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11/10/2006
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How Red Hat Lost Friends And Gained New Enemies

Its steady success and expansion gave Oracle, and even IBM, reasons to want it taken down a few notches. Microsoft saw an opportunity.

Red Hat, once the little company that could, for years could do no wrong. It rode the rising popularity of Linux to become a $280 million-a-year company with a market cap as high as $6 billion, claiming 80% of the market for Linux-based enterprise servers. Other Linux-friendly vendors loved Red Hat, since it gave them and their customers a viable alternative to Windows. Even Microsoft, while openly anti-Linux, didn't treat Red Hat as too much of a threat.

But Red Hat's success is starting to breed envy and unease, and now partners and competitors alike--particularly Oracle, Microsoft, and Novell--are trying to wipe the grin off the commercial face of Linux.

Two of the software industry's behemoths, which agree on little else, seem like-minded that something needs to be done to slow down Red Hat. First, Oracle chief Larry Ellison said his company was entering the Linux support business, an area that yielded almost a fifth of Red Hat's revenue last fiscal year. Then, Microsoft struck a $442 million pact with Novell that covers product integration, patent protection, and marketing, giving aid and comfort to the only other mainstream Linux option businesses have.

It's a new reality for Red Hat. With fiscal 2006 sales up an impressive 42%, and net income up 75%, it's making serious money with little competition. The company's April acquisition of JBoss, maker of the open source Java application server and other middleware, for $350 million revealed its resources and ambitions to move beyond the Linux operating system. The Red Hat that big vendors once viewed as something of a raw material supplier--serving up the Linux shops for Oracle's databases and IBM's middleware--now looks more imposing.


Red Hat executive VP, Paul Cormier

"Rivals' plans could be a challenge for us. But it's going to be a big, big challenge for them." -- Red Hat's executive VP of engineering Paul Cormier
Red Hat characterizes the growing unfriendliness as a validation. "The two largest proprietary software companies just stood up, and by them saying that Linux is a threat to them, it's obvious that Microsoft and Oracle feel Linux is mainstream in the enterprise," says Red Hat executive VP of engineering Paul Cormier. Oracle's move will help Red Hat, Cormier insists, since Oracle will base its Linux operating system on Red Hat's Linux distribution. "If Oracle is going to be one step removed, customers want to go to the source," he says. (Wall Street thought differently, as Red Hat shares fell 25% following the Oracle announcement. They've recovered little ground, and Red Hat's market cap today is about $3.4 billion, far from its peak in May.)

Sam Peterson, senior VP of technology for Overstock.com, thinks Oracle's interest in Linux proves that the operating system has gone from being "a fad" to one of the dominant server platforms. Linux's lower cost is becoming less of the deciding factor, he says, as customers place more emphasis on its strong data center performance.

Overstock runs its Oracle databases on Red Hat Linux, and it uses Novell's Suse Linux for its Web and application servers. Peterson prefers Suse but runs Oracle on Red Hat because it has always been the first Linux distribution Oracle certifies with new database versions. He's not too worried about Oracle providing its own distribution of Linux unless it means a greater lag time for Oracle to certify its products on Red Hat.

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THE RISK TO LINUX
Given the importance of Linux today, it's high time for more viable rivals to Red Hat. Eighty percent market share and 75% profit growth beg for a stronger challenger. Oracle sees opportunity, and it's pouncing. That's good news for Linux customers.

However, Oracle's plan to offer customers its own bug fixes to the Linux kernel is troubling. Instead of waiting for Linux kernel maintainer Andrew Morton to collect the latest improvements and bug fixes into a formal release for all distributions, Oracle could create the equivalent of a proprietary operating system. The history of Unix tells us that's a bad idea, as a "forking" of the kernel locks customers into whichever variant they'd bought, with little incentive to switch even if they found a better offering.

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