Red Hat Reacts to Oracle's Unbreakable Linux
Published: October 31, 2006
by Timothy Prickett Morgan
As you might expect, the top brass at Red Hat have put the best face forward possible on the news that Oracle last week announced support services for a Linux variant based exclusively on various Red Hat Enterprise Linux. The company displayed humor at the Oracle OpenWorld event, where it was in the expo area quickly creating red T-shirts emblazoned with the phrase "Unfakeable Linux" on them. And, after its stock tanked about 24 percent, it ran down to Wall Street with wheelbarrows full of money to buy back a whole bunch.
Officially, Red Hat personnel have been quiet about Oracle's Unbreakable Linux announcement. On Friday morning, following the Oracle announcement, the company put out this statement: "The opportunity for open source just got bigger. Oracle's announcement further validates Red Hat's technical leadership. We will continue to optimize Red Hat Enterprise Linux for Oracle and compete on value and innovation."
Oracle's move could not have been much a surprise to Red Hat. RHEL is the volume leader in terms of Linux shipments on commercial servers, and Oracle's founder and chairman, Larry Ellison, has been musing since April that he might want a full software stack, including a Linux operating system. And Oracle is widely believed to have had its eye on JBoss before Red Hat acquired it for $350 million only a week before Ellison started talking about wanting a Linux of its own. (If there is any surprise, it is perhaps that Oracle's Linux was not called Larrix or Ellisonix.) And finally, in its fiscal first quarter, before the effects of the JBoss merger started to hit Red Hat's books, Red Hat had an 84 percent gross margin and was bringing 18 percent of revenues to the bottom line. Pricing pressure in some form was going to hit Red Hat, and one could argue that Novell's very aggressive pricing for SUSE Linux Enterprise Server 10 is a much bigger threat than Oracle.
To help explain the situation the company and its customers are facing now that Unbreakable Linux exists, Red Hat put out a document on its Web site. In that, Red Hat starts by explaining that it has a seven-year relationship with Oracle, and that this in no way undermines that relationship. The major IT providers have to support each other, even if they are all trying to build their own complete stacks, and they have to smile as they stab each other in the backs. This is not just a matter of fluff or bravado, but Oracle and Red Hat will still need each other.
Red Hat went on to explain that Oracle is only providing support for RHEL 3 and 4, not the new Application Stack, JBoss, and Hibernate middleware, the GFS file system, the Cluster Suite clustering software, or the Red Hat Directory Server. This, it would seem, merely invites Oracle to do just that--support all of Red Hat's products. But, of course, these being open source products, there is nothing that Red Hat can do to stop Oracle from doing the same thing with this software if Oracle chooses to. This seems less likely, since Oracle has its own alternatives to these bits of the Red Hat stack.
Red Hat makes a reasonable argument in the Unfakeable Linux document that Oracle's patches for the de-named Red Hat (which is what Unbreakable Linux really is) violate the certifications that Red Hat does for hardware platforms that support RHEL and application software that run on RHEL. "There is no way to guarantee that changes made by Oracle will maintain API (Application Programming Interface) or ABI (Application Binary Interface) compatibility; there may be material differences in the code that will result in application failures. Compatibility with Red Hat Enterprise Linux can only be verified by Red Hat's internal test suite," Red Hat explained in the document.
As for forking Linux, as Ellison said he was not interested in doing, Red Hat contends that Unbreakable Linux is most definitely a fork in the code. (I came to a fork in the code, and what I really needed was a knife. . . . ) "The changes Oracle has stated they will make will result in a different code base than Red Hat Enterprise Linux," Red Hat explained. "Simply put, this derivative will not be Red Hat Enterprise Linux and customers will not have the assurance of compatibility with the Red Hat Enterprise Linux hardware and application ecosystem." Admittedly, Oracle forks RHEL by making its own changes, but it promises at each version to get back on the main road, whereupon it begins forking again. So, maybe this should be called "spooning."
And on the indemnification issue, which Ellison claimed Linux vendors were not offering, Red Hat echoed the choir of the Linux community that reminded Oracle's founder that he is just plain wrong on this front. Moreover, Red Hat pointed out that the indemnification Oracle is offering is the equivalent dollar value to the support contract license. So, for instance, if you pay $399 for Unbreakable Linux and SCO Group sues you, Oracle gives you $399 worth of protection. That works out to about 35 minutes of a decent law firm's time. Don't spend it all in one place.
Red Hat's arguments that only Red Hat can build a RHEL distro are less convincing. Few doubt that Oracle has the skills to do what it says it will do: Take and support RHEL code, and do so for less money. But, once compatibility issues creep in, this can be a problem. Except, of course, if you are running a complete Oracle stack. You can be that no matter what, Oracle will make sure its software always works on whatever iteration of Unbreakable Linux it has under support contracts.
Aside from making the technical and business arguments against Oracle's Unbreakable Linux in the Unfakeable Linux document, Red Hat also capitalized on the fears of Wall Street, which seems to believe that Oracle will get some traction as a supplier of a variant of Red Hat Linux with what it calls more enterprise-ready support. The major brokerage houses that follow Red Hat stock either cut it to a sell or a neutral when it was either a neutral or a buy prior to the Oracle announcement. And, because of this, Red Hat's stock swooned 24 percent, hitting $14.83 a share by the end of the trading day. By Friday afternoon, about a third of that loss had come back as people came to their senses--and after Red Hat's board of directors authorized the company to spend $250 million to buy back its shares and $75 million to buy back the 0.5 percent convertible senior debentures due in 2024.
"We believe this repurchase program is in the best interest of our shareholders," explained Charlie Peters, Red Hat's chief financial officer, in a statement. "It underscores our belief in Red Hat's future and represents an opportunity to enhance long-term shareholder value." Red Hat did not spend all of that money in one fell swoop.
As we go to press on Monday afternoon, Red Hat's shares have recovered more than 14 percent. Red Hat has a market capitalization of over $2.8 billion, and is in no fear of being acquired. But the buybacks can put a dent in its war chest. On August 31, when Red Hat closed out its fiscal 2007 second quarter, the company had $568 million in cash and $270 million in short-term investments.
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