Big Blue Buys Red Hat: What’s Next for Linux as Red Hat Becomes Part of IBM?

Only six months ago we speculated that Google might acquire Red Hat, to help advance their cloud strategy while owning a key ingredient used by their competitors, including Amazon Web Services and Microsoft Azure. Fast-forward to today and a different cloud competitor has done just that. IBM and Red Hat have announced plans for IBM to acquire the dominant Linux distribution company for approximately $34 billion, a 60% premium over Red Hat’s stock price.
 

IBM versus Google

In some ways, IBM purchasing Red Hat could be a better outcome for AWS and Azure than if Google had done so. Compared to Google Cloud Platform, IBM has been less of a threat to AWS and Azure. This acquisition allows IBM to instantly claim billions of dollars in cloud revenue, overnight. This added revenue will be something of a misnomer, as much of the Red Hat “cloud” income will represent licensing of Red Hat software for use on competitors’ clouds, such as AWS, Azure and GCP. If IBM chooses to label this as IBM Cloud revenue, analysts may beg to differ.
Still, the income will flow to IBM without having to do much to actually sell to end users. After all, AWS, Azure and GCP resell Red Hat Linux to their customers, often without Red Hat being involved. In fact, there is very little “selling” of operating systems, as cloud consumers often standardize on an operating system to use before spinning up an instance or container. Red Hat success is likely more about branding and market presence, and service, things that IBM has some experience with.
While IBM is not an immediate threat to Amazon or Microsoft, this purchase could help IBM encroach on Google for third place in cloud revenue, even if the end users aren’t specifically using IBM Cloud. Amazon and Microsoft may feel less threatened working with IBM than Google, had Google acquired Red Hat. There are a couple of potential outcomes. IBM might be seen as a technology and services provider, and not a true competitors, so it will be business as usual. Or, more likely, the major cloud vendors will feel threatened by relying on a competing cloud platform provider for their operating system, the fundamental building block for any computing instance. This is similar to how AWS has dealt with Oracle, which led AWS to develop and promote alternative database options.
 

Linux versus Windows

There are zealots on both sides of the Linux versus Windows debate, so we will stick to the facts. Linux is growing, from 30% to 35% from 2015 to 2017 while Windows market share remains flat at 39%, during that same time period, according to IDC.

“As open source software and operating systems become more mainstream in the industry,
Linux distributions are becoming increasingly robust and widely adopted by enterprises.”
Stephen Turnbull, Director of Marketing, AMDMicrosoft may have made the bulk of their money on Windows (and Office) but they see that Linux is a big part of their future, especially as it relates to Azure. IDC continues, with more Microsoft projections and observations:

• The world’s biggest OS provider will officially provide its own open source Linux platform.
• Developers for the open source Windows Subsystem for Linux (WSL) can contribute to the Windows Store.
• Users can now run a supported Linux Virtual Machine on Windows.
• Microsoft acquired GitHub in May 2018 to play a greater role in the open source community.

 

Done Deal?

The deal isn’t done, but it’s likely that there is a high “break-up fee” to deter a bidding war. Instead of fighting over Red Hat, look for Amazon and Microsoft to invest in their own versions of Linux, or perhaps to acquire a second-tier platform like SuSE or Ubuntu. The beauty of Linux is that anyone can take the open source operating systems and make their own implementation. Red Hat has added value and services, not to mention brand recognition, but Microsoft and Amazon can certainly throw money at the problem and enhance their own brands of Linux, which they already offer. As two of the most wealthy firms in the world, they don’t have to choose build versus buy… they can afford to do both.
 

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