Industry Giant Takes on Red Hat

Oct. 26–For years, Red Hat has dominated mostly unknown software rivals.

But today, the Raleigh-based company begins competing against an opponent 50 times its size.

Oracle, one of the world’s largest software companies, announced Wednesday that it will distribute its own version of Red Hat’s Linux operating system and undercut the prices Red Hat charges for support services.

The technology community had speculated for months that Oracle, which sells databases and other business software, would start offering services for Linux. They didn’t expect the software giant to use Red Hat’s own product against it, said Rob Enderle, principal analyst with The Enderle Group, a technology consulting firm.

"Holy crud. That is incredible," Enderle said. "This is easily the biggest challenge Red Hat has ever faced."

One of Red Hat’s major obstacles until now has been convincing corporate customers of the credibility and reliability of its open-source software, which is developed collaboratively by amateurs and professionals around the world.

The thirteen-year-old company was a pioneer in giving away the software and charging for support services, such as patches and updates.

Red Hat’s business has been growing at a rapid pace, with revenue up 42 percent in 2006 to $278.3 million. The company has become the world’s largest distributor of the open-source Linux operating system.

But Oracle competes on a different scale. The company generated $14.4 billion in revenue in its most recent fiscal year, has a "scary-good" sales force and has developed a high level of service capable of supporting even the largest companies, Enderle said.

"This could easily become the premier distribution for Linux," he said.

In contrast, analysts from Jefferies & Co. wrote Oct. 13 that if Oracle introduced a Linux operating system, they don’t think "market share gains … will be automatic."

Still, Red Hat shares fell as much as $3.35 in after-hours trading Wednesday. The stock closed up 10 cents to $19.51 in regular trading before Oracle’s news.

The announcement late Wednesday left Red Hat scrambling to respond.

"The open-source pie just got bigger," spokeswoman Leigh Day said in a prepared statement. "The announcement today really validated open-source and Red Hat and our technical leadership. We’re going to continue to compete on innovation and value."

In the company’s most recent quarter, 99 of 100 customers renewed their subscriptions with Red Hat, she said. Day declined to give specifics on how the company will compete.

Enderle said Red Hat’s best chance of competing against Oracle is to merge with a larger company that can provide comparable service. Although customers pay Red Hat to provide some support for its operating system, the company is too small to provide everything its clients need, he said. That means server companies such as Hewlett-Packard and Dell have had to bear some of the weight of supporting Red Hat’s Linux.

Oracle said its "Unbreakable Linux" program will fix the bugs in past and current versions of Red Hat’s Linux without customers having to upgrade to a new version of the software. Every time Red Hat releases a version of its software, Oracle will synchronize its Linux and add its bug fixes, the company said in a statement.

"To get Oracle support for Red Hat Linux, all you have to do is point your Red Hat server to the Oracle network," Oracle President Charles Phillips said in the written announcement. "The switch takes less than a minute."

Oracle is already bringing its financial resources to bear. Through the end of January, the company is offering a free trial period for its customers and a 50 percent discount for others. Oracle will give customers who switch from Red Hat or competitor Novell credit for the remainder of their subscriptions with the companies.

Oracle’s services will start as low as $99 a year and run up to $1,999 for its highest level of support. According to Red Hat’s Web site, Red Hat’s Linux support is priced from $349 to $2,499 for servers.

Until now, Red Hat and Oracle have cooperated, with Oracle selling software to run on top of Red Hat’s operating system. The companies will still work together, Day said. But in June, an acquisition put Red Hat in direct competition with Oracle on some higher-level products.

Just days after Red Hat announced its $350 million acquisition of Atlanta-based JBoss in the spring, Oracle CEO Larry Ellison told The Financial Times that his company was looking into introducing its own Linux-based operating system.

But Wednesday’s announcement has implications beyond Red Hat, as it helps Oracle position itself against Microsoft as a broad software provider, Enderle said.

"This is potentially world-changing," he said. "It’s big."