Two big reasons Dell should buy Red Hat
Dell needs a software business to grow, and it could hardly do better than to buy into open source through Red Hat.
Dell's biggest problem is that its one-time differentiation--low-cost hardware assembly and distribution--is now common industry practice. Indeed, it now routinely gets beaten at its own game, as called out in a recent article by Ashlee Vance in The New York Times.
Dell's growth, to revenue of $56 billion in 2006 from $5.3 billion in 1996, has come from within. But company executives now concede that they need to make a large acquisition, or a series of them, to tap the repeating, higher-margin revenue streams that come from the software and services businesses....
"It's not a question of size (of acquisition)," said Brian T. Gladden, chief financial officer at Dell. "I think the question is more around diversifying our revenue base and becoming bigger in some things that are attractive for the long term...(Servers, storage systems, software, or services) is where we have to do an acquisition to become relevant. There is no question."
Assuming that this is correct, and that Dell needs to look beyond hardware for growth, it could hardly do better than to buy Red Hat, or possibly Sun or Novell, for two reasons. The first is that buying Red Hat might be the least painful option for Dell getting into software in earnest, as it would offer Dell a close analog to what it has done to hardware: a commoditized software business that depends heavily on low-cost assembly and distribution. Dell and Red Hat were made for each other, in many ways.
The second reason is that buying Red Hat would also position Dell to do what no other software company has done, but which offers tremendous financial promise: consolidate the open-source ecosystem to provide huge value to chief information officers. I argued earlier that, allowing CIOs to subscribe to its ever broadening portfolio of open-source solutions. Dell could expedite this, bringing cash and heft to the relationship.
Of course, Dell doesn't have much of a history of acquisitions, and might struggle to incorporate Red Hat, or any other software vendor for that matter. Red Hat, for its part, has a checkered history with acquisitions, though it is now making its JBoss acquisition pay healthy dividends.
Red Hat is brilliant at consolidating and delivering open-source software. Dell is brilliant at consolidating and delivering commodity hardware. Dell needs software to grow, and Red Hat could use some financial cushion as it seeks to expand its business beyond application servers and operating systems. Imagine if Dell/Red Hat could start offering open-source customer relationship management, enterprise resource planning, IT management, and more.
If you were a sales guy calling on CIOs, wouldn't you want to be selling the Dell/Red Hat suite of hardware, software, and services? The two companies routinely top CIO Insight's annual CIO surveys--combining them would give CIOs an amazing alternative to Microsoft and other solutions.
Update: The VAR Guy smacks me around a bit for thinking Dell would imbibe Red Hat. His thinking is strong, but I still think it depends far too much on Red Hat boxing itself into a corner as "the Linux company." If Red Hat gets ambitious with open source, all bets are off.