Marketing Memos

Business models are beautifully tragic things.  Like Shakespearian
economics in action, we see mighty kings brought low by pivotal character flaws. 
Fundamental weakness will draw heroes or villains to ruinous demise.

Which may be how Matthew Szulik, CEO at Red Hat feels today.

To the surprise of very few, high tech’s own Darth Vader, Larry Ellison,
found a way to take command of the entire IP stack with little investment, a lot
of grand media attention, and the fulfillment of his own
addiction to winning for the sake of it.  For months Ellison had
pondered publicly about the desirability of adding Linux to Oracle’s portfolio,
and thus providing to enterprises every element of the server stack above
hardware. 
Ellison found a way to do that by legally swiping the hard work of others
(i.e., by hijacking Red Hat’s Linux distribution) and discounting competitor
support pricing.  Indeed, all Larry and his buccaneers have to do is 
provide adequate support, at which they failed in the first week.

There are so many technology marketing parable at play in this saga that
volumes will undoubtedly be penned and published (hmmm, perhaps I should write
another book).  The ones worth examining include Red Hat’s fundamental
business strategy mistake, Novell’s lucky coincidence, and where demand and
branding play in customer buying.

Red Hat is a one trick pony.  All they offer is repackaged Open Source
software and support to go with it.  I won’t argue if their products are
good or bad, because
I have financial biases toward the SuSE brand.  But Red Hat’s business
model has a genetic defect in that all their revenue comes from
a single, and very exploitable fount.  Red Hat placed all their
financial eggs into one market basket, leaving them vulnerable to the effects of
usurpation by more dominate forces.  And if there is a more dominate force
in the IT technology business than Larry Ellison, I don’t want to witness it.

Red Hat’s weakness was more profound than proprietary software vendors in as
much as what they sold was, by deign of the underlying license, free to poach. 
Within a day the financial markets scrubbed away 26% of Red Hat’s market cap,
which likely caused everyone at the newly acquired JBoss to weep in despair
given that part of the
acquisition deal involved Red Hat stock and
saved JBoss from Ellison’s clutches, a fate that may be reversed in the
future.  Investors understood the implications of having $96B in capitalization compete against Red Hat’s, which is now only 3% of Oracle’s.  If Red Hat were more diversified, the impact
and the discounting of their share price might have been lessened.

Take Novell as an example.  On the same day that Red Hat’s stock was
chopped up like so many characters in The Bard’s plays, Novell fell only a
fraction.  Granted, Novell’s Linux revenues are small compared to Red
Hat’s, but they are also vastly more diversified.  Despite proclaiming
being the vendor of "Software for the Open Enterprise", Novell still peddles
proprietary goods in prestigious amounts.  The market punished the
weak in Darwinist fashion, penalizing Red Hat’s pure bread genetic defects and
being more kind to Novell’s mutt genealogy.

Open still is the question of the ultimate outcome from Ellison’s maneuver.  Within IT circles there has always been a desire to have "one
throat to choke", a quaint and semi-violent way of showing preference in buying the bulk of
your IT technology from one vendor, and by doing so having one source for fixing
problems.  This is Larry’s gambit - to
give IT buyers a driving reason to choose
Oracle.  If you actually implemented an OS-to-application stack from Oracle,
and assuming you were not previously institutionalized,
nothing short of a hardware failure would fall outside of Oracle’s sphere of
responsibility.  This is attractive to CIOs as it reduces variation in the
data center, and gives them mighty leverage when negotiating with their master
vendor.

Shrewd too was Larry’s decision to purloin Red Hat’s code. 
Red Hat is the Linux market leader, and Ellison is now offering Red Hat
Linux and support for less.  IT buyers get the Red Hat brand and Oracle’s
throat.  IT benefits. Larry benefits.  Red Hat gets dirked faster
than Polonius,
which shows the real value of being true to thine’s own self.

It will take time to play out, but if Ellison’s strategy works and IT buyers
flock to Oracle for Linux bits and backing, then Red Hat’s revenues will
decline.  This will inevitably lead to fears of their stability, dropping
of share price, and I’d wager Larry executing a hostile buyout at deeply
discounted share price. 

Oddly the two companies likely to benefit the most
from Larry’s New War are Novell and IBM, who have been so tightly entwined that
rumors of romance between
Hovsepian and
Palmisano persist.  Novell will pick up refugee Red Hat customers who loath
Larry and all he stand for.  IBM wins as their services group makes money
from any messy situation.  And I have few doubts that the two are already
collaborating on how to take advantage of any technological breakdown and
violation of the Open Source mantra that may arise from Oracle butchery of Red
Hat code, or Red Hat attempts to prioritize any Open Source.

Indeed, misery acquaints a man with strange bedfellows.

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