We Are in the Commodity Product Business

If we do not own intellectual property the way almost all of today's software companies do, and if those companies insist that their most valuable asset is the intellectual property represented by the source code to the software they own, then it is safe to say that Red Hat is not in the Software Business. Red Hat is not licensing intellectual property over which it has ownership. That's not the economic model that will support our customers, staff, and shareholders. So the question became: What business are we in?

The answer was to look around at other industries and try and find one that matched. We wanted an industry where the basic ingredients were free, or at least freely available. We looked at the legal industry; you cannot trademark or patent legal arguments. If a lawyer wins a case in front of the Supreme Court, other lawyers are allowed to use those arguments without requesting permission. In effect, the arguments have become public domain.

We looked at the car industry; you can get parts from a large number of suppliers. No one drives a car -- we all drive Hondas or Fords or any of several hundred alternative models of cars assembled from the collective parts available in that industry. Few people have the technical ability to assemble their own car. Those who do seldom have the time or inclination. Assembly and service form the core of the automotive business model.

We looked at the commodity industries and began to recognize some ideas. All leading companies selling commodity products, including bottled water (Perrier or Evian), the soap business (Tide), or the tomato paste business (Heinz), base their marketing strategies on building strong brands. These brands must stand for quality, consistency, and reliability. We saw something in the brand management of these commodity products that we thought we could emulate.

Ketchup is nothing more than flavored tomato paste. Something that looks and tastes a lot like Heinz Ketchup can be made in your kitchen sink without so much as bending a copyright rule. It is effectively all freely-redistributable objects: tomatoes, vinegar, salt, and spices. So why don't we, as consumers, make ketchup in our kitchen sink, and how does Heinz have 80% of the ketchup market?

We don't make ketchup because it is cheaper and much more convenient to buy ketchup from Heinz, Hunts, or Del Monte than it is to make it. But convenience is only part of the story. Convenience alone would suggest that Heinz, Hunts, and Del Monte share the market equally because they offer roughly equivalent convenience. In fact, Heinz owns 80% of the market.

Heinz owns 80% of the market not because Heinz tastes better. If you go to the Third World and find 100 people who have never tasted ketchup before, you find out two things: one is that people don't actually like tomato ketchup, the other is that they dislike all ketchups equally.

Heinz has 80% of the ketchup market because they have been able to define the taste of ketchup in the mind of ketchup consumers. Now the Heinz Ketchup brand is so effective that as consumers we think that ketchup that will not come out of the bottle is somehow better than ketchup that pours easily!

This was Red Hat's opportunity: to offer convenience, to offer quality, and most importantly to help define, in the minds of our customers, what an operating system can be. At Red Hat, if we do a good job of supplying and supporting a consistently high-quality product, we have a great opportunity to establish a brand that Linux OS customers simply prefer.

But how do we reconcile our need to create more Linux users with our need to ensure that those Linux users use Red Hat? We looked at industries where the participants benefit because of, not despite, the activities of the other participants.

Drinking water can be had in most industrial countries simply by turning on the nearest tap, so why does Evian sell millions of dollars of French tap water into those markets? It boils down to a largely irrational fear that the water coming from your tap is not to be trusted.

This is the same reason that many people prefer to purchase ``Official'' Red Hat Linux in a box for $50 when they could download it for free or buy unofficial CD-ROM copies of Red Hat for as little as $2. Evian does have the advantage that most of humanity drinks water -- we still have to create a lot of Linux consumers in order to have a market to sell our brand into.

The challenge is to focus on market size, not just market share. When consumer demand for bottled water grows, Evian benefits, even though many of those consumers start with a bottle other than Evian. Red Hat, like Evian, benefits when other Linux suppliers do a great job building a taste for the product. The more Linux users there are overall, the more potential customers Red Hat has for our flavor.

The power of brands translate very effectively into the technology business. We have evidence of this in the Venture Capital investors who have recently invested in several Open Source software companies. The one common denominator between all of the investments to date have been that the companies or their products have great name recognition, and are recognized as being quality products. In other words, they have successfully established a brand.