IBM agrees to buy Red Hat for $34 Billion. My initial reaction

First things first. I am a Red Hat employee, but this is my blog on my website.  What I say here is my own opinion and might not reflect what Red Hat or IBM decision makers think.

Here are some news stories.  Here is the Red Hat press release with the announcement. Here is the IBM press release. Here is a link to a Wall Street Journal article.  The article will be behind a paywall and so here is a PDF with the complete article for non WSJ subscribers. This time, it’s not a rumor. This time it’s true.

It doesn’t take a rocket scientist to see why IBM wants Red Hat. IBM is dying. It suffers from a viscous circle of shrinking revenue, impatient shareholders, and job cuts. Red Hat represents the opposite. Red Hat is hitting on all cylinders and the open source model Red Hat championed for the past twenty-five years now drives innovation in the IT industry. If I were IBM CEO, Ginni Rometty, I would want Red Hat too. And I’d want it now, while I still have the ability to make a big move.

For Red Hat, it’s both an opportunity and a threat. Despite IBM’s shrinking revenue, it’s still profitable, and so the opportunity stems from IBM deep pockets and brand recognition.

One threat is just plain fear.

The internal Red Hat email network lit up when the news went public, and many ex IBMers recalled a toxic culture at IBM. IBM has a shrinking revenue base, and so I’m not surprised today’s IBM culture is toxic. I know what these ex IBMers lived through because I lived through it myself in the 1990s Digital Equipment Corporation death spiral. I wrote about the IBM toxic culture myself when IBM tried to sell getting rid of remote employees as a positive move.  Here is the blog post.

These ex IBMers are afraid the IBM toxic culture will invade Red Hat. So am I. But the opportunity is, maybe the Red Hat culture will invade IBM. It happened with Next and Apple. Why not here?

Other threats may come from IBM groups with a vested interest in competing IBM products. AIX on Power comes to mind.

IBM Power is a different and more expensive computer chip architecture than the x86 systems inside just about every modern computer in the world. Programs that run on IBM Power will not run on x86 systems. AIX is the IBM Unix operating system. AIX is similar to the Red Hat flagship product, Red Hat Enterprise Linux (RHEL), but only runs on IBM Power and IBM charges a fortune for it.

Middleware might also be a big deal. Red Hat has a product called JBoss and IBM has WebSphere.

Storage is another overlap area. IBM has a huge SAN (Storage Area Network) business. Red Hat offers two software defined storage products, Gluster and Ceph. Software defined storage uses open-source software on top of commodity hardware to achieve similar performance and reliability characteristics as traditional and more expensive SANs.

When IBM chiefs make investment decisions and must choose whether to invest in Red Hat products or competing IBM products, what will they decide? No matter what anyone promises now, reality is, Red Hat will be one of many influencers in IBM’s Armonk, NY headquarters.  Will IBM drain the Red Hat cash cow to keep IBM legacy systems alive, or will Red Hat re-energize IBM? Everyone is making feel-good promises today, and IBM is offering lots of money, but the truth is, nobody knows what will happen at crunch time.

A couple personal stories

A few years ago, when I was an independent consultant and reseller partner, I met a few IBM engineers and spent time getting to know IBM server and storage products.  The attention to quality impressed me.

Other experiences were not so impressive.

I had a customer with an aging AIX on Power system and tried to move it to a virtual environment with RHEL on x86. To make it work, I had to overcome the program compatibility problem. I’d heard about a Power emulator that ran on x86. I investigated and found out IBM bought this product from the developer, killed it, and then the developer disappeared and nobody heard from him or his product ever again.  I hope IBM paid lots of money for that developer to disappear. And I wonder if it was worth the money to protect its legacy AIX base.

Would IBM try to kill RHEL after the Red Hat deal closes?  No way. Not after committing $34 billion.

But entrenched bureaucracy might be a killer.

In order to gain competitive pricing, reseller partners go through a process called registering the deal. IBM resellers also apply for a bazilion other programs, and then the sum of all these programs generates enough discount for a reseller to earn maybe between 5 and 10 margin points on a hardware sale.  Which explains why I never got excited about selling hardware. But I did it so customers could have a one-stop-shop if they wanted.

Shortly before IBM sold its x86 server division to Lenovo, I had a customer with a SAN opportunity coming up. The customer also needed to refresh its x86 servers, and so I registered the whole deal and applied for all the discounts. I quoted the servers but lost to Lenovo and CDW. CDW sold the Lenovo systems for less than my wholesale cost from IBM.

My cost was around $5000 and as I recall, Lenovo sold the hardware for around $4000. The customer offered me an opportunity to match the price. I declined. Selling for less than your cost is a path to bankruptcy.

After I lost to CDW, IBM dropped a bomb on me. The fine print on deal registration rules stated, if a reseller registers an opportunity and then somebody else wins, then that reseller must wait ninety days before registering any other opportunities for any other IBM products with that customer.

The storage was coming up and it was ten times bigger than those small servers. But because I was no longer eligible for those discount programs, IBM put me at a competitive disadvantage to every other reseller. My reward for introducing this customer to IBM.

I complained to Ginni Rometty’s office and an army of IBM vice-presidents responded. None of them – not one – could understand my complaint. Why couldn’t I just quote IBM products and live with a little bit less profit than I would otherwise earn? Not one had any idea about the sales competition in the field. And none had any desire or authority to override the automated system in the Philippines that penalized me for introducing IBM to this account.

About the same time, I ran into another storage company and partnered with them. And won against intense competition. An IBM partner rep called me in the middle of that battle and wanted to know where I was with the storage opportunity. I told him I couldn’t get past the penalty IBM invoked against me and I was partnering with somebody else for the storage.

Nobody from IBM ever called me ever again after that.

If IBM keeps its promise and lets Red Hat operate as Red Hat has always operated, Red Hat really could transform IBM and change the world.  But if IBM operates in typical IBM fashion and strangles Red Hat, then lots of good people will find somewhere else to work and IBM will have killed Red Hat and squandered its own last hope to rise from its ashes.