IBM recently pulled off the largest software acquisition in history by announcing its intention to acquire open source cloud provider Red Hat for $34 billion. Experts said IBM’s acquisition of Red Hat opens a new dynamic in the cloud wars between IBM, Google, Amazon and Microsoft. They also said it gives IBM added muscles in the enterprise hybrid cloud space, opens up a large conversation around containerized apps and microservices infrastructure and begs the ultimate question: will IBM’s massive bet on Red Hat save the struggling company or make it HP-Autonomy, Part 2, another massive deal gone south?
Here are some more takeaways on the IBM-Red Hat mega deal:
Will the Major Cloud Providers Play Nice?
The reality of cloud today is that your partners are your competitors, according to Al Gillen, general vice president of software development and open source for IDC. What does this mean for the cloud market? “It is becoming increasingly rare for a major player to not play both roles,” Gillen said.
“Even for Red Hat today, it is a competitor to Microsoft, Google, Amazon, but it also partners with all those players to support its products on their clouds." IBM owning Red Hat, he said, makes it "a little more distasteful for cloud competitors" now than it was last week. "They still cannot afford to ignore the substantial installed base of Red Hat customers," Gillen said.
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AWS Has Competition in Open Source in Cloud
Open source remains a big theme around chatter on this acquisition. Jim Whitehurst, president and CEO of Red Hat, said in a press release that open source is the default choice for modern IT solutions. "Joining forces with IBM,” he added, “will provide us with a greater level of scale, resources and capabilities to accelerate the impact of open source as the basis for digital transformation and bring Red Hat to an even wider audience, all while preserving our unique culture and unwavering commitment to open source innovation."
That said, organizations leveraging business applications in the cloud have said they see Amazon Web Services as the “natural home for open source solutions,” according to Ollie O’Donoghue, research director of IT Services for HFS Research. “That may change as IBM continues to wrestle with the hyperscale players, but with significantly boosted credentials in open source,” he added. “It’s doubtful that this will give IBM a meaningful leg up in the public cloud IaaS market, but will give them stronger credentials in an area they are already very strong, the enterprise hybrid cloud space. So the market will not change. IBM just got a little stronger.”
Can IBM and Red Hat Pull Off Necessary Synergy?
Is this acquisition too big to succeed? O’Donoghue noted there have been several major acquisitions like IBM-Red Hat, and, he added, most don’t end well. The most notorious example he cited is HP and Autonomy. “There are a few others that have managed to cling on to some positive elements, but these are few and far between,” O’Donoghue said. “The holy grail for an acquisition is synergy, so the whole is greater than the sum of its parts. This is pretty rare for acquisitions of this scale — getting your $34 billion worth will be an impressive trick if IBM can pull it off.”
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Massive Play Here for Containerized Apps, Microservices
Randy Heffner, analyst for Forrester, said bigger conversation around the IBM-Red Hat acquisition centers around containerized apps and microservices infrastructure. IBM, he said, acquired a great foundation with Red Hat's OpenShift, a container app platform by Red Hat built on Docker.
IBM acquired two important things through OpenShift, according to Heffner. As big as cloud is, there are still many applications running on-premises because they are hard to move. There are also security or data residency concerns. “OpenShift gives IBM a story to tell for on-premise-to-cloud migration — or simply hybrid cloud/on-prem operations of containerized apps and microservices,” Heffner said.
Further, doing high-end microservice-based solutions today is rocket science, and having control of OpenShift will give IBM a leg up on crafting what one might call the “app server” for microservices, he added. This, Heffner said, is a “very different type of modular app infrastructure that allows the masses of developers to build high-end microservice features into their apps.” He cited circuit breakers, service discovery, design for resilience, mixed programming languages and sharding.
Related Article: 7 Tech Giants Embracing Microservices
Cost May Be Too Much to Bear
Will cost be an issue down the road for prospective cloud investors? Some reports say moving to the cloud can prove costly. “I don't think it will be affordable for the prospect users unless the providers are willing to lose money while positioning their products/services for market share. But up to what to point?” questioned Halim Özberrak, co-founder of Betatek. “The market is huge and a lot of money is there for the taking for the providers and that's why we will see plenty more M&As,” Özberrak predicted.
With the $34 billion price tag Özberrak said he cannot see a pricing or a positioning logic that can be justified by ROI or return on equity. “That's the trillion dollar question to be answered and I would love to hear it,” he said. For a cloud investment to truly work, it has to be secure, widely and readily available and the opportunity cost-wise, meaningful for the users and profitable for the providers, Özberrak added. “But I don't see it happening in the very near future since the industry is growing by acquisitions,” Özberrak said.
Who Ultimately Can Win in 2019 and Beyond in the Cloud?
Heffner of Forrester predicts IBM will be the leader when this deal with Red Hat is realized, though others have some toes in the water on it. Google recently announced an on-premises version of its container engine. Google is managed on your hardware, but IBM can do that, too, and will have a wider range of deployment options, including being completely customer-managed, Heffner said. "IBM will have to sort out middleware duplications in its portfolio like JBoss vs. WebSphere, 3scale vs. API Connect, Fuse vs. IBM Integration Bus, data integration and more," Heffner said. "I believe IBM will simply maintain most of the Red Hat middleware brands, most are thriving open source communities, so they are good ecosystems and businesses for IBM to be in."