Red Hat dilemma: Cloud players balk at new support fees

Enterprise Linux leader Red Hat(s rht) is changing its support pricing model in a way that opens the door to rival operating systems — at least in the cloud service provider market — and perhaps more broadly. One large cloud provider said the move will more than double his costs, making the Red Hat Enterprise Linux (RHEL) option as pricey as Windows(s msft).

Pricing — specifically how much to charge for supporting open source software — is a big issue for Red Hat in this webscale era where many companies demand free or near-free operating system options. It doesn’t matter much to them if the check they’re writing is for software licenses or enterprise support, they don’t want to write it, and increasingly feel they don’t have to when there are legitimate, extremely inexpensive options — including CentOS which is a free, unsupported version of Red Hat Linux.

Why buy support on a free OS?

Why buy Red Hat support when you have a talented engineer who can support CentOS in house? The question for Red Hat, then, is how to please (and keep customers) in the cloud and webscale markets. And the question for other companies that resell support for open source software, is could Red Hat’s struggles to convince webscale and cloud vendors to pay, eventually affect me?

At issue here is the way Red Hat has restructured what it charges service providers for support which, in my sources’ case, means paying per socket as opposed to per server, according to an executive with this provider. Existing customers can continue on their current plan for a year, but all new customers that come in above the current service provider license agreement, will be charged the new rate immediately. A second large cloud service provider confirmed the pricing changes.

The unnamed source’s options are to subsidize Red Hat Enterprise Linux for customers — which his company has been doing — or pass the price increase on to customers, which, he said will drive more of them to use CentOS, Ubuntu, or even Windows which he said is now price competitive.

Red Hat mandate: prove value of support, certifications

Michael Ferris, director of cloud ecosystem for Red Hat, said the company started rolling out the support model changes gradually with RHEL 6 in 2010 in order to avoid shocking the system and letting service providers with long contracts adjust to the planned changes. The impetus for the support shift, he said, was to rationalize support pricing as more customers deploy a mix of on-premises, private, and public cloud implementations. The goal is to be more flexible to accommodate that move and to level the playing field between sales channels, he said.

“As painful as it is for some conversations, we cannot afford to have the largest providers have such a much better deal than a smaller regional provider,” he said.

Red Hat also offers per-VM price model for providers who want to purchase (and resell) RHEL by the hour a la Amazon(s amzn) EC2.  “That per VM model is consistent with what a customer or an ISV or any other consumer of our technology who purchase from us direct.”

Several Red Hat partners, including this service provider, say the company is in a tough spot because customers can move to CentOS and, as support prices rise, more customers are giving CentOS a look. Microsoft(S msft) has been able to lock in customers because so many run Office and Exchange Server — they truly do run the Microsoft stack. Red Hat does not have that luxury. “With Windows, where can you go? But Red Hat can’t [lock them in] because CentOS is the same bits [as RHEL],” he said.

“We used to [offer Red Hat] as a loss leader and subsidize it because people requested it. But now more of our customers are using FreeBSD, CentOS or Ubuntu. They don’t see the value any more,” the service provider exec said.

Red Hat, of course, says there is great value both in its support and service, and in the testing and certification it provides for the latest-and-greatest hardware. Red Hat says it is, after all, the first billion-dollar open source company. But how long can that last if its customers — or it’s customers’ customers — no longer see value in its support?

Said Ferris: “We have over a billion dollars in revenue from customers who look to us for value on premises and as they grow into the cloud. And, it’s no longer just about RHEL, it’s about our middleware and virtualization.”

Feature photo courtesy of Flickr user r_stephen