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In their S-1 filing Red Hat say they intend to derive significant revenue from technical support, training and education, custom development, consulting and hardware certification [service income].

I have doubts about this portion of their business model. I would like to tell you why and learn your opinion.


Certainly Linux has significant and growing market share, and certainly industrial users will spend on the above mentioned aspects. However the experience with other (non-proprietary) software shows that customers strongly prefer to establish close, intimate relationships with their service suppliers, and this is only possible if the suppliers stay small. To put it another way, there is a negative scaling as the ability of a service provider to the meet the customer's (sometimes unreasonable) wishes and the number of customers they support. One reason is because service providers are constantly confronted with competition for resources. Once a service provider deals with multiple customers (which could be different departments within the same organisation) they have to bear the onus for unpopular resource allocation decisions, rather than being able to deflect those decisions to a higher instance within the customer organisation.

A comparision can be made with companies that provide staff for UNIX administration. These companies rarely support more than 2-3 customers and it us unusual to see them grow much larger than 100 employees. (To anticipate a possible counterexample: EDS grew large because they were able to supplement their service with hardware infrastructure, such as large computer centers).

Red Hat carries an evaluation of circa $10 billion. Even if they would grow their service department to 400 productive employees (there are a few such companies), service would be unlikely to affect P/S (share price per sales) by much more more than 1% - corresponding to sales of about $100 million in sales. If the service component of revenue is that insignificant, one has to ask why they cite it as one of their most important potential revenue streams?

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