How Red Hat is making money on the public cloud with a hybrid approach

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Image: Conner Forrest/TechRepublic

Red Hat hasn’t traditionally played much of a part in public clouds, a fact its CEO Jim Whitehurst underscored in Red Hat’s recent earnings call. Though the company is now dabbling in a true elastic/consumption-based delivery and pricing model via OpenShift, Red Hat remains a primarily on-premises business that only feints toward a true cloud model in terms of service delivery.

Ironically, the hybrid cloud may be the trend that gets Red Hat fully planted in the public cloud.

Selling the past

Red Hat was early to market with a subscription-based business model, but that model obscures the old-school nature of Red Hat’s software. It’s almost entirely on-premises, geared toward enterprise data centers.

Looking at Red Hat’s consistently strong financial results, it’s hard to argue that this is a bad strategy. This quarter, subscription revenue grew 20% over the same quarter in 2015, hitting $531 million. Total deferred revenue topped $1.7 billion, up 19% year over year. And so on. It’s almost boring how consistently Red Hat delivers.

SEE: Red Hat’s open source success story built on killing complexity in IT

Even so, Red Hat can read the public cloud tea leaves, and has made it possible to run its software, particularly Red Hat Enterprise Linux, across data centers, public or private, for years. This has only recently started to pay dividends, however, because the early public cloud workloads were test and dev, which would have mostly gone to Ubuntu Linux.

“If you look two years ago, our relative share on public clouds was a bit lower because there was a lot of dev and test,” Whitehurst said on the call. “As enterprises look to move their application portfolio of production workloads that certainly helps us.”

Why? Because Red Hat tends to get trusted with production workloads. It’s less risky for risk-averse CIOs. Those same risk-averse CIOs are starting to push Red Hat into the full-blown public cloud, but they’re taking an interim step called “hybrid.”

The hybrid transition

In the Q&A portion of Red Hat’s earnings call, financial analysts dug into Red Hat’s results, with several of the first questions focused on public cloud. Asked if public cloud adoption through Azure and AWS “is playing a larger role” in Red Hat’s acceleration of subscription revenue, Whitehurst responded by first noting that purely on-premises workloads tend to run Windows, and so haven’t been Red Hat’s sweet spot.

However, “As soon as you start thinking about a hybrid cloud world, i.e. workloads that might run on premise or they might run on cloud…it’s highly likely 90 something percent of those are going to be on Linux,” Whitehurst said. And, if on Linux, then almost always on Red Hat Enterprise Linux, given that it’s the default choice for enterprise workloads, as noted above.

Interestingly, this doesn’t simply help Red Hat in the cloud, but also for its on-premises business. If a company wants to run Linux in the public cloud, and they’re not yet ready to go “fully native” in the cloud, they tend to run RHEL in both environments, Whitehurst detailed. Red Hat CFO Frank Calderoni then underlined this point: “The large customers that are…using the public cloud with us are also growing substantially their business on the private side, too.”

Ironically, in response to a later question, Whitehurst declared that the early momentum in public cloud for Red Hat has been with Microsoft Azure, its erstwhile nemesis, because that is where the larger companies went big with public cloud workloads, at least with respect to RHEL.

Amazon is sure that “hybrid” is simply a transitional phase for CIOs scared to embrace the future. They may be right. But Red Hat seems to have figured out a model where it gets to double dip on cloud (non) adoption. According to Whitehurst, “The hybrid cloud model and the fact that public clouds are starting to take share of workloads is actually a tailwind for our business,” both in the cloud and on premises. And, in a supreme bit of irony, Microsoft is helping to pay those bills.

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