Here's How Red Hat Entered the Massive Internet of Things Market Without Even Trying

Red Hat never really looked for a role in the exploding Internet of Things market. The Linux vendor didn't have to; Customers came looking for data transfers and security anyway.

Aug 13, 2014 at 12:00PM

The Internet of Things, commonly shortened to IoT, is a big deal. How big? General Electric (NYSE:GE) estimates that the blossoming machine-to-machine communications market could add more than $10 trillion to global production over the next 20 years. Consulting firm McKinsey puts the economic impact north of $2.7 trillion by the year 2025 -- and perhaps much higher.

This IoT boom is the logical culmination of today's cloud computing and big data trends. Big data collects massive data sets on everything from weather sensors and GE's airplane engines to health sensors on your wrist and your home's automated climate controls. The cloud computing angle sends this data to a centralized store, using standard Internet protocols, before putting the information to good use.

When all of these machines talk to each other with minimal human assistance, we're looking at the Internet of Things.

The pieces are just starting to come together, which makes it the perfect time for companies to stake a claim to this brand new and extremely long-term market opportunity.

But not everybody is chasing this market -- yet. Would you believe that Linux vendor Red Hat (NYSE:RHT) stumbled into this growth driver almost by accident?

RHT Revenue (TTM) Chart

RHT Revenue (TTM) data by YCharts.

Red Hat already has healthy growth going. Both sales and free cash flow have more than doubled over the last five years, which is more than you can say for the company's largest rivals.

So Red Hat was hardly desperate for another growth driver. Regardless, the company was dragged into IoT management by customers who figured Red Hat might have some useful skills in this space.

That's what Red Hat CEO Jim Whitehurst told me when we spoke by phone recently.

"We are doing more and more in IoT security and messaging," Whitehurst said. "It's been a core growth area." But Red Hat wasn't really looking for this opportunity.

Source: Red Hat.

What's the big deal?
Large industrial players are collecting more data than ever from their systems and machinery. For example, GE sees tremendous value in knowing more about its airplane engines as they operate under various conditions. A tweak here in response to cold weather, a customer recommendation there to account for long-haul system stress, and GE has created million-dollar value for a major airline customer.

But none of this is easy, even for an international conglomerate such as GE. When everything is connected, the machines must be exposed to the global Internet. That brings security risks on both ends of the data transfer and at many steps along the way.

"As soon as you hook them up to the Internet, all of a sudden security becomes a major concern," Whitehurst explained. "You probably want to make sure that you can attach security patches and updates to these operating systems. And frankly, Red Hat is one of the few companies that actually has a security response team and that continuously packs updates as well as security patches for Linux."

And that's where the accidental opportunity arose:

"Frankly, we've had a tremendous number of companies come to us and say, 'Hey, Red Hat, we need a slimmed-down version of Red Hat Enterprise Linux to go on our products, because we can't have our refrigerator or our TV all of a sudden getting hacked and spouting spam or people turning on the cameras,' etc."

So Red Hat was basically pushed into the Internet of Things, by having robust security and messaging systems with a formidable reputation to match. Some of this falls into the basic operating system market, where RHEL is a well-known solution that can run on very low-powered hardware without sacrificing security.


Red Hat CEO Jim Whitehurst. Source: Red Hat.

This huge puzzle has many pieces
Moreover, Red Hat provides a set of lightweight messaging tools that turned out to be valuable for machine-to-machine communications. These programs from the JBoss product portfolio are not new, but have found a whole new set of real-world applications.

"Whether it's a lightweight application server or a robust messaging platform, or again, a secure operating system, all of these things are starting to get more relevant," Whitehurst said. "These businesses have been out there for a long time, but the fact that people are now connecting things to the Internet, all of a sudden these tools become more important."

In one such deal, Red Hat sold its RHEL platform and JBoss messaging technologies to a nationwide data management program for American railroads.

"So any device touching the railroads now has to communicate where it is, what direction it's going, and basically Red Hat's messaging technologies are embedded in that," Whitehurst told me. And it's not small potatoes: "It's one of the largest deals we've ever done."

So Red Hat is getting traction in the Internet of Things, almost by mistake. Good things happen when you build great systems and wait for a new market to materialize.

"Yes, we are starting to build a larger business there," Whitehurst concluded. "It kind of happened as we stumbled into it, we didn't identify it. People came to us and identified us, saying, 'You have a security response team, you are capable of delivering a Linux-based operating system that we can plug in to the Internet and feel good about.'"

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Anders Bylund owns shares of Red Hat. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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