Dells Investment Shows Red Hat Is Red Hot

Updated: Company Chairman Michael Dell's major investment in Red Hat shows the strength of the Linux server and desktop markets, and may imply future moves for the computer company.

While its too soon to determine the full impact of Dells nearly $100 million investment in Linux vendor Red Hat, the move makes one thing perfectly clear: The Linux server market is red hot, and the Linux desktop market isnt far behind.

Red Hat Inc., of Raleigh, N.C., disclosed in an April 27 filing with the Securities and Exchange Commission that Dell chairman Michael Dell invested $99.5 million of his own money in the company. Dell made the investment in January 2004.

Dells investment in Red Hat is recognition of Red Hats successes in the Linux market in North America, Europe, the Middle East and Africa, said Laura DiDio, senior analyst for application infrastructure and software platforms at Yankee Group of Boston, Mass.

DiDio noted that over the past two years, Red Hat has captured 45 percent of the Linux market, putting it far ahead of its competitors. "Red Hat has been getting a lot of wins," she said. "Clearly, they have become a very desirable company to partner with."

At least part of the reason why Dell has invested so much money in Red Hat, DiDio said, could be to position it more favorably against its competitors in both the Linux server and desktop markets.

"Dell, like a lot of organizations, has looked at Linux and open source as a greenfield opportunity for revenue," she said. "Its all about positioning."

Dell has long been interested in making greater inroads into the Linux server market. In October, for example, Dell and Novell agreed to offer Novell SuSE Linux Enterprise Server 9 on some Dell PowerEdge servers.

/zimages/5/28571.gifRead more here about Dells agreement with Novell to distribute Novells SuSE Linux distribution preinstalled on Dells PowerEdge servers.

Dells investment in Red Hat also further legitimizes the Linux server market. At present, Linux has captured about 20 percent of the server operating system market, according to the Yankee Group.

The fast-growing Linux desktop market also is ripe for expansion. IBM kicked off the current growth when it sold an 81 percent share of its PC unit to Lenovo Group in China last year.

Chinas Red Flag Linux Software Co. Ltd. provides the lions share of Linux distributions in China, providing IBM/Lenovo very lucrative opportunity to grab a large share of the Linux desktop market—until now. Dells investment in Red Hat is probably a move, at least in part, to compete on a level playing field in the Linux desktop realm, DiDio said.

/zimages/5/28571.gifClick here to read more about the completion of the IBM-Lenovo deal.

Although some presume that Dells investment in Red Hat is simply the first step towards an eventual purchase of the company, DiDio said its too early to speculate.

"Red Hats valuation these days is pretty high, so they would have to pay a lot of money for it," she said. Instead, the investment could have simply been the most cost-effective way to enable Dell to provide more input into the company or to improve the relationship of the two companies for other reasons.

"It could be a first step [toward purchasing Red Hat] or it could simply be a good business move," she said.

The impact on other companies, such as Novell and IBM, also is unclear. Steve Ballmer, for example, reportedly met with Red Hat president Matt Szulik.

"Im sure they are watching all of this with keen interest," DiDio said.

Editors Note: This story was updated to include information about Red Hats disclosure of Dells investment.

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