Is Red Hat Looking To Buy Zimbra and Alfresco?

Is Red Hat (RHT) going to use its Red Hat Exchange to find acquisition targets? It's quite possible. And if that's the case, Zimbra and potentially Alfresco will be part of Red Hat at some point.

That speculation is just one of the tidbits coming out of Red Hat's analyst meeting with Wall Street on Wednesday.

Readers of ZDNet know all about Zimbra–Dan Farber and David Berlind have detailed the company's collaboration products and development.

Zimbra recently hit the big leagues by landing a deal with Comcast (CMCSA). Alfresco is an open source content management company.

Jason Maynard, an analyst at Credit Suisse, thinks Zimbra would be a "great fit" for Red Hat. In a research note, Maynard says that there are obvious synergies with both content management company Alfresco and Zimbra.

Meanwhile, Red Hat has a great way to do due diligence. Its Red Hat Exchange [RHX], which sells partner software, offers an avenue to monitor the best performing partners. Just like Salesforce.com (CRM), Red Hat will be able to track uptake from its partners and pounce if a deal works. 

Maynard's takeaway: Don't be surprised if Red Hat buys Zimbra at some point.

Maynard writes:

"We think investing in RHX is critical because they should be expanding their product footprint into a broader spectrum of product areas like systems management, collaboration, content management, database management, and SOA infrastructure."

"We think very highly of the Zimbra solution from a personal productivity perspective and hear it's soon going to be adding support for Blackberry (RIMM) and Microsoft (MSFT) Exchange integration. As software moves above a solution for a single PC, we believe it will be a core capability to deliver relevant business information to users across a wide range of devices. If Red Hat isn’t going to win the Linux desktop, it ought to be playing in the productivity enhancing space across the entire computing spectrum."

It's a similar story for Alfresco. What good is JBoss middleware if it can't manage all forms of content? If Red Hat bought Alfresco it would be a way to damage Microsoft's SharePoint plans and nudge its way into more Microsoft shops.

The big monkey wrench in Maynard's theory is follow-through by Red Hat. "Our major concern is that the company will under invest in marketing, sales and support capabilities. Simply building an online store, but not staffing it properly won’t yield the type of revenue that potentially is available," says Maynard.

Maynard says that Red Hat has a history of making announcements and not following through enough. Exhibit A for Maynard is Red Hat's Global Desktop announced on Wednesday. Three years ago the Global Desktop would have been swell. Today, Red Hat has allowed Ubuntu to capture market share.

Among other notable tidbits about Red Hat:

• Red Hat reckons that more than 80 percent of its customers are well into the evaluation period for Red Hat Enterprise Linux 5 (RHEL 5). Anecdotally, RHEL 5 is outpacing the update for the company's fourth version. Red Hat says RHEL 5 has six times the certifications compared to RHEL 4 at this juncture. Jeffries analyst Katherine Egbert said in a research note that RHEL 5's virtualization capabilities are driving a faster-than-usual adoption rate.
• JBoss development continues. Red Hat said deals for JBoss' open source middleware is evenly split between replacing prior versions and building new applications. Red Hat talked up a potential deal with a large Brazilian telecom company where Jboss would replace BEA's Weblogic. Overall, JBoss has seen more success against BEA rather than IBM's Websphere due to Big Blue's pricing.
• International strength is growing. Red Hat has greater than 70 percent Linux market share in Japan and India. In China, Red Hat is close to closing a deal with China Construction Bank, reports Egbert.

And then there was some virtualization pricing clarity on RHEL 5 guests. Pacific Crest analyst Brendan Barnicle notes that there were concerns about Red Hat's virtualization pricing and cannibalization of the company's core business. Red Hat executives clarified virtualization pricing. If you select virtualization when you get RHEL 5 you get free guest versions of RHEL 5. However, if you are a VMware customer you have to buy guest versions of RHEL 5. The concern was that everyone would wind up getting RHEL 5 free with the virtualization package.

Barnicle writes:

Red Hat CFO Charlie Peters confirmed that if a user does not select RHEL 5 for virtualization, then those guest versions are not free, even if the user has RHEL 5. If a user selects VMware, the user needs to purchase guest versions of RHEL, even if they are using RHEL 5 as the server’s operating system. Red Hat does not charge its full subscription price for these guest versions of RHEL, but it still does charge the customers.

And since VMware dominates the virtualization market with about 90 percent market share, Red Hat will be taking in revenue.

Barnicle adds this ditty:

"In fact, by offering virtualization, Red Hat may have found a way to increase prices without risking much. Since customers are not likely to use Red Hat’s virtualization, customers will still be purchasing as many RHEL subscriptions as ever, but now the customers may be purchasing those RHEL subscriptions at higher prices because they include virtualization. Ultimately, the RHEL 5 pricing strategy may prove to be an ingenious way for Red Hat to effectively raise prices."

Pretty smooth indeed–if it works.

Comments

[Dennis Byro...:]

Should Red Hat buy RHX application-supplier members such as Zimbra and Alfresco? The answers are "No" and "I don't think they want to."
-- I disagree with Jason Maynard and think such acquisitions would be a bad idea for both Red Hat and the larger open source software (OSS) community.
-- Not only didn't I hear that idea expressed by RHAT at Wednesday's Financial Analsysts conference (maybe Credit Suisse got some inside-baseball feedback outside the open meeting), I heard just the opposite at Red Hat's most recent quarterly-results conference call--see my March 30 SeekingAlpha post on the Red Hat quarterly results

Look at the scope of the opportunity:
-- Application spend makes up more than half of the overall $244B software market (2006, the total is based on publicly available IDC data; the applicaton percentage is based on my research).
-- There is no reason why application spend would evenutally not make up at least an equally high percentage of the $7B OSS market (2006, 3% of the $244B total, also based on publicly available IDC data released by Red Hat at Wednesday's financial analyst conference)
-- Today, packaged OSS applications represent only about 10% of the OSS market (also IDC data released by Red Hat at Wednesday's financial analyst conference)

For packaged OSS applications to become a larger share of the rapidly growing OSS market ($20B by 2010 from $7B in 2006), they need to attain the same quality level as both proprietary packaged apps such as SAP, Lawson, etc. and OSS infrastructure software such as RHEL, JBoss, etc.

Choice is required as well: not only does the OSS market need Zimbra for collaboration but it needs OpenOffice, etc. This is true for the same reason that it is important for users today to have a choice among Office, Notes, etc. That same choice and quality equation holds for all 50-plus types of packaged applications (the move to composite applications is going to increase that taxonomy by a factor of 10 but I put that factoid aside for this discussion).

Red Hat Exchange (RHX) is all about building that needed portfolio of quality products. RHX is potentially as important to the OSS movement (and the overall IT market) as the DEC ISV catalog was in the 1970s, the Oracle CAI program was in the 1980s, and the Microsoft ecosystem was in the 1990s.

Red Hat acquisition of application suppliers from their "catalog" (or using the program as a due-diligence method for M&A) would instantly set up conflict that will retard the entire OSS market's development. (Maybe in 10 years, after the OSS applications market is on solid footing, Red Hat can change strategy the way Oracle bought Datalogix in 1998 and Microsoft bought Great Plains, etc. earlier this decade).

And as I said above, not only didn't I hear that Red Hat wanted to acquire applications suppliers on Wednesday, I heard just the opposite in March.

2007 May 11 06:38 AM