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Analyst: Will new Red Hat SLA be followed by price cuts?

On the surface, Red Hat's streamlined service-level agreement is about simplification, not losing market share to Oracle or Novell. But that could change quickly as the competition introduces pricing cuts and customer wins.

When Red Hat Enterprise Linux 5 launched, it contained more than just new software. It also offered customers a substantially streamlined service-level agreement (SLA).

For more on RHEL 5:
RHEL 5 SLA screenshot

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Red Hat vice president of support Ian Gray showed off the new SLA at the Red Hat Enterprise Linux (RHEL) 5 launch in San Francisco last week. With one fell swoop of a presentation slide, Gray took the nine-page document that accompanied Red Hat Enterprise Linux 4 and turned it into a one-page affair meant to simplify a customer's service experience. "If we ship the bits, we support the bits," he said. "No more legalese."

In the old SLA's place was a "production support scope of coverage." While technically an SLA, this one-page document now says if Red Hat made it, and it's production-ready, then Red Hat will support it -- no questions asked.

In addition, Red Hat created a support center called the Red Hat Cooperative Resolution Center. The center will work to solve issues whether they arrive from Red Hat technology or a partner's applications, executives said. With this center, Red Hat will take sole ownership of inquiries for any partner's product that runs on RHEL 5, regardless of whether the problem lies with RHEL 5 or the partner's product. It's important to note that Red Hat says it isn't just covering vendors like Oracle, but all of its partner applications as well. According to Red Hat, its support technicians will accomplish this by working with the support staff of a customer's vendors to solve a problem.

Red Hat 2.0 -- but why?

Why the changes? Red Hat has typically boasted high customer satisfaction rates (according to Red Hat, 25 of the top 25 customers and 99 of the top 100 customers renewed their subscriptions in 2006), and second place commercial Linux vendor Novell Inc. does not appear to be gaining market share, according to the most recent financial reports filed in January. Novell's preliminary results for its first fiscal quarter 2007 had the company earning $15 million in revenues from its Linux platform products, which was an increase of 46% year-over-year. But Red Hat, by comparison, enjoyed a 45% increase to $105 million for the same period.

And yet, Red Hat executives were making comparisons to Novell in the days following the RHEL5 launch. In an interview with CBRonline, Red Hat senior vice president of marketing Tim Yeaton compared "another leading Linux distribution" and its 36-page SLA to RHEL 4's nine-page agreement. A Novell spokesperson said executives were at BrainShare this week and were not available for comment.

"There's been no complaining about Red Hat's service level," said New York City-based 451 Group analyst Raven Zachary. "But Red Hat has certainly taken heat from players like Oracle for RHEL pricing."

But at least one Red Hat user is dissatisfied with Red Hat support. Miles O'Neal, IT manager of Intrinsity Inc., an Austin, Texas-based provider of Fast14 chipset technology, said his company actually let its subscription to RHEL 4 expire because of confusing and inadequate support practices. He was critical of the new program's pledge to simplify things for customers with a one-page SLA.

"You actually still have to read several pages on the Web to determine what they really offer. And even then, some things are vague," O'Neal said. "They guarantee response times, but I don't see anything at all about resolution -- what, when and how."

Many of O'Neal's tools still require RHEL, so today he uses Scientific Linux, which is rebuilt from RHEL source code by the U.S. National Labs. Support is strictly a mailing list that includes the maintainers and the user community, comprised of primarily savvy administrators from the national labs and other high powered environments, he said.

Proactive vs. reactive

Meanwhile, as the SLA shrank to one page, Paul Cormier, Red Hat vice president of engineering, said support pricing would remain "exactly the same" as it had been with RHEL 4. RHEL 5 and the RHEL 5 Advanced Platform, which features additional storage and high availability features, plus unlimited virtual machine guests, are priced $349 and $799 per system and $1,499 and $2,499 per system for standard and premium subscriptions, respectively.

But what Zachary and other analysts are really waiting for is a reduction in Red Hat's enterprise pricing support. "Certainly what Red Hat lists as retail pricing isn't what's ultimately negotiated with the new customer or renewing customer, and clearly cost will come into the picture as Oracle makes customer wins," he said.

Research conducted by Portland, Ore.-based Pacific Crest Securities appears to confirm that. In a recent survey of Red Hat customers, 64% said a support discount was a "very important" part of the decision-making process when evaluating their relationship with Red Hat. But nearly half of that number said the discount would need to be in the range of 25% to 74% -- a significant drop. A second Pacific Crest survey released in March showed 33.5% would be the sweet spot for discounts.

"We'll wait and see what sort of feedback early adopters give Oracle's support before we consider them," said O'Neal. "For now we'll likely stick with either Scientific Linux or CentOS."

At press time, Oracle had announced Yahoo Inc. as one of its first customer wins, although specific details like the numbers of servers switched from Red Hat Linux to Oracle Unbreakable Linux were not made available to the press. Red Hat and Yahoo spokespeople have said that Red Hat still remains in use at Yahoo. In October, Oracle announced its Unbreakable Linux, a RHEL 4 clone, would come with support pricing that undercut Red Hat by 50%.

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