Blue meets Red

Over the weekend IBM announced that they were buying Red Hat for $34bn, in the world's largest ever software acquisition. Leaving aside the eye-watering price tag, the general reaction has been decidedly mixed with IBM shares falling by 5%. This was not a deal that anyone had seen coming. Red Hat employees were horrified, with some saying that they'd prefer the company to have been purchased by their former archenemies in Microsoft rather than by IBM. Not a comfortable prospect for the world's second largest contributor to Linux. The concern is one of cultural fit. IBM have strong open source credentials. They've supported running Linux on their mainframes for a long time. However, they have a highly traditional corporate culture.

Red Hat are a fast-growing and dynamic company with a famously open culture. As the champions of Linux in the enterprise, they've built a highly successful business developing and supporting Open Source software for the world's largest firms. This has led them to become the Switzerland of the cloud business, building upon relationships established within the Linux Foundation to develop alliances with everybody in the industry. All the major cloud providers allow you to run Red Hat Enterprise Linux on their platforms, and their software can be used to manage an entire cloud infrastructure. They have a bright future as the unifying force that binds the many disparate cloud providers together.

IBM, on the other hand, are a company in terminal decline. Their profits still come from the shrinking mainframe business despite high profile attempts to pivot towards AI and the cloud. They've been successful in generating publicity for their Watson AI, but have not been able to turn it into a revenue stream. The head of the Watson business unit stepped down last week after disappointing financials in their Health business. There have been reports of layoffs to accompany the change in leadership.

The modern IBM is still a giant, with quarterly revenues of $20bn, but it is radically different from the Big Blue of days gone by. Their historical position was built on their industry-leading hardware, but most of that business has been sold to Lenovo in an attempt to please Wall Street and boost profit margins. These days their point remaining hardware are the mainframes they're synonymous - a market they've dominated since the 1960s. This dominance opened connections to the C-Suite that their competitors couldn't match, allowing the company to complement their hardware with end to end to solutions using software and services their competitors simply didn't have.

In recent years, the world has moved on. Mainframes are a legacy technology, increasingly being replaced by cloud servers. IBM have attempted to change to, developing into a software and services company with ambitions to match Amazon and Google in the cloud space. The problem is that very few people care about IBM's cloud portfolio. The pioneers in the public cloud arena are Amazon, Microsoft and Google. IBM are also rans and copycats, selling add-on services to their shrinking band of mainframe users. Their market position as the 4th largest provider reflects this. Many companies would be satisfied with this position, but IBM are not one of them. Their cloud business is profitable, but it has little traction outside their existing customer base. For a company with a long and proud tradition of being pioneers in a wide variety of computing fields, mindshare is as important as market share. Buying Red Hat is an attempt to obtain the market position they've been unable to establish independently. Their desperation is evident in how much they're overpaying for their new acquisition.

The big idea is that a combination of Red Hat and IBM could dominate the multi-cloud and hybrid cloud spaces. Red Hat could be used to run and manage workloads hosted across multiple data centres and cloud providers, leaving Amazon, Microsoft and Google to fight it out for public cloud revenues. It's undoubtedly true that IBM's core customer base are interested in hybrid cloud, the problem is that Amazon and Microsoft are also well placed to provide a solution. Microsoft already offer a version of Azure that you can run in your own data centres, while Amazon have developed a close relationship with VMware, who also have a strong hybrid cloud message based on their hypervisor dominance. Other companies, such as Rackspace or F5, offer multi-cloud solutions.

Nor is any of this really thought-leading. Hybrid Cloud has been a talking point for years, but with limited ability to back-up the hype. Technology has finally made hybrid cloud possible, but IBM aren't actually offering anything new to the market. They're just trying to leverage their scale to sell Red Hat's existing solutions. In doing so, they could jeopardise Red Hat's position as the vendor neutral solution. If IBM try to limit Red Hat's capabilities on other clouds then customers will simply move to a different Linux distribution. Switching cloud providers is a lot harder than switching which version of Linux you use. This would allow another Linux vendor to move in and fill the gap, leaving IBM right where they started. Then they really would be irrelevant, just with a lot less money.