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4/18/2006
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JBoss: Red Hat's $350 Million Ticket To Ride

Whether Red Hat's $350 million purchase of JBoss last month proves a wise decision strategically or financially over the long term, it was a deal the enterprise Linux vendor needed to gain entry into the higher-value business-software market.

Whether Red Hat's $350 million purchase of JBoss proves a wise decision strategically or financially over the long term, it was one that Red Hat had to pull the trigger on if it hopes to compete in the higher-value business-software market.

The acquisition gives Red Hat, already far and away the leader among Linux distributors, an application-software stack that can be tightly integrated with its version of Linux, better equipping the developer to compete in the rapidly growing Service-Oriented Architecture (SOA) market.

"If you look at what Red Hat's long-term product differentiation would have been, it wasn't much," says Michael Goulde, senior analyst on the Applications Development & Infrastructure team at Forrester Research in Cambridge, Mass. "This [acquisition] pulls them up into the higher-end markets with an integrated stack they know works and that has customers. I don't know if I would have paid that much for it though."

Justifying the purchase from an economic standpoint, Red Hat executives cited a recent study by research firm Gartner that pegged the value of the Application Integration and Middleware (AIM) and Portal market at about $6.5 billion in 2006. Red Hat and JBoss execs believe melding the two companies' portfolios will present developers with the technologies they need to better exploit opportunities in that market.

With the acquisition, Red Hat picks up a well-known, open-source, Java-based application server capable of hosting business applications on both Linux and Windows. JBoss is also in the process of piecing together a suite of open-source Java middleware that includes a portal, messaging and a transaction server. Red Hat currently offers support for a competing open-source application server called Jonas.

"Strategically, what we saw was an opportunity to create an open-source platform that could span the range of development through testing, certification, production and deployment, as well as provide the basis for the next generation of application development [for SOAs]," says Tim Yeaton, senior vice president of Enterprise Solutions at Red Hat.

The acquisition should not significantly alter either company's distribution strategy. JBoss sells its products mostly direct through its inside sales force, while Red Hat derives 61 percent of its revenue indirectly, through OEMs, systems integrators and other channel players.

But Red Hat execs say they plan to take up those channel plans a notch and sign up selected VARs and distributors over the next year.

"Our objective is to not go out and sign up a massive amount of resellers," says Ed Boyajian, vice president of worldwide OEM and North America channel sales at Red Hat. "Rather, we're targeting just those resellers we think offer the most value to their customer segments and that have clearly defined markets."

In the next year or so, Red Hat hopes to recruit 50 to 100 VARs, Boyajian says. Those partners would focus on delivering solutions to users "in the tier below the global 500." Red Hat will continue to sell direct to its largest customers, many of which still prefer to receive products and services that way.

As for JBoss, the company will continue to sell mostly direct, although it does plan to take advantage of Red Hat's worldwide support and sales teams, as well as some resellers "where it makes sense," says Marc Fleury, CEO of JBoss.

"We [do] mainly direct sales, with some going indirect, but it's a very different mix," Fleury says. "It has mostly to do with pricing models. Middleware sales are different than those of operating systems bundled in the box."

NEXT: How the deal could alter the competitive landcape for Red Hat and its existing partners.

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