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Red Hat Shares Rocked

Updated from Oct. 25

SAN FRANCISCO -- Shares of Red Hat (RHAT) plummeted Thursday morning after Oracle (ORCL - Get Report) said late Wednesday that it will offer full support for customers running the smaller company's version of the popular Linux operating system.

Because Linux is essentially free, vendors such as Red Hat survive by selling support and maintenance to corporate customers, so every Red Hat customer who chooses to buy support from Oracle represents lost Red Hat revenue.

Investors understood that dynamic immediately, selling off Red Hat shares in after-hours trading. Early in Thursday's session, Red Hat lost $4.57, or 23.4%, to $14.94, as a slew of brokerages downgraded the stock.

Oracle CEO Larry Ellison announced the new program at his company's OpenWorld convention here, which has drawn a record 42,000 attendees.

As of Wednesday, Oracle will offer full support to Red Hat customers, at a price that Ellison claimed is roughly 50% lower. He said the inability of Red Hat and other Linux vendors to offer the kind of support needed by large businesses was holding back the progress of the open source operating system. "The lack of enterprise quality support has slowed the adoption of Linux," Ellison said. "This isn't about Red Hat, this is about increasing the adoption of Linux."

Ellison's announcement was something of a surprise. There has been speculation for months that Oracle would compete head to head with Red Hat by offering its own version of Linux. But that would have opened the company to charges that it was splintering Linux for its own selfish ends. Competing with Red Hat by offering support, though, is a much cleaner solution.

"I don't think this will kill Red Hat," Ellison said in response to a question from the audience. "This is capitalism. We are competing," he said.

Oracle, he said, will do a better job fixing bugs than Red Hat, indemnify customers against potential intellectual property issues, and offer better customer support for less money.

A spokesman for Red Hat could not be reached for comment.

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