Why does Big Blue really want a Red Hat?

As Red Hat is a leader in the open-source cloud space, and as enterprises the world over race to implement cloud solutions consisting of both open-source and proprietary systems, I thought that the IBM acquisition was to allow Big Blue to compete with the likes of Microsoft’s Azure, Google Cloud, and Amazon Web Services Inc. (AWS). I now realize this assessment was flawed.

When I worked for International Business Machines Corp. (IBM), it was soon after the company had acquired Lotus Labs Pvt. Ltd, which along with Notes, its client-server “shared workspace” offering, had a set of applications to rival Microsoft’s then already formidable arsenal. IBM has, over the years, proven very dexterous at acquiring and then divesting various arms within its software and hardware businesses. For instance, some years ago, it sold its Thinkpad PC line to Lenovo, a Chinese competitor.

IBM’s move in acquiring Lotus was to compete with Microsoft in the enterprise desktop space. As is often the case in the software world, companies are ‘frenemies’—that is both friends and enemies at the same time. When it acquired Lotus, IBM was still manufacturing PCs, all of which shipped with a Microsoft operating system at the core. Nonetheless, the hope was that users and enterprises would plunk down in favour of Lotus’s suite of Office rivals instead of Microsoft Office. After a few years of unequal competition, Lotus’s office suite of applications bit the dust and were “offloaded” to India’s HCL Technologies Ltd last year.

My first gut reaction, when asked about IBM’s eye-poppingly expensive $34 billion acquisition, announced on 28 October, of Red Hat Inc. at more than 10 times Red Hat’s revenues of $2.9 billion, was that IBM’s move was to garner control of the cloud ecosystem. Red Hat has made a name for itself as a provider of open-source systems such as Linux, as well as in buying up proprietary systems and converting them into standardized open-source. Red Hat provides cloud storage, operating system platforms, middleware, applications, management products, and support, training, and consulting services for these open-source platforms.

As Red Hat is a leader in the open-source cloud space, and as enterprises the world over race to implement cloud solutions consisting of both open-source and proprietary systems, I thought that the IBM acquisition was to allow Big Blue to compete with the likes of Microsoft’s Azure, Google Cloud, and Amazon Web Services Inc. (AWS). When asked whether the move represented a threat to Indian and other IT service providers, my response was that it didn’t—since no service provider has really sought to become a true cloud hosting provider like AWS or Azure. They have contented themselves with helping their clients plan and execute their moves to a hybrid cloud environment, and are happy to allow AWS and others the drudgery of actually maintaining a cloud environment.

Upon further rumination though, I realize that my initial assessment was flawed. This isn’t really a battle for cloud computing supremacy, though that remains a secondary goal. The real goal is for primacy in the open-source market. As software and services providers increase their delivery of ‘digital’ products to their enterprise customers in ‘agile’ computing projects, which use free open-source libraries, having a strong hold over the open-source ecosystem will become a cornerstone of the future ‘digitalized’ computing space for enterprises. Further, it is becoming increasingly evident that most enterprises will have a hybrid environment, with user-facing functions in a ‘digital’ format to allow for a snazzy interface, and the back-office systems that respond to these digital interfaces in order to provide the user a seamless experience through a result engineered in the back-room, but delivered through a reimagined digital front-end. Due to its independence and single-minded dedication to the open-source community, Red Hat has managed to build many strong ongoing relationships with service providers since it is viewed as an independent. IBM, on the other hand, given the ‘frenemy’ status it has since it both sells to and competes with service providers, has far fewer frictionless relationships. The acquisition announcement went to great lengths to ensure clients that Red Hat will continue to be run as an ‘independent’ business within IBM’s hybrid cloud division. It further clarified that Big Blue will continue “fostering the independence and neutrality of Red Hat’s open-source heritage and commitment, its current go-to-market strategy, its product portfolio, and its ‘unique’ development culture”.

But Red Hat’s 12,000-plus people are a flea on the 385,000-employee blue elephant’s back. A flick of its trunk will unseat the flea, much to the glee of IBM’s services competition.

IBM needs a good mahout.

Siddharth Pai has led over $20 billion in technology transactions. He is the founder of Siana Capital, a venture fund management company focused on deep science and tech in India.

*This article first appeared in print in the Mint and online at www.livemint.com

For this and more, see: