young and immature. It will look different, and it will be electronic, not physical installation of product. We don't want to corrode or get in the way of third-party partners. I'd say Rackspace is a third-party reseller, and it is an all online service. IBM Global Services, that's a pretty good partner, I think. I just think new models will be different, and we want to make sure we come out with a channel umbrella where we don't do anything to contaminate the integrity of these relationships.

CRN: We've seen cottage service industries spring up around top open-source projects such as Apache and Mozilla. What do you think of these?

Szulik: You've got to get financing. All of this is expensive. In the fourth quarter, our expense rate was $38 [million] and $40 million. How do those firms get capitalized to create an infrastructure for services? Venture funding is opening up.

CRN: But you do believe a channel model is viable in the open-source world?

Szulik: Economically, it has to be. Look at the economic exhaustion of proprietary models. The cost of software is plummeting so where is the margin and volume? We won't see development of CRM that takes four years to be deployed. Look at Salesforce.com. There will be other electronic models. CRN: How do you compare Red Hat's directory server vs. those of Microsoft and Novell?

Szulik: One is open-source, and the others are a proprietary model. The pricing model will be different compared to the way [others] sell and license. One is a strategic component to an open-source architecture, and the other is the same old stuff.

CRN: What is the plan for Red Hat Enterprise Linux 5? Executives here [at Red Hat's partner summit] said Xen and stateless Linux are planned for the next iteration, but what other features can we expect to see?

Szulik: [Laughs] We just finished RHEL 4. We just finished the directory.

CRN: What's your take on Microsoft and Sun pairing together and attacking Red Hat the company, rather than open source in general?

Szulik: They're made for each other.

CRN: Sun has embarked on a campaign to win back those on Wall Street and in the Washington, D.C., beltway that switch to Linux. What's your take on that?

Szulik: There was $19 billion worth of Unix sold last year, and it's an enormously large market. Enterprises are making architectural decisions. ... And they recognize that costs are going down and open-source solutions are going up. Our success comes at the expense of others. We have all the services, including directory services, virtualization and the credibility of a well-financed alternative [to Sun and Microsoft]. Our company is now economically viable, and our ecosystem is growing.

CRN: Red Hat keeps adding components to its Open Source Architecture. What are missing pieces that Red Hat is looking to fill in?

Szulik: One of the key components we got through is certificate management. By 2008 or 2010, there will be 800 million or 900 million devices attached to the network. Think about the value-add we can create by delivering not only the Linux OS but also delivering certificates through RHN [Red Hat Network], and then think about a reseller network delivering that.

CRN: Do you see opportunities for the channel with other pieces of the Red Hat stack, namely the Global File System and Cluster Suite?

Szulik: This like the directory. It is not going to be [something] technology people just drop in. I was with very large customer in San Francisco last week that is moving Microsoft products out and RHEL [Red Hat Enterprise Linux] in to build out a virtual environment.

CRN: Which company?

Szulik: [Pauses] I think we've been public about this one. The customer is the Gap. And we're witnessing a transition to [corporate] policy and practice and making sure that procedures are implemented and they're not just dropping in [technology] anymore. They're taking a virtual approach where the file system is the central nervous system. ... GFS has been well-received and has a bright future. The scaling of the OS, GFS and directory provide alternatives for building scalable infrastructure at lower costs.

CRN: Red Hat has committed to the Xen open-source virtualization project for Fedora and future enterprise Linux. What are your thoughts on the importance of virtualization?

Szulik: Xen is only one component of a virtualized environment. It goes way beyond that--storage and application virtualization, management services, multicore processors. It's not the processor and single server now. Xen is just one component of virtualization.

CRN: What do you think of IBM's purchase of Gluecode Software?

Szulik: It's great. It expands the breadth of Java-based app servers, and the market continues to get bigger and bigger.

CRN: Do you have any concerns about IBM buying an open-source company?

Szulik: They've been upfront about what their plans are about open source.

CRN: But it is the first time IBM scooped up an open-source company and products and brought it in-house. Some are concerned about what this precedent means.

Szulik: I've heard that. But I'll watch the behavior before I comment. IBM continues to be an active contributor to the open-source market.

CRN: Why doesn't Red Hat just adopt JBoss? It's a more popular J2EE-compliant app server and is being embraced by Novell and others.

Szulik: [The decision] was all around services and the serviceability of our customers. When you listen to the guys at JBoss, they say they're responsible for 90 percent of the JBoss code. If we're not in a position where we can service the customer and maintain the relationship with our customers through our open-source model, then what has really changed? Then we'd have to go to a software supplier for changes, enhancements and fixes, and it's not a true open-source environment. The Jonas model [on which Red Hat Application Server is based] is J2EE-compliant and is truly an open-source environment. JBoss is not a possibility. It's their development model. In many ways, it's a proprietary model.

CRN: Novell is pushing the channel of NetWare solution providers to transition to SuSE, Open Enterprise Server or Linux Small Business Suite for the SMB market. Do you plan to come out with a Red Hat Linux Small Business Suite?

Szulik: Why?

CRN: Why? Because Windows Small Business Server does well, and Microsoft makes quite a bit of money on it.

Szulik: [Smiles] We generated 10,000 new customers last quarter. Based on the number of small businesses, I was surprised at the growth and uptick.

CRN: Do those customers interface directly with Red Hat and get a subscription and support from Red Hat?

Szulik: Yes.

CRN: Microsoft continues to bang the drum that Windows offers a better total cost of ownership [TCO] than Linux. How do you respond?

Szulik: Lies and more lies. It's equivalent to [the report about] weapons of mass destruction. How can you prove TCO? Look at the stupidity of that argument. How can you make a generic statement like our company offers better total cost of ownership? How common are the computing environments, infrastructures, best practices and labor of customers that would allow any vendor to say that? It's ridiculous. No customer relies on a generic TCO report. One beauty of the Linux kernel is its modularity and that customers can deploy what they need. To make a generic statement is stupid. And if it were true, then why are we seeing Linux grow like this? Red Hat's growth was 56 percent last year. And why are Oracle, IBM and HP generating between $15 billion and $18 billion worth of Linux-related sales?

CRN: What is your take on OpenSolaris?

Szulik: It is not the code; it is the community around it. Will there be one? I still see [Sun Chairman and CEO] Scott [McNealy] in a penguin suit. ... Customers don't forget these things. You've got to make decision on where you are and what's your platform. [Sun's strategy] is very confusing to customers. What are they selling? First its Sparc, then Solaris [on Intel] and then OpenSolaris.

CRN: Like Microsoft, Red Hat has a full suite of branded infrastructure products and applications like Red Hat Application Server, Content Management Server, Global File System, Cluster Suite Directory Server and Certificate Server. You once sold a Red Hat database. Some view Red Hat as the Microsoft of the Linux industry.

Szulik: I don't get it.

CRN: The integration strategy, linking the OS with your own software stack, rather than using generic LAMP stacks.

Szulik: We've been shipping mySQL for eight years.

CRN: Recently, Red Hat expanded its agreement with mySQL. What does that signify?

Szulik: Customers are deploying mySQL on RHEL, and there's been a technology synergy there for between eight and 10 years. The extension is for optimization [of our code together]. We're going in the right direction. We are technically aligned with key [open-source] partners.

CRN: What will the OS market look like in five years?

Szulik: There will be two operating systems: One will be Windows and the other Linux. Security will become improved. And what will IP look like in a digital mechanism for that creativity? We'll see new and original business models we haven't thought of yet.

CRN: Have any ideas?

Szulik: How many people are going out there and building economic models around Red Hat, or JBoss, or mySQL.net? I'm sure in 12 to 24 months there will be new models. There is venture capital coming into new companies like SpikeSource and SourceLabs.

CRN: What do you think of those companies. Aren't they competitive to Red Hat's services model?

Szulik: It's fabulous. I like venture capital slowing into companies. I was worried we'd be the only company in the category.

CRN: We were told at one point there would be a Red Hat messaging server. Is that still in the cards?

Szulik: It's a broad question. To replace [Microsoft] Exchange? Absolutely. There are a number of important open-source projects out there. It's a component of the virtualization prcoess to process communication, and it's important to the file system. Collaboration is the easy problem to solve, but process-to-process messaging on multicore processors for transactions is very valuable and strategic. Online OLTB business is becoming more frequent, and multicore processing and messaging will be a core component of it.