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.

Jim
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.

Rh

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.'"

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers