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July 23, 2007 | Comments: (0)
Why Microsoft Should buy Red Hat
Some background:
- Matt asked "Why doesn't Oracle just buy Red Hat?"
- I explained why Oracle would not buy Red Hat
- Luis Villa replied to Matt's question: "Because Red Hat employees would leave en masse."
- Microsoft announced fiscal 4Q07 growth of 13% on Thursday (or 16% if you only count their true software revenue - which falls into the "Client", "Server & Tools" and "Microsoft Business Division" reporting categories). Microsoft crossed the $50 billion total year revenue mark with the close of fiscal 2007.
- I compared Red Hat's stock performance over the past year vs. some Traditional software vendors (see below)
If you're still with me....
Red Hat is growing and executing well. Financial analysts expect Red Hat to hit $517M this year (fiscal 2008, ending Feb. 2008), and $631M in fiscal 2009. At this pace, Red Hat should cross the $1 billion revenue mark in fiscal 2011. Red Hat may well be the gorilla in the Open Source marketplace. But after everything is said and done, that marketplace is tiny in comparison to the total software market. If you believe in the stock market's ability to predict a company's future value, one could argue that Red Hat investors are in a "sit tight" mode right now. At a P/E of 72 and PEG of 1.44 (vs. Google's PE of 45 and PEG of 0.99), Red Hat's stock has likely priced in as much growth and "great news" that we could think of. Few doubt Red Hat's position in the overall OSS market, but some may be waking up and asking whether being #1 in 1.8% of the software market is enough to drive the multiples that Red Hat shares enjoy today.
While both vendors have strong operating system franchises, Red Hat isn't really eating into Microsoft's revenues. IDC predicts that the Linux & Windows markets are growing 26% and 9%, with Unix revenues declining by 3% from 2006-2011. Red Hat's Jboss division adds a JEE portfolio that does compete with .NET as the infrastructure for enterprise applications. But here again, it's very unlikely that Microsoft faces off against JBoss in (m)any customer deals. It's more likely that Microsoft competes against IBM WebSphere, BEA WebLogic or Oracle AS, and JBoss only comes into the picture when the customer has already selected JEE. While there is some overlap, Red Hat is much more complimentary to Microsoft's offerings than we'd like to think.
Just imagine a Microsoft that could offer customers a choice of Windows/.NET, Linux/JEE or, and here's the magic, BOTH. The fact is most customers have heterogeneous environments, and those that don't today, will likely in the future.
In the face of OSS competition, one of the best moves we made in the IBM WebSphere division was purchasing Gluecode. As I've mentioned (over and over), having a free application server, based on the open source Apache Geronimo project has done nothing but spur the growth of our overall WebSphere Application Server family. In some cases, the customer chooses WAS CE, in other cases, they choose Traditional WAS products. We help customers be successful with their choice and, equally important, ensure that their previous investments in WebSphere infrastructure are protected. This is exactly the scenario that Microsoft could create for themselves. Microsoft would be able to offer Windows, Linux, .NET or JEE in various combinations to solve customer problems. As a competitor, this would be a scary combination.
What's more, Red Hat could help Microsoft gain OSS street cred almost instantly. To me, this would easily become Red Hat's most important contribution to the software industry. Forget being #1 in 1.8% of the software market. How about helping a $50B software company evolve its thinking around OSS in order to become a $75B software company while increasing customer choice and satisfying customer needs? Goosebumps.
I doubt this acquisition will ever take place for three reasons. First, because of vendors such as IBM, HP, Intel and Oracle who have investments in/with Red Hat. Second, because Microsoft wouldn't want to take the risk. I'd argue that there is much less risk than appears on the surface. Sure, there would be some internal friction during product positioning discussions if the deal went through. But internal friction is healthy and shouldn't get in the way of helping customers succeed with your offerings. Lastly, as Luis' comment highlights, Red Hat's culture would also pose a barrier to this deal. But I’d argue that the only thing that these comments do is put a damper on the deal price, which, at the end of the day, is bad for Red Hat investors. One could argue that JBoss employees felt the same way about Red Hat prior to the acquisition. And yes, some left Red Hat, but some stayed. It would be up to Red Hat management to convince employees about the historic importance of their efforts inside of Microsoft, which would be a pretty compelling reason to stay.
A Red Hat marketing slogan states: "truth happens", what about "change happens"? And why not help Microsoft change?
PS: I truly doubt this deal will ever happen, but it’s interesting to think about the possibilities.
Posted by Savio Rodrigues on July 23, 2007 09:17 AM
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- COMMENTS
Who is your dealer? He must have some really good stuff....
Posted by: James at July 23, 2007 11:41 AM@James, I'm high on life :-)
Would you care to explain why this would be a bad deal for Microsoft?
I agree, that on the surface, the idea is laughable, but after the laughter subsides, there is value to MSFT and, even RH, in a deal....
Posted by: Savio Rodrigues at July 23, 2007 11:50 AMSavio,
"... and fourth, (this acquisition would not take place because) the U.S. Department of Justice and European Competition Commission would be investigating it until the end of the century."
But you are right, the users want this kind of open choice.
Posted by: Dennis Byron at July 23, 2007 12:30 PMBoth have a lot to offer, both system have good advantages, both companies have good ideas and solutions; put the two together cheaper support from Red Hat, cheaper software from Microsoft.
Mircosoft marketing, Red Hat solutions for the professionals a truly good combination.
Yes I think it's a good deal for us the buyers, we must be what matters at the end of the day because both need us!
Red Hat could help Microsoft gain OSS street cred almost instantly
Microsoft's purchase of RH would destroy RH's OSS street cred instantly.
Posted by: -dsr- at July 23, 2007 01:08 PMPurchasing gluecode and creating Websphere Children's Edition based on it may have been the best thing for Websphere division, but it wasn't the best thing for Geronimo. It is not in IBM's best interest to EVER have a strong Geronimo. It will always be hobbled. It will never have mature transaction management, clustering, etc... Anything that would take away revenues from the greater Websphere platform which is 1billion+revenues for the company.
The same scenario would be if MS bought Red Hat. A hobbled linux/jboss platform to keep MS offering attractive.
Posted by: Bill Burke at July 23, 2007 01:10 PMROFL - MS and good solutions. I liked that about cheaper software from MS when no competitors exist too.
You must be not aware that every solution worse than a MS one is deemed to disappear. Hence every solution MS provides is the worst possible one ;)
@Bill Burke,
I don't speak for the Apache organization, but the thing about Apache projects, is that they are typically not run by any one entity. So, if you'd like to argue that IBM has in some restricted what the Geronimo community has worked on, I'd have to question your views. We have IBMers working on the project, but there are also other contributors from other companies and those unaffiliated with a vendor. Everyone gets a vote on future direction, and pretty much every project decision. This is unlike a typical OSS project that is single-vendor controlled.
So, yes, you could argue that Microsoft could try to stifle RHEL/JBoss efforts, but that wouldn't make much sense since RHEL/JBoss don't really go head-to-head vs MS. There are more net new deals that RHEL/JBoss would get MS into than deals where MS would gain from a hobbled RHEL/JBoss.
Posted by: Savio Rodrigues at July 23, 2007 06:06 PMWon't happen. The core of Red Hats business is built around GNU / Linux software, which is beginning the migration to GPLv3. Under the provisions of this license if MS bought Red Hat, then it would be offering / selling products licensed under GPLv3. This would provide immediate patent protection, from MS, for all who use open source software. Plus, any changes MS tried to incorporate into its Red Hats product line, would have to migrate back to the community. MS would also lose its bility to keep its crappy DirX / MS office technology under proprietary license.
Posted by: Quentin at July 23, 2007 08:35 PMI know many of the developers on Geronimo. I was told, by a good source, that gluecode team ask for IBM to OS certain portions of websphere to the geronimo project and was refused. That's what I heard. Maybe it isn't true. You tell me, you work at IBM.
Posted by: Bill Burke at July 23, 2007 09:24 PM@Quentin,
It's likely that Microsoft's position on Linux patent infringement would change if they acquired RH :-)
@Dennis Byron,
Great point about the DoJ & EU investigating the deal. Many reasons why it won't happen...but think of the possibilities if it did :-)
@Bill Burke,
I am not aware of the discussion you mention...but that shouldn't mean much. However, the situation you mention is a little different than "IBM wants to keep the man/Geronimo down". :-) We actively contribute to the Geronimo project with developers who are paid by IBM to develop Geronimo.
Again, I can't speak for anyone at Apache, but I'd argue that IBM "gives", at an absolute minimum, in line with what other community members do. We absolutely benefit from work that is done by the entire Apache community (and beyond in the case of Geronimo), but we contribute our fair share to the community.
Look, anyone is free to ask IBM, or any vendor, to OS any part or component of their portfolio. Heck, I'm sure there is someone out there that would want us to OS the CICS transaction manager. But, the likelihood of that happening is approximately the same as you taking me to a Patriots game with your season tickets.
Posted by: Savio Rodrigues at July 24, 2007 07:28 AM@Quentin: "MS would also lose its bility to keep its crappy DirX / MS office technology under proprietary license."
Well... no. Each product is licensed independently, so Microsoft could (for example) sell a GPL product (Linux) and a proprietary product (MS Office) without any legal problems a'tall.
They could even sell "MS Office for Linux" as a proprietary product (note that Adobe PDF Reader and Flash are distributed this way today).
Of course, figure skating would become a popular sport in the Hell Olympics...
Posted by: ricegf at July 24, 2007 11:12 AM> What's more, Red Hat could help Microsoft gain OSS
> street cred almost instantly.
It's the exact opposite: MS would be giving OSS credibility, which would be slitting their own throat.
Remember when Gates said "the internet is just a fad"... don't give the competition credibility (until you can successfully undermine them).
Remember when DEC said "the PC was just a FAD" -- they didn't want to legitimize PC's to their VAX customers. That helped them hold on to a big-iron market long after it should have died.
Remember when IBM gave credibility to the PC (thinking they had control over the platform, until Compaq successfully clean-room reversed engineered the BIOS)?
Posted by: Chris at July 24, 2007 11:27 AMif Microsoft buys a company to have Linux in product line, it'd be Novell. (relations and culture are better than with RH.)
Dutch
Posted by: Dutch at July 24, 2007 12:01 PMImpossible. All RH products are GPLv2 bound. Very likely, GPLv3 code will make its way into Red Hat products as well. This would either mean:
1. Complete Firewall between RH and MS departments. Would be an interesting legal structure that would be scrutinized by the FSF.
2. MS complies with GPL and actively participates in the FOSS movement. CentOS would be using MS contributed code in its distro.
Both options are quite unlikely.
The already mentioned cultural differences not only exist between RH and MS, but between the FOSS world and MS in general. Cooperation between FOSS and MS would come to a grinding halt. Bad for everybody, except for MS, who don't care about Free Software in the first place.
Here's another one: 'The Linux Desktop is going through stages of rapid growth. One of the key players is Canonical with its Ubuntu Free desktop OS. In order to be able to serve their customers with the desktop of their choice, MS has acquired Canonical and will continue to develop Ubuntu.'
Suppose for a moment you read that in you RSS reader. Would you think:
A. Ubuntu? Wasn't that an African tree?
B. Great. We are finally going to see a truly functional Linux desktop.
C. Oh My Deity! I need to call my congressman, this is the death of Linux?!
D. www.stocks.com/microsoft
A small hint: if your answer is B, you really ARE smoking something....
Microsoft offer choice? The sky is blue here. What colour is it where you are?
Microsoft announced in March that there would be no version 10 of Visual FoxPro. VFP is a great mid-level DBMS, but MS has never really promoted it. Finally, they had strangled it enough to call it quits.
I expect a similar scenario could repeat.
measuring the value of technology by their stock rating is probably the dumbest thing i've heard in years.
therefore, this article is worthless.
Posted by: plex0r at July 24, 2007 12:59 PMI hope MSFT and RH never have any connection. The reason I tried Redhat's Fedora is that the pre-service_pack_2 XP was such an unreliable, windows-incompatible, disgusting piece of filth. The reason I have stayed with Fedora is that it not only gives me the reliability and security that I never had with Windows, but I now have all of the configurability that has been exterminated in recent Windows releases, and more.
Posted by: s_mcintosh at July 24, 2007 01:15 PMThis was a great comedy piece, do you write for any well known comedians.
Posted by: tracyanne at July 24, 2007 02:19 PMGPLv2 has an implicit patent license for the code it covers. GPLv3 has made that explicit.
Given that MS claims that "Linux" (by which they seem to mean the entirety of Free Software) infringes on 200+ of their patents, by flat-out distributing a GNU/Linux distro they'd pretty much be giving up any patent leverage they ever had.
That's why MS is reneging on its Novell deal--it wants nothing to do with distributing GPLed software.
Now, there's nothing saying there couldn't be an MS BSD...
Posted by: aristos_achaion at July 24, 2007 07:08 PMThe logic of the article and those of several commenters is based on some very bad assumptions. One is that "even" if Microsoft bought Redhat, they would continue to provide the complete "packaging" of the Free/Open Source Software (FOSS) free of (without) proprietary (and very expensive) administration/ installation/update tools that are now included as FOSS.
The second is that Microsoft would not be comfortable and accepting of the FOSS development model and timetables which contrast completely with their business model of "rush to market regardless".
Get real guys, any involvement by Microsoft in the FOSS environment will be of no real benefit for FOSS users. Did you notice th implications of Apple purchasing the "cups" UNIX/Linux printing technology copyrights?
Posted by: W. Anderson at July 24, 2007 09:33 PMGiven the reaction to Microsoft buying Novell, RedHat would almost certainly draw a worse reaction.
It would practically guarantee Microsoft a tough time from the Justice Department in a new Democratic Administration, which seems likely to happen.
And it would likely coalesce the Linux community around Ubuntu.
No, I don't think it would be a good idea at all, for anyone.
Posted by: Dana Blankenhorn at July 25, 2007 06:55 AMMicrosoft would be much better off by following Apple's lead and get out of writing kernels by adopting a (GPL-free) BSD kernel.
Microsoft would then have a solid kernel to put under their office software and web browser, with no other cost than a simple copyright notice at boot time.
They would also have the scalability to offer their development frameworks on tiny and huge devices.
Posted by: Henry Cobb at July 26, 2007 09:05 AMIt would be like MS and FoxPro. FoxPro had a desk top database in the DBase III+ family, which was extremely fast, easy to learn and use, and had an excellent superset of the old XBASE language. It ran circles around the pathetic MS Access. People ignored their copies of Access which came with Office, and bought FoxPro. MS couldn't stop FoxPro, so they finally bought it, dumbed it down, put the Microsoft stamp on it (e.g. impossible, useless Help screens) and destroyed it. Red Hat Genuine Advantage anybody?
Posted by: rich97 at July 27, 2007 06:26 AMI have made this prediction annually for the last five years to the original R. X. Cringely: Microsoft will adopt the LINUX kernel and place the Windows GUI on top it and call it Windows. This will allow them to eliminate or re-assign all of those coders stuck working on the kernel and even worse fixing its bugs and security flaws, offer their customers something that is finally stable and secure, and actually increase the profitability of the OS. They'll have a world of programmers developing their kernel and ensuring its security, and all they'll have to worry about is making the GUI stable and attractive. A couple of years after my prediction of this, Apple did essentially that, using the MACH kernel instead of LINUX, but look at how successful it has proven to be!
Posted by: Padre at July 31, 2007 12:39 PMThe author asks "A Red Hat marketing slogan states: "truth happens", what about "change happens"? And why not help Microsoft change?"
The answer is, "change happens" is already the slogan of insurance firm Zurich. Although irritatingly they spell it "change happenz" as if they were selling ringtones to teenagers rather than insurance. So there you go.
Off-topic? Huh?
Posted by: dan at August 6, 2007 05:21 AM
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