Red Hat defiant as market punishes stock

By Stan Beer
Monday, 30 October 2006 09:04

Opinion and Analysis

When the market wipes a quarter of your company's share price because a powerful competitor declares its intention to enter your market space, one would think tough measures are called for. Unfortunately Red Hat, which now has to contend with Oracle competing for support of its Linux distribution, appears to have confused tough measures with talking tough.

When Red Hat CEO Matthew Szulik said last week that his company would not cut prices, despite Oracle's announcement that it will offer support for half the current going rate, he was talking tough. However, few market analysts believe Red Hat can simply ignore a rival like Oracle and expect to maintain market share.

The problem for Red Hat is that, as far as Linux is concerned, the company doesn't actually own anything. Sure it has wrapped up a Linux distribution and called it Red Hat Linux but it can't actually sell it as a product because it's open source. It can only make money supporting it.

What this means is that Red Hat can't stop anyone else taking the same distribution, rebranding it and also offer support for the product at a cheaper price, which is what Oracle intends to do. Welcome to the world of open source, where the software is free but the people who support it are not.

While some deny it, a sizeable proportion of analysts believe that Red Hat's very survival is at stake now that Oracle has announced its intention to move in. Oracle could do two things. It could continue to squeeze Red Hat until its share price tanks and the company becomes cheap enough to buy with small change. Alternatively, Oracle could completely squeeze Red Hat out of business and snap up as many of its technical staff as it can.

Anyone who believes that hard headed business users will stick with Red Hat for sentimental reasons and snub big bad Oracle should think again. In these days of cost conscious IT departments, the CIOs, CTOs and MIS managers will buy support from whomever can provide it at the best possible price.

For Red Hat, which lives on its support contracts, all of the above spells bad news. The company's only hope is to lift its game, drop its prices and try to convince Oracle that its business is not worth the fight. However, based on Oracle's recent track record, that does not appear likely.