Oracle (ORCL) has been running roughshod over the enterprise-software world of late, winning gobs of market share by buying up the competition in an $18 billion acquisition spree.Now it appears that the database giant is gearing up to make a run at a very different sort of enemy: Red Hat ( RHAT), the pre-eminent seller of Linux. Oracle CEO Larry Ellison kicked off speculation about his company's open source aspirations in a published interview in mid-April, in which he said Oracle could well build its own version of Linux. His words put the hurt on Red Hat's shares for a few days, but since then the stock has more than made up for the downturn, appreciating by 12%, while the tech-heavy Nasdaq dropped 1%. Now there's talk on Wall Street that Oracle may use its annual analyst meeting in July to announce its debut as a Linux provider. Goldman Sachs analyst Rick Sherlund took the possibility seriously enough to publish a 36-page note on the subject this week and convene a conference call with investors and independent Linux experts to discuss the matter. Because so much of Red Hat's software is open source, there's no legal impediment to stop Oracle from building its own version of Linux that would be compatible with, if not a clone of, Red Hat Enterprise Linux, or RHEL. "It is indeed legal for Oracle to take RHEL and redistribute the Linux distribution as Oracle Linux, so long as Oracle removes all protected content (such as Red Hat's trademarked name and logo.)" Sherlund wrote, citing Eben Moglen, a Columbia University professor of law and legal counsel to the Free Software Foundation. Indeed, there already is a number of Red Hat clones on the market, including the popular CentOS. Novell ( NOVL), the struggling No. 2 player in the Linux market, has its own version of the operating system that is similar to, but not a clone of, Red Hat's.
Why would Oracle, which is already in two distinct lines of business -- databases and applications -- opt to move into a third? "We believe that Mr. Ellison wants a Linux operating system so that Oracle can build a fully integrated stack (operating system + database + middleware + applications) to challenge Microsoft ( MSFT) and also to preempt Red Hat from moving unopposed up the open source stack," Sherlund wrote. Moving "up the stack" is industry parlance for expanding the reach of a software company from providing just one function to providing all, or nearly all, of the software required to run a business. Ironically, Oracle and other vendors that supported Red Hat as a counterweight to the Redmond, Wash, behemoth, now see Red Hat as the Microsoft of the open source world and feel the need to lessen its influence. IBM ( IBM), for example, is widely believed to have helped Novell purchase Suse Linux to ensure that there would be a viable alternative to Red Hat. Although there's a general feeling that Oracle will likely go ahead and launch a version of Linux, there's disagreement on how much of a threat it would pose to Red Hat's business and hence, its share value. Oracle did not respond to several requests for comment. At one pole are analysts like Laura Didio of the Yankee Group, who disagrees with the thesis that building a Red Hat clone would be quick and easy. "Linux is not a commodity and software is as much an art as it is a science. If he bases his clone on the General Public License
the overarcing agreement covering the fair use of Linux, we're talking about 6 million lines of code to debug," she says. With the market for experienced Linux engineers tightening, the effort could take as long as a year, not counting time to test compatibility and other issues, she says.
Trip Chowdhry, managing director of Global Equities Research, calls Oracle's potential entry into the Linux market "a nonevent for Red Hat." Chowdhry figures that Oracle Linux would be part of a single-purpose appliance linked to the company's database or application software. "People buy an appliance because they do one thing very well." But Linux, he says, is an all-purpose operating system, likely to appeal to smaller businesses, not Red Hat's core enterprise customers. But Russ Herrold, a principal at CentOS, says building a stable Red Hat competitor would be "very doable; it's not particularly hard." he said on the Goldman call. How long would it take? "Could be done in three months with 15 engineers." Of course, building the software doesn't guarantee that anybody will be interested in using it. Red Hat is generally considered to excel at support and service (though some sources within the open source community say the reputation is exaggerated) and is known to be compatible with many flavors of hardware and software. Therefore, few people believe Red Hat would suffer anything approaching a hemorrhage of customers. But Sherlund, who downgraded Red Hat to underperform in April, worries that competition from Oracle could result in pricing pressures that could hurt Red Hat's margins. "Oraclecould easily undercut Red Hat on price, offering a largely similar Linux product for a much reduced price compared to RHEL or even at a nominal cost if bundled with other Oracle products including Oracle 10g database," he wrote. Goldman has or is seeking investment banking relationships with Oracle and Red Hat. Tom Berquist, CFO of Ingres, an open source database startup and a former Wall Street software analyst, disagrees. "Red Hat is cheap enough so that Oracle would be hard-pressed to undersell them." Moreover, the market's reaction to Ellison's initial comments indicates that the risk of Oracle's entry into the market is largely priced into the stock. "There will be a reaction to the headline when Oracle makes its announcement, but it won't be severe and the stock will bounce back," Berquist predicted. Although the basic version of Red Hat Linux is free, the company charges for advanced versions, and makes most of its money by selling support and access to its network of developers. Dismissing any effort by a company as large and savvy as Oracle is always dangerous, but for now, Larry's penguin (the Linux mascot) doesn't look terribly threatening.