April 18, 2006 10:59 pm

Oracle fires a shot across Red Hat’s bows

For long-time watchers of Larry Ellison, the revelation that Oracle is looking at launching its own version of the Linux open source operating system has aroused a suspicion: is the software industry’s most acquisitive CEO stalking his next
target?

Mr Ellison made the comments in an interview with the Financial Times this week, laying out strong reasons why the database software company should embed a version of Linux into its existing software.

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Such a move would make life far harder for Red Hat, which has emerged as the leading Linux company so far – particularly if, as Mr Ellison suggested, IBM decided to follow suit.

As a shot across Red Hat’s bows, the comments have had an immediate impact. The Linux company’s shares have dropped 8 per cent this week – although at $5bn, the company is still worth around three times what it was a year ago. “We want them to be successful, because Red Hat is to some degree our way of competing with Microsoft down at the core level,” the Oracle chief executive officer said. “But they’re a small company and they’re not supporting the customers very well.”

One answer, he suggested, was to launch a new version of Linux, or simply embed the Red Hat version in Oracle’s products and offer support from its own service organisation.

Simply offering the Red Hat version of Linux to its own customers could create a legal dispute, according to Rick Sherlund, software analyst at Goldman Sachs.

But Oracle would still be free to create its own version from the free component programs available over the internet.

For now, Mr Ellison has advanced two reasons for not buying Red Hat or Novell, which became the second biggest distributor of Linux after its acquisition of the German company SuSe two years ago. One is price. Open source companies have started to attract fancy valuations, as evidenced by Red Hat’s purchase last week of JBoss – a company that Oracle had itself tried to buy. Without control of their own intellectual property, these companies are not as valuable as Wall Street thinks, according to Mr Ellison.

“If an open source product gets good enough, we’ll simply take it,” he said. “We can do that, IBM can do that, HP can do that – anyone with a large support organisation is free to take that intellectual property and embed it in their own products.

“I believe JBoss is a $16m company breaking even, MySQL is a $30m company breaking even,” said Mr Ellison.

“You can build a sustainable business [in open source], you just can’t charge a lot for it. There’s brand value – there’s real brand – there’s people, and that’s it.”

The second reason for not buying a Linux company, according to Mr Ellison, is the risk that other big technology companies would abandon it.

“I don’t see how we could possibly buy Red Hat – IBM would just say, ‘Larry, congratulations, we’re going our own way’,” he said.

Despite that, Red Hat’s growing dominance of the Linux business, and its decision to acquire JBoss and start building out a fuller “stack” of software that competes with companies like Oracle and IBM, could alter the balance of partnerships in the software world and prompt a more drastic response.

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