Canonical’s New Growth Milestone

Company sets new long-term goals after a breakout year

For several years Canonical, owner of the open-source Ubuntu Linux distribution, has been investing heavily to develop its software from being one of many Linux distributions to being a full-stack system. This includes virtualization, containers, operations and management software, and an app store serving a developer ecosystem. During that period, the company has been funded by the CEO, Mark Shuttleworth, and many people have questioned the financial viability of a smaller player pitching itself against the likes of VMware and Red Hat.

However, at an event for analysts last week, Mr Shuttleworth said that Canonical is having a breakout year, and that those conversations have now stopped. The company is likely to be profitable in the current financial year, for the first time in many years. It hasn’t needed the external investment that had been set aside, it’s set to declare financial independence, and, according to the CEO, is now on the path toward the initial public offering that he first touted during 2018.

This improvement in financial performance is mainly down to the company having a full software stack to serve four key “battlegrounds” and achieving significant momentum in each. The battlegrounds are public cloud, data centre, the Internet of things (IoT) and edge computing clusters, which are also a big part of IoT and serve other aspects of enterprise computing.

For a smaller player like Canonical, the development of a full stack designed to serve multiple markets was seen internally as a “moonshot” project, even though some of the layers come from other open-source projects such as Kubernetes. So, Canonical regards its success in 2019 as evidence that it has achieved a milestone in its development, and that it can now pose serious competition to the other major full-stack players, namely Red Hat and VMware.

A key element of the progress Canonical has made in 2019 is its differentiated approach. Rather than using its own layers of the stack as differentiators that, in effect, tie customers to the company, it aims to do two things. Firstly, it argues that each generation of infrastructure should be cheaper to operate and manage than the previous, thanks to improved integration and automation. Canonical sets out to be a lower-cost alternative than its major competitors. Secondly, and related to this, it puts huge focus on automating housekeeping tasks such as updates and patches, because they dominate the long-term costs.

Another aspect of its improvement this year is growth of managed services. Canonical had an expectation that companies would want to manage the infrastructure themselves, but it set up a limited managed services capability to help those who need it. Canonical has been surprised by the strength of demand, with 50% of new deals for cloud systems being fully managed. At one level, the company should be able to prove its PR claims about costs by setting a fixed price for operating any cloud anywhere in the world. However, the economics of managing infrastructure put a natural limit on profitability for managed services. In addition, Canonical doesn’t wish to compete with its partners, so it’s not looking to grow this area strongly.

Having reached a milestone, Canonical is working on the next. It expects most of the growth in open-source innovation for the coming years in applications, rather than infrastructure. Its new aim is to expand the scope of its operations to include applications. To this end, it’s already providing round-the-clock support for key applications, including Apache Kafka, MongoDB and Apache Hadoop, plus security updates for 1,000 more. It plans to extend this to all packages running on Ubuntu. Canonical recognizes that this is a hugely ambitious goal, as it spans multiple markets including the highly fragmented IoT world, and has set no timescales for achieving it so far.

Although ambitious, this is an entirely logical plan. There’s good evidence that the host of a large app store has an enduring revenue stream and develops a control point in the industry. Of course, this can cause tensions — as we’re seeing with Netflix and Spotify refusing to collect their subscriptions through the Apple app store to avoid a “tax”. And the open-source community is rightly starting to resent the fact that larger players can make large sums of money from free software, while developers get nothing. Canonical and others will need to be sensitive to this as they build their future positions.