Microsoft, Novell paint target on Red Hat

After years of acrimony, rivals Microsoft and Novell have agreed on at least one high-priority pursuit: cutting down Red Hat's influence.

The two companies on Thursday outlined a technical and legal partnership meant to better bind their respective products and remove legal concerns over using open-source and Microsoft software together.

The deal, announced at a San Francisco press conference by Microsoft CEO Steve Ballmer and Novell CEO Ronald Hovsepian, generated an avalanche of headlines as the long-time foes pledged to "bridge" the worlds of proprietary and open-source software.

Although the pact is clearly significant to both companies and the software industry at large, some industry participants expressed a dose of skepticism as well.

Improved interoperability between Microsoft and Novell products will better serve the growing number of customers that use both Microsoft and open-source software. But some people questioned why Microsoft needed to choose Novell as its preferred Linux vendor and sign a patent agreement to achieve its technical goals.

Microsoft gets to look like a good guy working with the open-source community.

--Rick Sherlund,
Goldman Sachs analyst

"Am I the only one that feels (Ballmer's) seal of approval for a technology he'd dearly love to kill is clearly disingenuous and designed to support a weaker competitor in the hopes that both Novell and Red Hat will die?" wrote Matt Asay, a former Novell executive and now a vice president of business development at open-source company Alfresco.

Red Hat has a dominating share of the market compared with Novell and poses a greater competitive threat to Microsoft than Novell, Asay pointed out, adding that the deal recalled the much-ballyhooed 2004 agreement between Microsoft and Sun Microsystems.

At Thursday's event, Ballmer said the agreement is meant to make their "respective products more attractive to customers" by making them safe from legal entanglements and more interoperable.

"We definitely want those customers who are combining Windows and Linux to choose the Novell Suse product line. And we're going to put our marketing behind that," Ballmer said.

The deal underscores how Microsoft has come to accept the popularity of Linux and open-source business models.

The two companies' technical pledge of interoperability, which covers virtualization as well as Microsoft Office and the Novell-backed OpenOffice, will appeal to customers eager to mix Microsoft and Novell software, analysts said.

The patent agreement also covers Mono--Novell's open-source implementation of Microsoft's .Net development software--and Samba--a Novell-backed open-source file-sharing software.

Both companies also pledged to improve their management of Windows Server and Suse Enterprise Linux.

Despite the range of technical collaboration, financial analysts said that the effect is not expected to be material to Microsoft.

In a note entitled "Microsoft and Novell--Calm down, not that big a deal," Goldman Sachs analyst Rick Sherlund said Friday that the arrangement nonetheless offers substantial marketing benefits to both companies.

"Customers benefit, Novell gets a much needed marketing boost given the relatively low market share of Suse Linux, and Microsoft gets to look like a good guy working with the open-source community," he wrote.

The stock price of financially struggling Novell jumped 17 percent on Thursday on the news. Red Hat stock, meanwhile, was knocked down slightly.

Perhaps not surprisingly, Red Hat criticized the deal on its Web site on Thursday, while Red Hat employees pointed out the potential legal potholes to the distribution arrangement between Microsoft and Novell.

Red Hat appears philosophically opposed to a patent truce with Microsoft. In answer to the question, "Did Red Hat consider a similar patent deal with Microsoft?" the company answered: "An innovation tax is unthinkable."

In a response to a question about Red Hat at Thursday's press conference, Ballmer indicated that Microsoft has sought to establish similar legal and technical arrangements with other companies. But Novell's business model of mixed open-source and proprietary software made it a natural choice for collaboration.

"We had discussions with lots of folks in the industry. You can probably guess a list of names, as you hypothesized one," he said, referring to Red Hat. "But, it was really when Ron (Hovsepian) called and initiated a contact, since he's thinking about where he wanted to take Novell, that we were able to put together something that addressed the business issues, the patent issues, and the technology issues all at once."

Red Hat has had a tough couple of weeks.

Last week, Oracle announced that it intends to offer support for Red Hat Enterprise Linux. Although the deal is explicitly aimed at siphoning off Red Hat's revenue from Linux support, Oracle's plan also recognizes the popularity of Red Hat Enterprise Linux among corporate customers, analysts said.

By contrast, long-time Linux backer IBM has sought to ensure market adoption of both the leading Linux distributions--Red Hat Enterprise Linux and Suse Linux Enterprise Server. When Novell bought Suse Linux in 2003, IBM made a $50 million investment in Novell and has certified its products for Suse Linux Enterprise Server.

Both events--Oracle's Linux support plans and the announced Novell-Microsoft pact--are squarely targeted at Red Hat and could succeed in lowering the company's clout, said Stephen O'Grady, an analyst at RedMonk.

Red Hat has been "taken down a peg--possibly several pegs. Their relationship with their customers and (independent software vendors) cannot help but be impacted--negatively for Red Hat--by the Oracle and now Microsoft/Novell announcements," he wrote.

O'Grady noted, however, that independent software vendors who write and certify applications for the most commercially interesting distributions of Linux have more influence in the long term than Microsoft, Novell and Oracle in establishing market share.