Red Hat’s red-hot opportunity

You almost never see the Fedora on Bob Young’s head anymore. Whoever his colourful haberdasher was, he must have gone out of business, because at major industry events it’s more often a ball cap the Red Hat CEO wears these days. How fitting, since he and his remarkably successful company may soon

be drafted to join Team AOL.

Late last week the Washington Post reported that Young’s company was in talks to be acquired by the Internet Media giant for an undisclosed sum. The idea is that AOL would configure Red Hat Linux, probably the most popular distribution of the open source operating system, to override Windows on its Internet service.

The potential buyout caps months of ongoing tension between AOL and Microsoft, which backed out of plans to bundle AOL 7.0 on Windows XP when it was launched last fall. Despite seemingly endless negotiations, the two companies have also failed to come to terms on renewing the five-year deal that saw Internet Explorer as AOL’s default browser. This may be because AOL is unhappy with the part of the agreement that stipulated Microsoft would give AOL a prominent place on the desktop, as opposed to the nether regions of startup menu like “”Online Services.”” Its demands come at a bad time, given that Microsoft has spent the last year trying to rid itself of icons rather than add to the mix. As I explained in a previous editorial, Microsoft has been moving towards a three-icon desktop that includes compatibility buttons, one for bug reports and the recycle bin.

Microsoft, on the other hand, has been leaning on AOL to offer greater compatibility between its MSN Messenger and AOL’s own Instant Messaging service. AOL has also been a vocal supporter of the United States government’s antitrust actions against Microsoft, which is not exactly a great way to foster vendor-ISV relations.

The purchase of Red Hat would require AOL to make significant investments in the evangelization of Linux. This is a risky move for an Internet service provider, though the Linux community could argue that its pro-Windows stance in the past was similarly coercive. With the weight of Time Warner behind it, AOL does have a considerable arsenal of media properties through which it could communicate such a message.

In Red Hat, AOL would gain a valuable position in the open source community, and a company that has proven itself capable of adapting to shifting market conditions. Bob Young has managed — in part through his rose-coloured headgear — to become the walking embodiment of the firm’s brand. More importantly, he and his team have formed useful partnerships with vendors like IBM and have been proactively working to grow Linux’s server share by preparing distributions compatible with Intel’s Itanium processor.

While it has suffered through restructuring and downsizing over the past year, Red Hat has kept making money. Late last year the company beat analysts’ estimates by posting US$1.3 million in profit before charges for its third fiscal quarter. But it did so by focusing on embedded systems and converting Unix customers. This Wednesday, in fact, Red Hat will join IBM and research firm IDC in a Webcast discussing the Linux vs. Unix debate. At a time when it is necessary to choose your battles, it has not been locking horns with Microsoft.

An acquisition by AOL could give Red Hat more exposure to users than it has ever enjoyed. But it could also derail a business strategy that is working. My advice to Bob: Hold on to your hat.

sschick@plesman.com

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