Red Hat Looks to Partners to Grow Linux Biz

In many ways, Linux cuts out the middleman by enabling users to get at the source code and freely download an operating system.

Yet for Linux vendor Red Hat (NYSE: RHT), the middleman — in the form of partner relationships — is a key foundation for financial success.

Red Hat is now expanding its partner program with a new premier partner level as well as specialization programs for virtualization, JBoss middleware and Red Hat Enterprise Linux infrastructure technologies.

The new program comes at critical time for Red Hat as it tries to continue to crow its positive financial momentum amid challenging economic conditions.

“Channel contribution to Red Hat’s revenue typically runs in the 50 to 60 percent range globally, with this past quarter (Q1 FY10) coming in at around 60 percent,” Roger Egan, vice president for Red Hat’s North American channel sales, told “Yes, we are trying to get that number to 60 percent to 70 percent consistently.”

Key concerns with any expanded partner effort is how it might affect Red Hat’s profit margins — whether they are higher or lower than when it sells direct. But while Egan didn’t go into specifics, he said that the arrangement would work out neatly for Red Hat.

“We believe this to be very beneficial to our sales model, and that it will drive additional revenues by focusing on net new business for the company,” Egan said.

Specialization vs. platform plays

In particular, Red Hat CEO Jim Whitehurst has noted several times during the company’s investor calls that JBoss deals are a key part of the overall Red Hat product mix.

For Red Hat’s recent first-quarter fiscal 2010 report, CFO Charlie Peters said that Red Hat during the quarter locked had in five deals that were worth $1 million or more — two of which were standalone middleware deals.

With Red Hat’s enhanced partner program, partners will now be able to focus on specific areas of interest instead of selling an entire platform.

“This structure was designed to meet the partners’ business model by giving them options for specializations — they have the ability to focus on the areas that align with their interest, and if they want to sell in more than one area, they can get multiple specializations,” Egan said. “The additional benefit is that none of our partners are forced into investing in areas that do not benefit them.”

The expanded partner program follows Red Hat’s announcement earlier this year of an Open Source Channel Alliance (OSCA) with business process services vendor Synnex (NYSE:SNX). That effort is supposed to help make it easier for VARs to distribute and support open source software.

“The Partner Program is the guiding principal for how Red Hat works with and brings value to its partner ecosystem,” Egan said. “The OSCA and partnership with Synnex are additional ways Red Hat has come up with to drive open source and create solutions relevant to our partners and solving their customers’ problems.”

As to whether OSCA has been having a material impact on Red Hat so far, Egan did not provide any specific numbers. He did indicate, however, that there was positive momentum.

“We are seeing a lot of interest in this effort and are looking to expand it,” Egan said. “Yes, by focusing on selling solutions and not just point products, we are giving our partners something they can take to their customers to solve real business problems all based on open source.”

While Red Hat’s efforts with OCSA and its broader partner effort are directly related, Red Hat has another partner effort that isn’t tied into the new initiatives. In 2007, Red Hat launched the Red Hat Exchange (RHX) as a Linux app store where users can find solutions from independent software vendors (ISVs).

A year after RHX started, scaled back its team supporting the marketplace.

But Egan said the effort continues going strong.

“Red Hat Exchange continues to connect customers with complete, open source solutions from the operating system up,” he said. “This is primarily an open source ISV play, and while we do look at the entire ecosystem as a whole, the two are not related in a meaningful way at this point.”

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