IBM’s $34 billion acquisition of Red Hat is set to boost IBM’s ability to compete against larger rivals in the hybrid cloud space, but some worry that a divergent corporate culture could doom Red Hat’s participation in the open source software community.
That view was perhaps best summed up by BMO Capital Markets analyst Keith Bachman, who wrote in a research note that, “From a strategic perspective, we think IBM needs to take bold actions, but we also think the most significant risk is that IBM, in our judgement, has a mixed track record on integrating and managing purchased product companies.”
That integration challenge is acute in terms of the Red Hat deal. Many view the company as a beacon for how open source software can be at the heart of a successful business model and fear IBM’s integration plans could snuff out that innovative spirit.
“I just hope [Red Hat] manages to keep its independence to some degree and not bring an IBM-focused agenda to the open source software community,” said Dan Conde, an independent analyst and consultant for the cloud computing space. “That’s inevitable, but the point of open source software is to make decisions that benefit the larger community.”
Others were a bit more optimistic, stating that IBM has been more proactive with the open source community.
“IBM, amongst the large tech companies, has been one of the strongest open source leaders and supporters,” said Edwin Yuen, senior analyst at Enterprise Strategy Group. “I don’t think that Red Hat’s open source focus will change under IBM, at least in the near term.”
Red Hat’s Hats
Red Hat is best known as an open source software stalwart. Its business model is based heavily on open source software platforms and it’s a significant contributor to the space. Its services are either based on open source code or the company develops services and then contributes those services to the open source community.
The company posted $1.6 billion in revenues through the first half of its fiscal 2019, which was a 17 percent increase compared with the previous year. Net profits surged a similar amount year over year to $200 million in 2019.
Its flagship product is the Red Hat Enterprise Linux operating system (RHEL), which is based on the open source Linux kernel. According to an IDC report, RHEL trailed only Microsoft in terms of worldwide market share in that space at the end of 2017. However, RHEL has seen a significant slowdown in terms of overall growth, though Red Hat’s management said that dip was cyclical in nature due to the platform’s subscription model.
Red Hat also has an OpenStack distribution. It recently combined that platform with Juniper’s Contrail Enterprise MultiCloud platform to provide a managed system to help deploy and run applications and services on any virtual machine (VM), container platform, and any cloud environment.
Red Hat also jumped early on the containerization bandwagon. It signed up to support both the Docker container platform and Kubernetes container orchestration platform when both were still in their infancy. Those efforts are now part of its OpenShift platform.
OpenShift is a cloud-agnostic container development platform that allows enterprises to manage the migration of containerized resources between their on-premises equipment and the cloud. It competes in the space against rivals like Pivotal, Docker Inc., and Rancher Labs.
Red Hat has struck a number of deals with large cloud providers to integrate OpenShift into those platforms. This includes a deal last year with Amazon Web Services (AWS) that provides OpenShift customers with direct access into a handful of AWS services, and similar agreements earlier this year with both Microsoft and IBM.
“It’s hard to find a customer that’s not looking at or starting to use OpenShift in some way, which is great to see,” noted Red Hat CEO Jim Whitehurst during the company’s most recent quarterly results conference call.
Arvind Krishna, senior vice president of IBM’s Hybrid Cloud, repeatedly stated that Red Hat would continue to support current deals it has with cloud providers even if they are direct competitors to IBM’s hybrid cloud ambitions. He also noted that IBM’s cloud platforms would not gain any technology advantage compared to what Red Hat is offering to other cloud providers.
Those claims will be a focal point for the market as IBM will need to tread carefully on how it integrates Red Hat into its own operations as it looks to remain competitive against larger rivals like AWS and Microsoft.
Conde said that if done correctly, Red Hat provides IBM with some diversification to help offset some of its other businesses that have lagged. This includes its “cognitive solutions” business that witnessed a 6 percent drop in revenues during IBM’s third fiscal quarter.
“It does bolster credibility with running hybrid cloud offerings based on systems like Red Hat’s OpenShift, and may be able to create a better solution,” Conde said. “However, these technologies such as Kubernetes are also available from other vendors and there’s no guarantee that IBM will have a unique advantage. What may be more important is that they will acquire talent that understands this better.”