To date, much of Red Hat’s success has come because the software is relatively inexpensive, Unix applications port easily to Linux, and because Red Hat is not Microsoft i.e. they are not a large, integrated vendor that can lure customers in with low pricing but exploit their pricing power once the customer becomes dependent on the software. Most customers view Red Hat Enterprise Linux as a way to break free of large vendor lock in and the high economic toll it extracts.

However, with Oracle buying Sun, Red Hat now has two giant competitors, both of whom have virtually unlimited pricing power. We believe it will be increasingly difficult for Red Hat to compete over a sustained period as a small, standalone, independent vendor against the upcoming entry of Oracle, who could offer cheap hardware/software bundles, steep discounts to stay on or migrate to Open Solaris, or even pay customers to not use RHEL as they seek to stabilize the Solaris maintenance stream. Therefore, with Red Hat’s choice-based value proposition potentially pre-empted by a data center land grab among 2 giants, it seems to us that Red Hat needs a partner. A large partner. Someone with pricing power, C-level relationships, and a significant enough presence in the data center to combat the Oracle/Microsoft threat. IBM fits the bill.

So, caught between Oracle (ORCL) and Microsoft (MSFT), Red Hat (RHT) rushes into the waiting arms of IBM (IBM). Makes sense I Suppose, as Barron’s recently argued–though with a caveat: Unlike Sun (JAVA), which was fast slipping into the mud when Oracle acquired it, Red Hat is doing quite well for itself. And that could make it prohibitively expensive.

The desktop has become a lot like teenage sex: A lot of people are talking about it but not many people are doing it.”

–Matthew J. Szulik, Red Hat CEO, October, 2005

I’d argue that a worldwide monopoly, enforced by business practices that a federal judge has found to be predatory and anticompetitive, probably has more to do with killing innovation than anything the open source movement could ever do.”

–Szulik on Microsoft’s 2001 claim that Linux “stifled innovation”

Matthew Szulik, Red Hat’s wisecracking chief executive officer, is stepping down after nearly a decade on the job. He’ll remain with the company as chairman of the board, but Jim Whitehurst, a former Delta chief operating officer (yes, an airline exec), will take on the CEO role.

Szulik, who’s been with Red Hat since just a few months after its IPO in 1999, said he’s giving up the CEO job because of a family crisis. “For many months, my family has been challenged by serious health issues,” Szulik said during a conference call to discuss the company’s strong third-quarter financial results. “It became clear to me that I needed to direct the same level of attention and effort in support of my family at this time that I have invested in Red Hat for nearly a decade.”

And hopefully–no, presumably–that will be enough to resolve whatever crisis it is that Szulik faces (and all of us here at D wish you the best, Matthew). Under his stewardship, Red Hat reported yesterday that third-quarter profit surged 39% from a year ago, to $20.3 million. Revenue rose 28% to $135.4 million.

“For many years, my face has been pressed up against the windshield trying to look into the future,” Szulik wrote in a farewell posted to the Red Hat blog. “Learning and adapting to an evolving Red Hat community, culture and marketplace. Red Hat associates past and present, along with members of the open source community and our customers and partners, picked up their brushes, dipped them into a paint palette of color to create this artwork called Red Hat. I take pride when customers and industry types comment to me that the people of Red Hat are ‘different.’ Not like the cylons who have come to dominate the industry of technology. Through our actions, the open source community and the people of Red Hat are defining a modern economic relationship between developer and customer. Collaboration. Transparency and value delivered. Our customers and marketplace are responding as evidenced by our financials and strong market potential. What was once considered a joke in 1998 no longer is. Today governments and industry are responding to the values and practices of open source as evidenced by their support of OLPC [One Laptop Per Child] and the broad open source education initiatives in India, South America and parts of Africa.”

Such anti-Linux declarations being biannual, it’s clear we were about due for another one, which Ballmer dutifully provided last week at a company event in the United Kingdom.

… Our battle is not sort of business model to business model. Our battle is product to product, Windows versus Linux, Office versus OpenOffice.
The only other thing I would say that is probably germane is, we spend a lot of money, the rest of the commercial industry spends a lot of money on R&D. We’ve spent a lot of money licensing patents, when people come to us and say, ‘Hey, this commercial piece of software violates our patent, our intellectual property,’ we’ll either get a court judgment or we’ll pay a big check. And we are going to–I think it is important that the open-source products also have an obligation to participate in the same way in the intellectual property regime.

“That’s why we’ve done the deal we have with Novell, where not only are we working on technical interoperability between Linux and Windows, but we’ve also made sure that we could provide the appropriate, for the appropriate fee, Novell customers to also get essentially the right to use our patented intellectual property. And I think it’s great the way Novell stepped up to kind of say intellectual property matters. People who use Red Hat, at least with respect to our intellectual property, in a sense have an obligation to eventually compensate us.”

So according to Ballmer, if you’re a Red Hat customer you may have an “undisclosed balance-sheet liability” to deal with in the near future. And if you’re not, you probably want to stay away from free software entirely. Because, as Groklaw’s Pamela Jones suggests, Microsoft apparently plans to eradicate it.

Ballmer “has just clearly outlined how Microsoft intends to extinguish Linux as we know it,” Jones writes. “Microsoft knows full well that in any intellectual-property regime based on software patents, particularly when used as weapons against innovation to protect and reward the old, no one can compete with Microsoft. They have all the money. FOSS is written by individuals who don’t have a pile of gold under the bed to go to court and get a court judgment or pay ‘a big check.’ Ballmer of course knows that. So this is the anticompetitive plan, under the guise of everyone having to play by the same rules.”

Anyway, the move will likely be viewed with some distaste by the Linux community, which has denounced the Novell-Microsoft deal as a sort of Hitler-Stalin alliance against Oracle and Red Hat or, worse, as undermining the open-source movement by pitting one Linux distributor–Novell–against the rest of the Linux community.