IBM is buying Red Hat. A summary view I’ve already expressed to a reporter is that it’s about the only smart move open to IBM, but there’s a big question whether IBM knows why it’s smart and will exploit the deal properly. IBM is literally a legend in IT, having held the position of “most strategic influence” in my surveys for longer than any other vendor (in fact, longer than all of them combined). Red Hat is a legend in open-source, but often “legendary” is a term used to describe past greatness. Is there really hope this is a good match, and if so, why?
IBM has seen over 20 quarters of steady revenue decline, which surely isn’t a good thing. Part of the reason is that IBM has virtually exited the market that actually made it successful—selling computers. Except for the mainframe line, IBM has turned into a software and professional services firm, and that’s obviously going to reduce revenues. But Microsoft, who owes its existence to IBM’s PC, surpassed IBM in revenues without hardware, so it’s possible to have a growth IT business on software alone—if you have a broad base.
What’s IBM’s biggest problem? The lack of that base. When it shed so much of its computer business, it shed realistic access to the great majority of business IT buyers. You can only do so much with the Fortune 500, and every account you lose has to be replaced from the broader market—a market IBM apparently was willing to give up on. The obvious benefit of a Red Hat deal is that it brings IBM access to that broad market that they lost.
Red Hat has the base, but it built it on exploiting open-source software that is necessarily available from other sources. When Red Hat started out, open source software was a refuge for geeks, and Red Hat effectively took open-source out of the Dungeons and Dragons world into the real business world. The problem is that open-source is now mainstream; Red Hat’s success created its own problem when the “open-source-plus-support” model became mainstream itself.
What’s Red Hat’s biggest problem? A revenue model that’s increasingly making its offerings look like commercial software rather than open source. It’s hard to sell something others are giving away, and as open source becomes more comfortable to business, it’s only going to get harder. If Red Hat wants to make money on free software, they have to add a very significant value.
It may be simplistic, but I think that to make the IBM/Red Hat deal gel, you’d need it to address the two companies’ biggest problems. That raises two questions—is that possible, and will IBM be able to navigate the path to that happy outcome, given IBM’s apparent strategic missteps in recent years. We can start to address these questions by looking at “popular wisdom” on the motivation of the move. There are two specific value propositions given for the deal; do either of them deliver?
If you read either the financial or technical press, the whole deal is about the cloud. By buying Red Hat, IBM immediately becomes a credible competitor to Amazon, Microsoft, and Google, so the stories say. If that’s really what’s behind the deal, then IBM has a very hard road ahead, and neither company is likely to solve its own biggest problem.
Red Hat is hardly a cloud giant. Yes, IBM could base a cloud strategy on Red Hat software, but would that be either wise or differentiating? Red Hat does offer most of the open source software tools that drive the cloud, but as many skeptics of the deal have pointed out, open-source software is open, meaning that IBM could have gotten the software without buying Red Hat. The good news is that IBM doesn’t need Red Hat to be a cloud giant, they need Red Hat to be a data center giant with a foot in the hybrid cloud age.
Cloud computing is a natural partner to data center computing when applications have to support a broad and geographically diverse base of users. The cloud can provide critical front-end support for web-based and app-based users, insulating the data center from the details of the user interface. For businesses, this is the critical hybrid cloud mission, and it’s a partnership between cloud services and data center technology.
Every significant business IT user will end up with hybrid cloud. Hybrid cloud demands a cloud, but as I’ve just noted, it also demands a data center incumbency. IBM has that for a very limited set of large accounts, and Red Hat has a very broad position in the data center. If you look at the competitive dynamic between Amazon and Microsoft, it should be obvious that the former has the market share because they’ve won the startup and social network business but the latter has corporate and hybrid cloud momentum because they have premises IT products. Now, with Red Hat, so does IBM, and so a hybrid cloud driver is at least possible.
Another story I hear in the media is that IBM is going to improve Red Hat’s telco position. Gosh, to me that’s saying that two firms who have nothing much will have plenty when combined. Red Hat clearly has aspirations for the service provider space, and so does IBM, but neither company has generated swoons of admiration from the network operator community overall, and telcos in particular. The operators I’ve talked with don’t like IBM’s apparent disinterest in specific operator issues, and they don’t like Red Hat’s licensing/pricing model. It’s hard to believe that IBM would somehow alleviate the concerns operators have for Red Hat’s pricing, and it’s hard to believe that IBM’s very limited insight into the operator market would be able to somehow energize Red Hat’s efforts in that space.
There are two possible avenues to success in the operator space; NFV and carrier cloud. The former, IMHO, isn’t going to deliver decisive results, and in any case I think it would be difficult to reconcile with the Red Hat pricing model. The latter would require some specific strategy for addressing the real drivers of carrier cloud, and neither Red Hat nor IBM seem to understand even what those drivers are, much less how to address them.
The telco/operator angle on the IBM deal for Red Hat is too tenuous to be believed, no matter how eager you may be. That means that if classical wisdom is correct, only the first motivator—the cloud—makes any sense. There’s no question that Red Hat could be IBM’s avenue to creating hybrid cloud success, possibly enough success to take a place alongside Amazon and Microsoft as the premier cloud vendors for real business services.
The problem with this approach is that Microsoft has a long lead in hybrid cloud, and Amazon is trying hard to do deals with other players (recently Cisco) to create an on-prem hosting capability for AWS services. That’s not enough to create true hybrid cloud opportunity, but it demonstrates that the space is likely to get more crowded and competitive. That’s not the kind of opportunity that creates a quick validation for M&A.
It’s my personal view that the cloud, or the operator market, aren’t the primary goals of the deal at all. I think what this is about is creating a pathway to very broad engagement for IBM, a way for IBM to leverage what remains of its natural talents in gaining strategic influence. Professional services are an IBM strength; could they be directed through Red Hat at a broader market? Could they give Red Hat the kind of differentiation that open-source once did, but can’t do any longer?
That’s where the question of how much IBM really understands comes in. I think that there could be enormous positive symbiosis here; Red Hat is indeed the only smart move left for IBM. I think that very few, if any, IBM leaders know why that’s the case, which means it’s unlikely that IBM will be able to leverage Red Hat fully.
I hope I’m wrong. I literally entered IT on IBM gear, and there’s no company I’ve had more continuous respect for…until recently. IBM is off-track, and it’s critical for them to admit this, to themselves and to their customers, and use Red Hat to launch a broad effort to align open-source software with the emerging technical trends like containers and cloud computing and IoT, by linking those trends to business. Do that, and IBM will become a giant again.
