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With Red Hat, can Big Blue catch up in the cloud?

With Red Hat, can Big Blue catch up in the cloud?

Deal makes sense but is the eye-watering price tag too much?

IBM’s $34 billion gamble on Red Hat could be the game changer that reverses the tech giant's ailing cloud computing business.

That was the view put forward by Alan Waite, a senior director analyst at Gartner, following Big Blue's leapfrog into the hybrid cloud sphere after years of playing fourth fiddle to Amazon Web Services, Microsoft Azure and Google in the highly competitive cloud market.

At US$34 billion, the deal represents the third largest acquisition in American tech history - following the US$67 billion merger between Dell and EMC in 2016 and JDS Uniphase's US$41 billion acquisition of the supplier SDL in 2000.

Although the amount of money spent is ‘eye-watering’, explained Waite, the deal ultimately makes sense for the 107-year-old company after seeing its revenue steadily decline for the past five years.

It’s a good thing for IBM: it makes sense for them,” he said. “It gives them great cloud hybrid IT capabilities. They haven’t been particularly successful at integrating across on-premise and public cloud. They haven’t been able to match AWS and Google in this sphere.

“Hybrid cloud is absolutely a growth area and IBM has been short of them lately. We’re not seeing on-premise go away. That means the future is hybrid for IT and that’s a major reason for this purchase.

"They sold the x86 business to Lenovo. They have become less and less in the on-premise environment, but while their cloud is ok, it has not set the world on fire. It’s only upside for IBM, but they will have to get their value for money.”

Open source

Although its primary product is free, open-source software built on Linux, Red Hat has made lucrative gains off its software and services arm, Red Hat Enterprise Linux product.

According to Forrester’s VP and principal analyst Dave Bartoletti, the powerhouse of IBM and Red Hat together could potentially reshape the open source and cloud platforms market for years to come.

However, like any merger, bringing the two entities together will pose its challenges. As such, for Waite, IBM’s decision to let Red Hat remain independent for the time being is the right one.

“My concern from a Red Hat side is how do the cultures integrate,” he said. “IBM has some good open source offerings, but their focus has always been a commercial success, so there may be some cultural concerns. They should leave Red Hat to do their thing, which has been successful.

“Red Hat is very strong on its products: Red Hat Linux, Openshift and Ansible, from the Gartner point of view, have been very popular.

“IBM also needs to leverage that investment into their own technologies. They could use it to improve their own public cloud offerings. Some of the Red Hat technology, like Linux, has the chance to go across x86 or IBM mainframe product line.”

Looking specifically at the local market, the potential for significant growth is already there, Waite added.

“Australia and New Zealand are among the most advanced cloud adopters in the world, so anything that improves hybrid architecture or helps integration between on-premise and cloud is good for Australian businesses. Nearly all have significant public cloud capabilities.”

However, the big question remains as to whether IBM’s bet on Red Hat will be enough to catapult it ahead - or even close- to its top-tier competitors. The answer, according to Waite, is unfortunately no.

“It’s unlikely they will catch up,” he said. “Right now they are a second-tier provider. It’s a positive for them, but if you look at how much Amazon’s cloud business is, it’s unlikely IBM will catch up. But overall, this deal will be a net positive for them.”

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