--charging less than half of Red Hat's list prices--and to supply its own free version of that product built from the publicly available source code. Oracle pledged high-grade support from its own army of employees--including Linux kernel programmers who understand the most technical details.
The Redwood Shores, Calif.-based software giant essentially announced a plan to divert Red Hat's support subscription revenue stream into its own coffers. Red Hat's stock plunged 24 percent Thursday, closing down $4.68 at $14.83 as investors erased $681 million in market capitalization.
Red Hat's business is under new pressure, but it won't be simple for Oracle to walk off with all its customers. The big sticking point for Oracle: potential incompatibility with genuine Red Hat Enterprise Linux (RHEL).
Take the case of Cisco Systems, which has more than 5,000 RHEL subscriptions for its developers' Linux workstations. One person involved in making sure the Linux systems run smoothly is concerned that Oracle's Linux lacks the hardware and software certifications possessed by RHEL and its main current rival,.
"It's going to take years to develop the relationships with outside vendors currently certified for Red Hat and Suse," said the technician who requested anonymity. "For company like mine, we can't go out on a limb like that. It has to be a certified solution."
The certification hurdle
Oracle argues that any application that will run on RHEL will also run on its version of Linux rebuilt from Red Hat's source code, but the Cisco tech isn't having any. "It's not going to be exactly the same," the tech said.
Others are cautious, too. "I wouldn't try to apply an Oracle operating system patch to one of my RHEL servers. That would probably lead to some instabilities," said Tabor Wells, director of technology for Smarter Living, which runs the SmarterTravel.com and BookingBuddy.com Web sites.
That opinion matches that ofprogrammers, who have been cloning RHEL based on source code for years.
BEA Systems, an Oracle competitor that sells Java server software that runs on Linux and other operating systems, is an instructive example.
"You wouldn't believe the complexity of our certification process. We have to certify every version of an operating system with every version of our product on different hardware, using diff Java virtual machines...There's an unbelievable cost to adding another operating system to the matrix," said Eric Stahl, senior director of investor relation. "If Oracle comes out with its own thing unsupported by companies like us, customers won't adopt it."
Oracle's pledge to provide its own bug fixes--in some cases fixes that Red Hat isn't providing--poses further problems. Oracle said it will periodically re-synchronize its software with Red Hat's, but that means the company will remain reliant on Red Hat to avoid straying down a different, incompatible path in the software development road.
"The major risk is that Oracle will fork Linux. If Red Hat does not incorporate Oracle's bug fixes, Oracle will fork the operating system, which could limit its impact," First Albany analyst Mark Murphy said in a report Thursday.
Punishing Red Hat
Red Hat, through its JBoss acquisition, has had the temerity to start competing directly with Oracle. Now Oracle has returned the favor, and even if customers don't plan to buy, they can benefit.
"Customers now have a viable way to drive down the cost of running Linux and are likely to use this information in contract negotiations even if they don't switch," said Credit Suisse First Boston analyst Jason Maynard. "This move was very aggressive and is likely going to cause disruption in the Red Hat business at some point in the coming quarters, as Oracle accounts (for or) influences around 10 (percent) to 15 percent of their business."
But Red Hat already has factored in some of the price pressure. Its published annual support rates for single servers are lower than what it charges for customers that buy large numbers of subscriptions, said Red Hat CEO Matthew Szulik, and the company doesn't plan to re-evaluate pricing.
"We don't have an enterprise customer that buys pays retail pricing. All our enterprise customers have volume discounts," Szulik said Wednesday.
And Wells gets cheaper prices by purchasing subscriptions through Dell. If he had to resubscribe for Linux support next week, he'd stick with Red Hat rather than switch to Oracle, he said. "I think Red Hat has proven themselves as a really solid vendor in the Linux space," Wells said. "They have a long history here. They have a solid product."
But he's not ruling anything out. In particular, if he were an Oracle customer, he'd evaluate Oracle's Linux support seriously, he said.
Oracle's move hurts Red Hat, but selling Linux support isn't likely to generate much direct revenue.
"We expect the immediate impact of this plan to be minimal for Oracle," Sanford C. Bernstein analyst Charles Di Bona said in a Thursday report. "We estimate that if Oracle had been able to capture all of Red Hat's fiscal 2006 revenue (of $278 million) at a discount of 50 percent, the impact on Oracle's earnings per share would have been only $0.01."
That doesn't mean the move doesn't make business sense, though. "By driving greater adoption of Linux, Oracle further benefits as the leading provider of databases for Linux environments," Di Bona said.
But Dave Dargo, chief technology officer of open-source database company and Oracle rival Ingres, said in his blog Thursday that Oracle's relatively inexpensive Linux support just spotlights just how costly the rest of the company's products are.
To run Oracle's database software on a four-processor server, a customer would pay $197,699 using Linux support from Red Hat and $197,199 Linux support from Oracle--"a savings of a whopping 0.25 percent," Dargo said. "They're solving the wrong problem. Let's assume that Oracle provided the Linux support for free, that's $0.00, nada, nothing, zilch. The price for Oracle on that Linux for the first year would still be $195,200."
Indeed, open-source databases still pose a challenge to Oracle. Smarter Living, for example, uses the open-source MySQL software. "We started with MySQL, and it did what we needed it to and well," Wells said. "If I need specific Oracle functionality around data warehousing, I might use (Oracle) to power that, but at the same time, that's a space MySQL has been making a lot of moves in recently as well."
And there's some data to suggest Red Hat customers won't necessarily jump ship for Oracle. CIO Insight magazine's 2005 survey of 884 computing technology executives ranked Red Hat No. 1 in value and reliability, with 84 percent rating the company as excellent or good.
In contrast, Oracle was No. 39 out of 41 in the annual survey, with a 55 percent favorable rating.
"Oracle has a tough enough time providing decent support on their internally developed, proprietary software," the Cisco tech said. "What makes them think they can develop stuff better than Red Hat for the open-source community if they can't develop their own software?"