Why IBM is taking a 'leap of faith' with Red Hat acquisition

Tech giant IBM's US$34bn acquisition bid for source software company Red Hat is a major gamble, but one that could redefine the future of not only cloud computing but of the company's culture, according to a senior executive at Red Hat.

IBM has struggled to transform itself from a legacy hardware vendor into a services-based company. But like other major IT companies, the company has recognized the importance of the cloud model and the need to support private, public and private clouds.

John Allessio, Red Hat's VP of global services, who worked for IBM for 27 years before joining Red Hat four years ago, told BNamericas that he thinks IBM sees the acquisition of Red Hat as its ticket to competing with Google, Microsoft and Amazon Web Services (AWS) in cloud services, while also being the key to keep up with the rapid innovation in the industry.

And this is a big gamble. The US$34bn price tag is roughly a third of IBM's market value and a 60% premium on Red Hat's market value (last quoted at US$20bn).

Red Hat's revenues were US$2.4bn in 2017 compared to IBM's US$79bn, but Big Blue's income has been dropping steadily since 2011. Red Hat has no patents or assets. So why does IBM believe this company can help turn its fortunes around?

A MODEL FOR THE FUTURE

According to Allessio, IBM is essentially buying an open source development model, and a corporate culture and passion that is customer-centric. In this way IBM, a company that has dabbled in and supported open source development software, is moving away from the safer proprietary software model and trying to anticipate the future.

Red Hat gives away open source software for free, but charges a support fee to those customers who rely on Red Hat for maintenance, support and installation.

But the model is precarious. At any time customers can go back and get the source codes and do maintenance themselves. This does not happen with proprietary software which locks the buyer in.

And this comes back to the customer-centric model, convincing customers to pay for a superior service.

"It's a leap of faith that by sharing and being open, your customers are better off. And by creating this support model that makes it enterprise grade, that's the differentiator, that's the secret sauce," Allessio said.

Allessio believes that the future is open source, because only by engaging a huge community of developers to work on solutions can you keep up with the pace of change in technology we are seeing today.

"We believe that having now engaged a huge community, combined with the rate and development of technology, open source will far outpace any proprietary development model," he said.

CLOUD IS THE KEY

But how does this fit with the cloud? IBM has said that the main benefit of the acquisition will be to allow the company to become a leader in hybrid cloud.

While cloud appears to be open, as you can lease capacity, Allessio believes that the big cloud services vendors, Microsoft, Google and AWS, have essentially repeated the old vendor hardware-software lock-in model as you need to code your APIs on proprietary software to enjoy the full computing capabilities of their services.

IBM's vision, according to Allessio, is to leverage an open software-based platform where customers can freely move from one cloud to another and charge for premium service.

"I think the infrastructure-as-a-Service [IaaS] model today is almost like the hardware of the past...if you code your apps in a proprietary way to use specific computing capabilities you'll be locked in to Amazon, Azure or Google in the future, just as in the past you were locked into vendor hardware platforms."

"So with Red Hat, being open source and vendor agnostic, you can run our operating system, our Openshift capability across AWS, IBM, Google and Azure."

"And if you code to our open APIs just like you did in the old days before the cloud, you can move the workload between different clouds," Allessio said.

"Red Hat has to play at the top of its game every day. We have no customer guarantee. Our protection, or wall, is our innovation, our capacity to work with the customer. That may sound simple but it's hard to build. I think [IBM CEO] Ginny Rometty has realized she can't build that but she can buy it and infuse that way of thinking into her organization."

WHAT'S IN IT FOR RED HAT?

For Red Hat, the deal opens up a global network of countries and potential customers where it has so far been unable to reach.

"What Red Hat gets is IBM's presence in the major markets worldwide in Asia, EMEA and Latin America. We get access to those decades-old IBM relationships and IBM's scale to introduce Red Hat and our corporate culture to these companies," Allessio said.