IBM’s announcement that it wants to pay $34 billion for open source leader Red Hat raised the eyebrows of everyone who follows enterprise tech.
The largest software acquisition in history, and for what? Revenues that represent little more than a rounding error for the Armonk behemoth? Open source software that IBM could get for free? Bragging rights, perhaps?
None of these explanations can hardly explain the serious green Big Blue is paying for Big Red. Here’s my take.
What IBM is Actually Buying
Red Hat offers unquestionably enterprise-class software, including its Kubernetes-based OpenShift Container Platform, the JBoss Enterprise Application Platform, and perhaps its crown jewel, Red Hat Enterprise Linux.
Just one problem: Red Hat’s products are unapologetically open source, which means first, the code itself is free for the taking, and second, that Red Hat’s business model centers on support, training, and professional services, rather that software licenses or subscriptions.
If not the software itself, then, what is IBM getting? The most common answer: Red Hat’s people.
By all accounts, Red Hat has an amazing team, to be sure – but there is one big hole in this theory: people can walk. And they are already doing so, in droves. Once any golden handcuffs expire, expect to see more defections.
IBM, of course, realizes it will lose many of Red Hat’s best people – if not for the difference in culture, then simply for the fact that IBM requires its personnel to live near its offices, a policy that has long been anathema to the Red Hat culture.
What about Red Hat’s customers? It lists many blue chips on its customer list to be sure, but most of them are IBM customers as well in one way or another. After all, we’re talking enterprise IT here, and it doesn’t take long until you run into some IBM product or service at any big company.
The real evidence that the acquisition isn’t about customers is to compare the revenues of the two companies: Red Hat’s $2.9 billion to IBM’s $79 billion (2017 numbers). Yes, IBM makes more than 27 times what Red Hat brings in, and is nevertheless paying nearly half its annual revenue number (not profit, mind you) for the smaller company.
Where does that leave us? In my opinion, this acquisition is all about OpenShift, which I believe IBM sees as the key to hybrid IT. Hybrid IT – a workload-centric abstraction across multiple public clouds, private clouds, virtualized infrastructure, and legacy assets – is shaping up to be the modern enterprise IT paradigm for the next decade.
And at the heart of enterprise IT? Kubernetes, the open source container orchestration platform at the heart of OpenShift.
Fair enough, IBM is skating to where the puck will be, and that means enterprise Kubernetes at scale, and the best way to get there is via OpenShift. But such a strategy doesn’t adequately explain the acquisition, for the reasons I covered above.
My conclusion: this acquisition is a desperation play, a Hail Mary of Hail Marys. Remember, IBM’s 2013 SoftLayer acquisition was itself a Hail Mary attempt at competing in the public cloud market. Established vendor Microsoft succeeded with Azure, so why not IBM?
Only SoftLayer underdelivered. Cloud Foundry-based BlueMix didn’t help IBM turn the corner, either. And Big Blue’s other strategic moves, namely Watson and blockchain, aren’t going to turn the company around any time soon.
It’s time to put all the chips on double-zero and let that little steel ball spin.
Intellyx publishes the Agile Digital Transformation Roadmap poster, advises companies on their digital transformation initiatives, and helps vendors communicate their agility stories. As of the time of writing, IBM is a former Intellyx customer. None of the other organizations mentioned in this article are Intellyx customers. Image credit: Mark Hillary.