Red Hat And The Power Of Infinite Goods

from the economics-of-free dept

The New York Times has a great write-up of the continued rapid growth of Red Hat. Despite the looming recession, Red Hat is predicting 30 percent revenue growth in the coming year, to more than half a billion dollars. For a few years, Mike has been talking about how to make money while giving away infinite goods, and Red Hat could probably be the poster child for his argument. Despite the fact that virtually all of its "products" are available for free on the Internet, Red Hat is still convincing companies to pay it hundreds of millions of dollars. Of course, the reason this works is that Red Hat's product isn't its operating system or other software. Red Hat's product is access to the time and expertise of its employees, and to Red Hat's extensive ecosystem of developers, hardware vendors, and others who have built atop the Red Hat platform. Because Red Hat stands at the center of this tight-knit web of relationships, their employees are better-positioned than anyone else to quickly solve customer problems. And it turns out that companies are willing to pay hundreds of millions of dollars for that assistance.

The most interesting part of the article is where it talks about Oracle's effort to undercut Red Hat by offering the same software at a lower cost. Apparently, as we predicted, it hasn't been going too well. And it's not too hard to see why: Larry Ellison doesn't seem to understand Red Hat's business model. What Red Hat is selling isn't software, but support. And the value of a support contract is a function of the expertise of the company providing it. Not only does Red Hat have a number of key Red Hat developers on staff, but it also has a ton of strong working relationships with developers and vendors elsewhere in the Linux community. That means that if a customer encounters a bug in its Red Hat Enterprise Linux installation, Red Hat will either have an engineer on staff who can fix it, or it will have a strong relationship with the outside developer who developed that piece of software or the firm that manufactured the hardware. That makes it more likely that it will be able to address the issue quickly and incorporate the fix into the software for future releases.

Oracle has made comparatively little effort to either hire Linux developers or foster strong relationships with the broader free software community. As a result, Oracle isn't able to provide the same kind of value that Red Hat can. Yes, Oracle tech support can fix straightforward problems, but if they need to make changes to the code, they'll often need to go to a Red Hat engineer for help getting it fixed. And not surprisingly, most customers would rather cut out the middleman and go to Red Hat directly, even if it costs a little more.

Filed Under: earnings, infinite goods, open source
Companies: oracle, red hat

The Enterprise Landgrab Continues: Oracle Buys BEA For $8.5B, Sun Buys MySql for $1B

from the buying-in-the-air dept

Something must be in the air today, as two big acquisitions were announced this morning. First, Oracle announced that it will fork over $8.5 billion for middleware maker, BEA. BEA has been on the radar since last October, when BEA rejected Oracle's unsolicited $6.7 billion offer. Carl Icahn, BEA's largest shareholder, had initially agreed with BEA's counter offer of $21 per share, but then later started pushing publicly for the sale. Oracle held fast to its offer of $17 per share, so it's surprising to see that they were able to agree on $19.375 per share, especially when there were seemingly no other bidders. These acquisitions continue an overall trend of consolidation in the enterprise software market, kicked off by Oracle's 2004 acquisition of PeopleSoft. Since then, Oracle has spent about $110 billion in its acquisition of about 30 companies. Oracle is in a battle with German software giant, SAP, who is also knee deep in the land grab with its recently successful $6.7 billion acquisition for Business Objects. Meanwhile, Sun will spend $1 billion for open source database maker, MySql, making a strong play in the $15 billion enterprise database market. This deal makes sense for Sun, who has been building up its stable of open source products. That said, when will the speculation begin for an Oracle-Sun merger? Both hate Microsoft deeply, and both have been trying to expand beyond their core markets. And, MySql even rejected Oracle's acquisition offer back in 2006. At some point, someone's going to think it makes sense for the two to combine.

Filed Under: acquisitions
Companies: bea, mysql, oracle, sun

Hey, Icahn, Haven't You Heard Of Playing Hard To Get?

from the blowing-it dept

Despite having publicly pushed BEA to sell itself, Carl Icahn's initial response to Oracle's takeover attempt was to say that the offer was too low at $17 per share. BEA itself responded by counteroffering at $21 per share. However, Oracle stood fast and said that since there didn't appear to be any competition, it saw no reason to raise the bid. It also said that the $17 offer would expire Sunday night. Of course, seeing as it's now Monday, the offer has, indeed, expired. Yet, Carl Icahn isn't happy. He's now demanding that BEA put the $17 offer to a shareholder vote and is threatening to sue over it. Perhaps it's just me, but this feels like one of those situations in a bad movie or TV show where two sides are negotiating, and even though one side has instructed everyone to stand firm and play hard to get, as soon as the other side stands firm itself, one guy in the corner gives in and says "take the deal guys! take the deal!" You can almost hear the sighs of exasperation from BEA's board members muttering under their breath and trying to kick Icahn to stay quiet for a little longer to see if Oracle comes back again with another bid.

Filed Under: acquisitions, carl icahn
Companies: bea, oracle

Ellison Looks To Pull A PeopleSoft On BEA

from the gotta-keep-SAP-out-of-the-headlines dept

You didn't think that Larry Ellison would let SAP keep the headlines very long for moving to buy Business Objects did you? Just a couple days after that news broke, Ellison made an unsolicited bid to buy BEA. BEA has rejected the offer, saying that it's too low -- and responding in a rather aggressive manner. Of course, this might sound like deja vu. Oracle made an unsolicited bid for PeopleSoft four years ago (days after PeopleSoft announced it was buying JD Edwards), which the company spurned leading to a protracted legal fight that eventually resulted in Oracle winning, and Ellison's antagonists getting shunted aside. That took 18 months. How long do you think this one will take? In the meantime, the lesson seems clear. When two Oracle competitors announce a multi-billion dollar deal, give it two or three days before Oracle will respond with its own (unsolicited) multi-billion dollar acquisition attempt.

Companies: bea, business objects, oracle, peoplesoft, sap

Tech Industry Forced To Care About Interest Rates

from the where-credit-is-due dept

Historically, major tech firms have shunned debt financing, but in recent years, this has changed somewhat. Highly acquisitive companies like Cisco and Oracle have started to use some debt to finance their purchases. As with the increasing presence of private equity in the tech industry, low interest rates have helped fuel this trend. But the low interest rate environment appears to be coming to an end, and its effects are already being felt in the industry. Yesterday, online travel site Expedia announced that it would suspend a planned share buyback program because it couldn't acquire the necessary capital to finance the purchases. Meanwhile, a few non-tech private equity deals are hitting the skids for similar reasons. In the past, industry, might have ignored these economic developments, but it's likely that a number of companies, particularly mature ones, are going to feel a pinch.

Filed Under: debt, interest rates
Companies: cisco, oracle