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IBM's Red Hat Acquisition: 'Management Has Run Out of Steam'

Mitch Wagner
10/30/2018
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With the Red Hat acquisition, IBM is targeting hybrid cloud, Sharma says. "It is not a leading vendor in the public cloud market, and by no means a competitor to AWS, Google and Microsoft, and has no intention to improve its positioning [in the public cloud market]," he says. "IBM's plan is to target hybrid cloud opportunities involving containers, open standards and Linux systems."

IBM claims the Red Hat acquisition "will enable it to help enterprises move to the cloud without getting locked into a proprietary technology stack," Sharma says.

Overall, Sharma expressed bafflement at the acquisition.

"For some reason, IBM believes that hybrid and private cloud opportunity will grow at comparable rates to the public cloud opportunity," he says. "What's still not clear is why IBM decided to buy a company, Red Hat, best known for distributing the open source Linux operating system, to win the hybrid cloud battle." Red Hat's cloud revenue is too small to "impart any serious thrust to IBM cloud ambitions," Sharma says.

"Though IBM has said that Red Hat will operate as a separate business unit under IBM's hybrid cloud business, with time I'd expect IBM to push against Red Hat's open source culture and focus on only revenues. Red Hat's engineering teams need to adapt to IBM's business-heavy bureaucratic culture. Not much original open source culture will remain, say, four to five years from now," Sharma says. (See IBM: Don't Panic! We Won't Mess With Red Hat.)

"The one good thing for Red Hat is that IBM's sales prowess will provide greater exposure, especially for multi-million-dollar deals involving top executive leadership." But IBM may have difficulty adapting to Red Hat's smaller deals targeting developers, and not normally running to millions of dollars, Sharma says.

IBM's Red Hat acquisition is an attempt by IBM to recapture its 1990s turnaround, under then-CEO Lew Gerstner, who took over a failing IBM in 1993 and rebuilt it as a business services company, helping enterprises navigate the then-new terrain of the Internet and e-commerce, says independent analyst Ben Thompson, writing at his website, Stratechery.

Other companies provided technology -- IBM provided "solutions" to solve business problems, Thompson says.

The problem with applying this strategy today is that Gerstner's successor, Sam Palmisano, failed to invest in public cloud infrastructure when he needed to, a decade ago; "indeed, one of the most important takeaways from the Red Hat acquisition is the admission that IBM's public cloud efforts are effectively dead," Thompson says.

Thompson adds: "This is the bet: While in the 1990s the complexity of the Internet made it difficult for businesses to go online, providing an opening for IBM to sell solutions, today IBM argues the reduction of cloud computing to three centralized providers makes businesses reluctant to commit to any one of them. IBM is betting it can again provide the solution, combining with Red Hat to build products that will seamlessly bridge private data centers and all of the public clouds."

The problem with this strategy is that enterprises then risk lock-in with IBM in their quest to avoid being locked in to Amazon, Microsoft or Google. And if Red Hat's openness protects enterprises against that problem, IBM's increasingly sophisticated customers can just use those open tools to build solutions themselves, Thompson says.

Moreover, Microsoft also specializes in hybrid solutions, but "because Microsoft has actually spent the money on infrastructure, their ability to extract money from the value chain is correspondingly higher." IBM has to "pay rent" to public cloud providers for infrastructure, where Microsoft has its own, Thompson says.

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— Mitch Wagner Follow me on Twitter Visit my LinkedIn profile Visit me on Tumblr Follow me on Facebook Executive Editor, Light Reading

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