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4/10/2006
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Red Hat-JBoss Deal Blurs Lines Between Open Source Partners, Rivals

Partners and analysts weigh impact of Red Hat - JBoss marriage on the software industry and discuss the increasing complexity of co-opetition and competition in the open source market

Red Hat's planned buy of JBoss puts it in direct competition with key Linux partners including IBM, Oracle, SAP and BEA and will alter the competitive landscape in the open source market, observers claim.

After the official announcement Monday morning, investment firm Goldman Sachs issued a statement praising Red Hat's move to buy JBoss for $350 million. The New York investment firm acknowledged it would come as a blow to many of Red Hat's Linux partners as well as operating system rivals Novell and Microsoft but asserted it's a good risk.

"Red Hat will need to move up the infrastructure stack and add a database, application server, portal and integration technology to deliver an open source infrastructure stack to compete with that of BEA, Oracle, IBM and Microsoft," the firm said in a statement. "Efforts by Oracle and IBM to help Red Hat gain traction in the enterprise with Linux has just backfired. We view this as a strategic negative for Oracle, IBM, BEA and Microsoft."

The deal with open source application server leader JBoss will cost the Raleigh, N.C. Linux leader roughly 17 percent of its $805 million in cash and debt securities but was a necessary maneuver as customers seek the same efficiencies in the open source world that they get in the commercial software world, according to Technology Business Research.

"The consolidation of the two companies echoes the ongoing consolidation of the commercial software stack, offering many of the same benefits of integration, scale and differentiation of revenue streams," said Stuart Williams, a senior analyst at the Hampton, NH firm. "It's a sizable hit on the company's current assets but a calculated risk."

One former Red Hat insider said the company would have saved between $100 million to $150 million in valuation had they done the deal with JBoss in 2004.

Nevertheless, it will make Red Hat far more competitive than it was marketing its own homegrown application server based on JONAS and database stack that failed in the marketplace, the same source said.

The announcement will likely disturb IBM's WebSphere group, but "if JBoss and Red Hat help IBM sell more hardware, they won't have much to be disappointed about," said the source, who asked to remain anonymous. "Novell should only be pissed at Novell. By Novell acquiring JBoss, they could have strengthened their position with SUSE by adding brand equity to the open source story."

The deal underscores the increasingly complex dynamics of co-opetition in the open source software era as proprietary software giants and open source ISVs partner and vie for power.

While the trend is viewed as healthy for competition, such abrupt vendor realignments such as Red Hat and JBoss' deal this week often catches ISVs, partners and customers off guard -- and sometimes in the crossfire.

For example, observers note that Red Hat's buy of JBoss will upset IBM's software group but possibly draw applause within IBM Global Services and IBM hardware sales groups. It could also bring IBM and Red Hat rival Novell closer together and force Microsoft – which has been cooperating with JBoss – to retreat. These scenarios would inevitably impact customers running Websphere on Red Hat Linux, JBoss on SUSE Linux and JBoss on Windows.

This means partners should study the ramifications before dispensing advice to customers. It is unclear, for example, what level of technical support Red Hat will offer JBoss' Windows customers – which represent 50 percent of JBoss' entire installed base.

Microsoft, for example, is committed to its JBoss partnership but could pull out of the deal if Red Hat attempts to convert jBoss-Windows customers into Linux customers, one partner noted.

"That's going to be an interesting question and a challenge for Red Hat to figure out," said Stephen Walli, vice president of open source development strategy at Optaros, a Cambridge, Mass. open source consulting firm. "It's a sizable number of customers for Red Hat to walk away from but if Red Hat wants to turn those customers into Red Hat Linux customers, it could be good for business."

Partners expect the resulting out-of-the-box integration and efficiencies between Red Hat and JBoss will help both ISVs and their respective channels expand business opportunities. "The Red Hat JBoss combination elevates the enterprise confidence level and makes it that much better for our clients to accept and for us to deliver solid solutions," said Navin Nagiah, CEO of Cignex, Santa Clara, Calif. "Novell should view this as a wake up call."

Still, it's not clear how the competitive landscape will shake out after the Red Hat-JBoss marriage is sealed. One analyst suggested the deal could have positive impact on Novell and its partners.

"The real challenge for Red Hat will be the inherent conflict with IBM and Oracle," said Scott Donahue of independent analyst firm, Tier 1 Research, which reiterated its buy position on Novell. "Clearly both of these companies see JBoss as a major competitive threat and will be less likely to favor Red Hat. We see this contention directly benefiting Novell, especially as IBM will be forced to move more rapidly to embrace Novell, and perhaps even acquire the company."

For their part, both Novell and Microsoft told CRN in e-mail responses that they will continue to partner with JBoss, honor their contracts and support their mutual customers.

The news Monday put to rest ongoing speculation about JBoss' negotiations since IBM's acquisition of open source application server company Gluecode last year. JBoss was rumored to have engaged in acquisition talks earlier with Oracle and Novell.

Its acquisition by Red Hat is a better deal for customers and partners because the two are both open source companies and have similar business models, maintains Tom Janofsky, a J2EE architect at Tripod Technologies, a JBoss partner in Cherry Hill, N.J.

"It's a good fit because JBoss' brand as a professional open source company is a really good fit with Red Hat's history of producing exactly that," Janofsky said. "It's also a good fit for JBoss partners because I don't think there is a lot of overlap with existing Red Hat partners. Hopefully the combination will expand the opportunities all around. JBoss's Java EE stack will get Red Hat in accounts that they weren't in before, and Red Hat's accounts will probably get JBoss in front of LAMP accounts and other app servers running on Red Hat Enterprise Linux."

Partners agreed that customers will likely react better to a merger between two pure open source companies. But it may also pose a problem for partners and customers that don't want one vendor to control the whole open source stack.

"Red Hat has always said they wanted to be the Microsoft of Linux, and this puts them one step closer to being able to deliver that complete, end-to-end platform,' said Chris Maresca, senior partner at Olliance Consulting, Palo Alto, Calif. "However, this type of platform dominance is exactly why Linux and Open Source gained such huge momentum in the IT industry, so there might be a general backlash if Red Hat manages to establish platform dominance."

"End-users should probably hedge their bets by using integrated application stacks like OpenLogic as a way to retain vendor-independence," said Maresca.

OpenLogic and BEA claimed the deal is not a big negative for them.

"Large enterprises that we talk to certainly want one throat to choke for certification and support of open source solutions - and the deal today between JBoss and Red Hat could help provide that for key fixed stacks," said Steven Grandchamp, CEO of OpenLogic. "But certified fixed stacks are just the tip of the iceberg. The larger need is for companies to have the flexibility to create stacks that are specific to their needs."

In an e-mail response to CRN, BEA noted that it will be "interesting to see how IBM and Red Hat's relationship changes now that they are more competitors than partners."

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