4 reasons IBM bought Red Hat for $34 billion

The news that IBM is to buy Red Hat - the enterprise Linux distribution - shocked the software world this weekend. It took many people by surprise because it signals a weird new world where the old guard of tech conglomerates - almost prehistoric in the history of the industry - are revitalizing themselves by diving deep into the open source world for pearls. So, why did IBM decide to buy Red Hat? And why has it spent so much to do it?

Why did IBM decide to buy Red Hat?

For IBM this was an expensive step into a new world. But they wouldn't have done it without good reason. And although it's hard to center on one single reason that forced IBM's decision makers to put money on the table, there are certainly a combination of factors that meant this move simply makes sense from IBM's perspective.

Here are 4 reasons why IBM is buying Red Hat:

• Competing in the cloud market
• Disappointment around the success of IBM Watson
• Catching up with Microsoft
• To help provide support for an important but struggling Linux organization

Let's take a look at each of these in more detail.

IBM wants to get serious about cloud computing

IBM has been struggling in a competitive cloud market. It's not exactly out of the running, with some reports placing them in third after AWS and Microsoft Azure, and others in fourth, with Google's cloud offering above them. But wherever the company stands, it's true that it is not growing at anywhere near the rate of its competitors.

Put simply, if it didn't act, IBM would lose significant ground in the cloud computing race.

It's no coincidence that cloud was right at the top of the IBM press release. Ginni Rometty, IBM Chairman, President and Chief Executive Officer, is quoted as saying "The acquisition of Red Hat is a game-changer. It changes everything about the cloud market... IBM will become the world's #1 hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses."

Clearly, IBM wants to bring itself up to date. As The Register wrote when they covered the story on Sunday IBM "really, really, really wants to transform itself into a cool and trendy hybrid cloud platform, rather than be seen eternally as a maintainer of legacy mainframes and databases."

But why buy Red Hat?

You might still be thinking well, why does IBM need Red Hat to do all this? Can't it just do it itself?

It ultimately comes down to expanding what businesses can do with cloud - and bringing an open source company into the IBM family will allow IBM to deliver much more effectively on this than they have before.

AWS appears to implicitly understand that features and capabilities are everything when it comes to cloud - to be truly successful, IBM needs to adopt both an open source mindset and toolset to innovate at a fast pace.

This is what Rometty is referring to when she talks about "the next chapter of the cloud." This is where cloud becomes more about "extracting more data and optimizing every part of the business, from supply chains to sales" than storage space.

IBM's artificial intelligence product, Watson, hasn't taken off

IBM is a company with its proverbial finger in many pies. Its artificial intelligence product, Watson, hasn't had the success that the company expected. Instead, it has suffered a number of disappointing setbacks this year, resulting in Deborah DiSanzo, the head of Watson Health, stepping down just a week ago.

One of the biggest stories was MD Anderson Cancer Center stepping away from a contract with IBM, after a report by analysts at investment bank Jeffries claimed that the software was "not ready for human investigational or clinical use."

But there are other stories too - all of which come together to paint a picture of a project that doesn't live up to or deliver on its hype.

By contrast, AI has been most impactful as a part of a cloud product. Just look at the furore around the AI tools within AWS - there's no way government agencies and the military would be quite so interested in the product if it wasn't packaged in a way that could be easily deployed.

AWS, unlike IBM, understood that AI is only worth the hype if organizations can use it easily. In effect, we're past the period where AI deserves hype on its own - it needs to be part of a wider suite of capabilities that enable innovation and invention with minimal friction.

If IBM is to offer out Watson's capabilities to a wide portion of users, all with varying use cases, IBM can begin to think much more about how the end product can deliver the biggest impact for these individual cases.

IBM is playing catch up with Microsoft in terms of open source

IBM's move might be surprising, but in the context of Microsoft's transformation over the last decade, it's part of a wider pattern. The only difference is that Microsoft's attitude to open source has slowly thawed, whereas IBM has gone all out, taking an unexpected leap into the unknown.

It's a neat coincidence that this was the weekend that GitHub officially became part of Microsoft. It's as if IBM saw Microsoft basking in the glow of an open source embrace and thought we want that.

Envy aside, there are serious implications. The future is now quite clearly open source - in fact, it has been for some time. You might even say that Microsoft hasn't been as quick as it could have been. But for IBM, open source has been seen simply as a tasty slice of the software pie - great, but not the whole thing. This was a misunderstanding - open source is everything. It almost doesn't even make sense to talk about open source as if it were distinctive from everything else - it is software today. It's defining the future.

Joseph Jacks, the founder of Open Source Capital, said  that "IBM buying @RedHat is not about dominating the cloud. It is about becoming an OSS company. The largest proprietary software and tech companies in the world are now furiously rushing towards the future. An open future. An open source software driven future. OSS eats everything."

https://twitter.com/asynchio/status/1056693588640194560

 

IBM is heavily invested in Linux - and RedHat isn't exactly thriving

However, although open source might be the dominant mode of software in 2018, there are a few murmurs about it's sustainability and resilience. So, despite being central to just about everything we build and use when it comes to software, from a business perspective it isn't exactly thriving.

Red Hat is a brilliant case in point. Despite being one of the first and most successful open source software businesses, providing free, open source software to customers in return for a support fee, revenues are down. Shares fell 14% in June following a disappointing financial forecast - and have fallen further since then.

This piece in TechCrunch, almost 5 years old, does a good job of explaining the relative success of Red Hat, as well as its limitations:

"When you compare the market cap and revenue of Red Hat to Microsoft or Amazon or Oracle, even Red Hat starts to look like a lukewarm success. The overwhelming success of Linux is disproportionate to the performance of Red Hat. Great for open source, a little disappointing for Red Hat."

From this perspective, this sets the stage for an organisation like IBM to come in and start investing in Red Hat as a foundational component of its future product and software strategy.

Given that both organizations are heavily invested in Linux, this could be a really important relationship in supporting the project in the future. And although a multi-billion acquisition might not look like open source in action, it might also be one of the only ways that it's going to survive and thrive in the future.

Thanks to Amarabha Banerjee, Aarthi Kumaraswamy, and Amey Varangaonkar for their help with this post.

Update on 9th July, 2019

As pert the reports from The Fortune, IBM on Tuesday morning closed its $34 billion acquisition of Red Hat, which was announced last October.

The pricey deal, which paid Red Hat owners a hefty premium of more than 60%, marks IBM CEO Ginni Rometty’s biggest bet yet in transforming her 108-year-old technology company.

In an interview Tuesday morning, she said some tech analysts have assumed the move to the cloud would lead to a “winner take all” scenario, where one giant platform—Amazon Web Services?—ends up with all the business. Read the full story here.