Blockbuster IBM-Red Hat Deal Draws Support – and Concerns for the ‘Spirit of Linux’
In the possible climax to the recent spate of major M&A activity (Salesforce-MuleSoft; Cloudera-Hortonworks), the biggest of the bunch so far is IBM’s acquisition of open source powerhouse Red Hat, a $34 billion blockbuster bid by IBM to lead the surging Linux big data analytics and hybrid cloud market, following a similar splash in June by Microsoft when it acquired the GitHub open-source collaboration platform for $7.5 billion.
Widely considered an impressive move by IBM, the deal has also raised concerns about the future of Red Hat and of Linux. To be sure, IBM and Red Hat pledged to maintain Red Hat’s commitment “to open governance, open source contributions, participation in the open source community and development model, and fostering its widespread developer ecosystem.”
And in a conference call on Monday, Arvind Krishna, IBM’s SVP for hybrid cloud and Paul Cormier, Red Hat’s president of product and technologies, went out of their way to emphasize that Red Hat would remain a “distinct unit” within IBM for economic and cultural reasons. “Red Hat as a brand is going to keep going as long as I can foresee,” Krishna said. Cormier predicted little disruption of upstream open-source software development as a result of the transaction, adding that it would remain “an enterprise software company with an open-source development model.”
But Tyler Jewell, CEO of OSS integration company WSO2 and former CEO of Codenvy, expressed the concerns of many when he said the deal could kill “the spirit of Linux” under IBM’s “commercial- and patent-first… proprietary model,” while “potentially opening the door for distributions other than CentOS and Fedora to gain wider acceptance.”
Industry analyst Patrick Moorhead of Moor Insights & Strategy said, “IBM needs to watch out for that. My recommendation is to run it like Dell ran VMware, which is basically hands off for the most part… Actually, IBM has a track record for deep integration, as opposed to a hands-off approach. But I expect, based on IBM’s public statements, that IBM [will do as it said]. Otherwise, right now most Red Hat code is running on somebody else’s servers. You don’t want to incentivize Dell or Lenovo or HPE to move it to a different stack.”
The sheer size of the Red Hat deal and the more than 60 percent premium paid by the buyer – $190/share, one of the largest in the tech industry – based on Red Hat’s current stock price illustrates how the acquisition could serve as a make-or-break cloud acquisition for struggling IBM. IBM stock opened the day sharply lower in response to the Red Hat deal.
Red Hat gives IBM major product and, possibly as significant, services entrée into the cloud and big data/machine learning workload worlds where strategic IBM technologies, such as its Watson cognitive computing platform, have not met IBM’s expectation. Red Hat, on the other hand, is firmly established in the Linux markets IBM seeks. In a published article in TheStreet last month, Red Hat CEO Jim Whitehurst said, “The big secular driver of Linux is that big data workloads run on Linux. AI workloads run on Linux. DevOps and those platforms, almost exclusively Linux. So much of the net new workloads that are being built have an affinity for Linux.”
Those workloads live in increasingly popular hybrid computing environments, in which organizations divide their analytics applications and data among on-premises and public clouds, according to regulatory and cost-efficiency mandates. Hence, IBM’s primary goal in acquiring Red Hat is to keep pace with public cloud leaders Amazon Web Services, Microsoft Azure and Google Cloud. The motivation for the deal “is to win in hybrid [cloud] on the basis of open technologies,” said Krishna.
The acquisition “feels like it may be too little too late," said Ryan Duguid, chief evangelist at Nintex, a low-code process automation platform vendor. “In many ways, Red Hat still feels like a legacy play, and while it offers necessary capabilities for hybrid and multi-cloud deployments, it is by no means sufficient when compared to the investments Microsoft and Google have made in offering a true platform as a service.”
The deal also hinges on expanding delivery of Watson and other AI applications in containers within hybrid clouds via the de facto standard Kubernetes cluster orchestrator, an infrastructure technology Krishna likened to the foundational Internet protocol, TCP/IP.
“Kubernetes is the center of our hybrid cloud strategy” as a way of orchestrating Linux-based containers, added Cormier. “We’re still a relatively small company,” he continued, adding that innovation around Linux has created enormous enterprise demand. “We can’t recognize the potential of the demand” without IBM.
Red Hat argues that the only way it can scale its OpenShift platform for running Kubernetes as well as expanding its flagship enterprise Linux operating system was to join forces with a large enterprise software vendor like IBM.
Moorhead also cited IBM’s sales and services scale.
“I also see potential synergies in IBM’s ability to get their sales force engaged and operating and working with a much more diverse set of customers because essentially this gives them access to Red Hat’s customer base, which is essentially every single large enterprise that’s out there,” he said.
“I do see a lot of business in the private cloud, moving people from a virtualized environment to something with containers and Redshift,” said Moorhead, referring to AWS’s Internet hosting service and data warehouse product. “And I can see how IBM Services can kick into gear, let’s say being a turnkey service provider, let’s say taking an enterprise’s 10 legacy application and move them to Redshift.”
Industry watcher Addison Snell, CEO of Intersect360, sees the acquisition primarily supporting IBM’s long-term AI market strategy, noting that his company’s research puts Red Hat in a leadership position among commercial HPC users, with 43 percent of responses, double that of the next-largest competitor.
“IBM's stated intent with this acquisition is to become a leader in enterprise hybrid cloud, which is credible,” Snell said, “but given the price IBM paid, combined with the company’s recent strategic initiatives, I believe it runs deeper. Cloud-scale computing right now is all about the data. IBM must see data to be mined under the control of the Red Hat operating environment, which IBM can make use of in an AI-centric approach to enterprise computing.
“IBM’s hardware share has dwindled, and the company has failed so far in gaining a sufficient toehold with the major cloud providers,” Snell added. “The Red Hat acquisition dramatically expands IBM’s presence in the technology stack, both on-premise and in public cloud. IBM wants that access for the AI implications, to tailor cognitive cloud offerings based on individualized enterprise usage.
Krishna said the Red Hat acquisition brings a large installed base of OpenShift and Red Hat Enterprise Linux users to the IBM public cloud, thereby putting it in a position to dominate the hybrid market characterized by a mix of private infrastructure and, increasingly, multiple public cloud providers.
Long a contributor to open-source projects, IBM has like Microsoft and other public cloud vendors been steadily raising its profile in the Linux community. Most notably, IBM has embraced Linux as the leading operating system on its latest generation of mainframes, including Red Hat’s distribution.
Hence, IBM’s deal for Red Hat drew praise from Linux developers. "IBM's announcement that it is acquiring Red Hat presents a tremendous opportunity for both organizations and highlights the importance of open source in the tech sector,” said Jim Zemlin of the Linux Foundation. “We believe IBM will be a good steward of Red Hat….”
Industry analyst Steve Conway, SVP, Hyperion Research generally sees the acquisition as positive for bringing a more solid financial footing and overall support to the Linux community.
“It’s a very good thing because you’ll remember that for some years people were worried about the future of Linux because it was kind of a political football,” he said. “The Sun-Oracle part of it kind of winked out. Ten to 12 years ago, the main topic of debate was whether Linux will still be around for HPC users. This is a very good thing, for effectively we have Intel strongly supporting Linux and IBM strongly supporting Linux, so people needn’t worry so much about the future of Linux, it’s going to be strong.”