Why Red Hat's Open-Source Cloud Is IBM Game Changer

(Bloomberg) -- IBM’s $33 billion purchase of Red Hat Inc. -- the world’s second-largest technology deal ever -- shifts the competitive landscape for cloud computing and the software movement known as open source. Revenue at Red Hat, which sells software and services based on the open-source Linux operating system, is expected to top $3 billion for the first time this year as a growing number of large customers turn to cloud computing.

1. What does Red Hat do?

It makes open-source software. This means it gives the code for its program away for free. It makes money from charging subscriptions for services such as fixing bugs, giving advice, and releasing software upgrades. Much of Red Hat’s core business is focused around its Linux-based operating system, which helps businesses run their information technology systems. Red Hat also offers infrastructure services for companies that manage private or public cloud services.

2. If its open-source, why pay to buy Red Hat?

Red Hat made $823 million in its most recent quarter, the majority of it through subscriptions. This brings IBM a collection of relatively sticky software clients, many of whom are undergoing a transition into shifting their IT -- be it back office plumbing or client-facing platforms -- onto the cloud.

3. Why is cloud computing such a big deal?

Internal, legacy IT systems are expensive to maintain and even more costly to upgrade. Companies both new and old are realizing that -- thanks to improved internet infrastructure -- much of their old IT can be run and managed by cloud vendors such as Amazon, Microsoft and Oracle. While executives debate how much to outsource (public vs private cloud), the tech companies are more than willing to charge business to move and host projects to the cloud. It’s a business worth billions of dollars.

4. What’s a hybrid cloud?

Red Hat will become part of IBM’s Hybrid Cloud unit. Hybrid cloud is a mix of private cloud -- which is built for one client -- and public cloud, which is generally defined as a cloud service offered over the internet, such as the software you use to do your expenses. Executives such as IBM’s CEO Gini Rometty think hybrid will be the next big thing, balancing the need to improve technology, save money, and keep data secure.

5. Why Does IBM need Red Hat to get ahead in cloud?

IBM initially missed the boat on cloud, letting Amazon and Microsoft get way ahead in the core business of public cloud storage. For the last several years, it’s tried to get back in the game through smaller acquisitions and developing its own products, but that hasn’t been enough. Red Hat is a smaller company but it’s got solid credibility and is growing -- two things IBM needs.

The Reference Shelf

• Bloomberg News on the deal.
• In Bloomberg Opinion, Shira Ovide looks at why IBM and Red Hat are better together.
• Red Hat’s website explains a hybrid cloud.
• In 2017, David Rubenstein interviewed International Business Machines Corp. CEO Ginni Rometty as part of his "Peer-to-Peer Conversations" series.

--With assistance from Gerrit De Vynck.

To contact the reporter on this story: Giles Turner in London at gturner35@bloomberg.net

To contact the editors responsible for this story: Nate Lanxon at nlanxon@bloomberg.net, Anne Cronin, Molly Schuetz

©2018 Bloomberg L.P.