Editor's note: Novell will pay about $40 million to Microsoft over the next five years, not $40 million each year as was stated earlier. We regret the error.
Open-source software specialist Red Hat (NASDAQ:RHAT) has long been the top choice for enterprises with an interest in running the Linux operating system. Lately, however, the company has been caught in a crossfire between much larger companies, all seemingly intent on stealing a piece of Red Hat's pie.
Ready, aim ...
The first shot was fired last week by Oracle (NASDAQ:ORCL) CEO Larry Ellison, who announced that Oracle would ship a Red Hat clone, renamed Unbreakable Linux, with support available at about half the price Red Hat charges. That platform will be pushed as the best Linux version for running Oracle's databases.
"I don't think this will kill Red Hat," Ellison said at a press conference. "This is capitalism. We are competing." He also said that a "lack of enterprise-quality support" was holding Linux adoption back, and the move was designed to grow the total Linux market.
Then a salvo was heard from Redmond, where Microsoft (NASDAQ:MSFT) unveiled a cross-licensing and cross-promotion deal between Windows and Novell's (NASDAQ:NOVL) SUSE Enterprise Linux. SUSE is Red Hat's only credible competitor in the enterprise Linux space, and with Microsoft's mighty marketing assets working in its favor, it's a fair bet that the distribution should increase its market share significantly.
The deal boils down to Microsoft paying Novell about $350 million over the next five years for selling copies of SUSE as a companion to its large-scale Windows installations. Novell will pay about $40 million of that right back in return for a guarantee that Microsoft won't bring patent infringement lawsuits against SUSE customers.
Who's safe?
The patent indemnification does not protect Novell itself, as that sort of deal would break the rules of the GPL v2 license under which the Linux core itself is distributed. Instead, the protection applies to end-users and to any modifications they introduce into their SUSE systems. One of the draws built into open software is the option to modify the software to fit your particular needs, and the Microsoft contract should let companies do so without looking over their shoulders for infringement lawsuits launched from Washington state.
That is, in theory. You see, the protection only applies as long as the programmer doesn't get paid for his work. While many unpaid enthusiasts do contribute code with no compensation at all, others do it as part of their jobs at IBM (NYSE:IBM), Hewlett-Packard (NYSE:HPQ), Novell, Red Hat, or a host of other open-source supporters. Still others work for free in the hopes of catching the eye of one of these companies and getting a paid job doing what they love. That's great, but any payment at all nullifies the Microsoft patent protection. For the enterprise market, it all boils down to empty rhetoric from both partners.
It's the end of the world as we know it
So, is it time for Red Hat to roll over and die? Hardly. While there's no doubt that both of these projects will affect Red Hat's results going forward, they are hardly nails in the company's coffin. Paul Cormier, executive VP of engineering, takes a hard line in his company's defense:
"There's no question that Linux is a viable part of the enterprise. The two largest proprietary software companies just stood up, and by them saying that Linux is a threat to them, it's obvious that Microsoft and Oracle feel Linux is mainstream in the enterprise."
Microsoft would love to have control of Linux and keep it behind Windows from a technical point of view. "Microsoft's strategy for coexisting with Linux is to take a piece of any revenue stream that Linux creates," notes Cormier.
Oracle could strike out on its own and create a Linux distribution from scratch, but it chose to go with essentially a rebranded Red Hat version instead. That speaks to the software's stability, technical leadership, and solid reputation. Cormier said that Microsoft and Oracle were reaching for control more than revenues, and that software vendors wouldn't rush to test and certify yet another operating system, especially while Oracle competes against many of them.
Secret sauce
Red Hat's support system has a few advantages over Oracle, too. With support centers on four continents, staffed by a total of 200 certified Red Hat engineers in front-line support, 24/7 staffing is no problem. But unlike many trouble-ticket handlers that put low-paid, minimally trained staff on the first line of support, Red Hat strives to handle every problem on the first call. Rather than escalating up to highly paid level 2 or 3 experts, 97% of all calls to Red Hat support are handled on that first step.
Not only do Red Hat staff members know Red Hat products inside and out, but they also receive cross-training in major partner products like Oracle, Sybase, VMWare, and so forth. "When customers come to us they're, looking for a single throat to choke for support, and we try to deliver the goods," said Gray.
There are multiple levels of customer satisfaction surveys in place, and a separate advisory board tasked with finding new ways to improve customer service. This is the kind of customer-centric fanaticism that brought Walgreen (NYSE:WAG) to its dominant position today in the drugstore space, for example.
Next song!
Red Hat is probably in for a couple of rough quarters as customers jump on the Oracle and Novell bandwagons, mostly out of curiosity. Then it will be up to those companies to keep their newfound clients. Chances are that a good number will eventually go back to what they already know, not to mention that classy support system. In the meantime, I'm betting that the market will go into a blind panic at the first sign of lower profits, kicking Red Hat into the gutter. That would be our buy-in point, my friends.
Further Foolishness:
- Nothing Novel About Novell
- A Triple in the Making
- Why You Should Be Terrified
- Buy Before It's Too Late
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Fool contributor Anders Bylund holds no position in any of the companies discussed here, and he prefers Ubuntu or Debian Linux himself. You can check out Anders' holdings if you like, and Foolish disclosure never fails to satisfy.
