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By Martin LaMonica, 11 April 2006 13:45

NEWS

Red Hat's acquisition of JBoss is one step toward what many consider inevitable: the creation of open source companies that rival the clout of entrenched software-providers.

The deal, announced Monday after months of speculation, gives Red Hat a suite of open source Java middleware to complement its Linux distribution. The companies have a similar open source business model, and both offer corporate customers subscription support services and the ability to download products for free.

The combined line-up significantly boosts Red Hat's product portfolio, making the company a more important provider for business customers and developers. Red Hat said the acquisition will add to its earnings next year and that fast-growing JBoss was on track to take in $60m in revenue this year.

Analysts said the combination of two high-profile open source companies underscores the expanding impact of open source software and practices on the business software market.

By assembling a larger set of products and services, Red Hat can better mimic - and compete with - established corporate software companies. The industry's largest companies - Microsoft, IBM, Oracle, Sun Microsystems, Novell and BEA Systems - are each seeking to build a full "stack" of software infrastructure products with a healthy third-party product "ecosystem," or partner network.

"This [acquisition] represents the reassembly of a [vendor] ecosystem, which you now have with open source," said Forrester Research analyst Michael Goulde. "This is a step toward establishing a branded ecosystem, as opposed to a do-it-yourself ecosystem."

The hefty price tag for the deal - $350m plus a potential $70m, depending on the financial performance of the JBoss unit - underlines Red Hat's optimism that it can attain rapid revenue growth, Goulde noted.

JBoss had become an attractive takeover target because of the wide adoption of its Java application server, and it had had discussions with a number of acquirers, said JBoss founder and CEO Marc Fleury.

Red Hat CEO Matthew Szulik said the company's decision to acquire JBoss was driven by corporate and government customers who are showing growing interest in the open source model.

"It was inevitable that open source software was going to challenge the economics of [software] infrastructure and continue to move up to the application level, whether it's Red Hat or other firms," Szulik said.

Fleury, who will now sit on the executive board of Red Hat as senior vice president and general manager of the JBoss division, called the deal "a defining moment."

"It's another proof point that [open source] is transforming the industry," he said.

Analysts were generally favourable on the deal, and Red Hat's stock received a jolt, rising 9 per cent on Monday afternoon. In addition to giving Red Hat a broader product line, the acquisition gives the company a way to differentiate its offering from Linux competitor Novell.

But even with the fast-growing company's promise, there are some potential pitfalls, said analysts and industry executives.

By entering the Java middleware market, Red Hat places itself into competition with some Linux partners, notably Oracle and IBM. Different corporate cultures and a headstrong personality in Marc Fleury pose integration challenges as well, said analyst.

Although they both seek to sell to high-level IT executives, Red Hat's software is generally used by Linux systems administrators while JBoss' software is aimed squarely at Java developers.

"They haven't been chasing the same customers, which can be a challenge," said Dave Gynn, director of enterprise tools and frameworks at open source services firm Optaros. "It's good in that it opens up opportunities, but at same time, they haven't been selling to same customer."

Szulik said that it will take two or three years to fully judge the wisdom of paying at least $350m for a company with anticipated revenue of $60m in 2006.

However the combination of the two companies works out, the move validates the notion that corporate customers want more than just Linux when it comes to open-source software, analysts said.

Indeed, open-source databases and middleware are two vibrant areas of open-source development, which has prompted entrenched suppliers to change their tactics.

IBM acquired a very small open-source Java application server company called Gluecode for less than $50m. Oracle and BEA are making their Java server software work well with open source Java tools.

In the database realm, Oracle sought, but failed, to acquire MySQL, a successful open source company that earned almost $40m in 2005. Oracle also bought InnoBase and Sleepycat, two specialized open-source database providers.

Microsoft, too, is adapting to the expansion of open-source practices: it now provides source code for some of its products and has signed partnerships with JBoss and with SugarCRM, an open-source application company.

Some argue that apart from licensing tactics, Microsoft and open source businesses are a lot alike. Like open source companies, Microsoft appeals to software developers and has always sought to create an ecosystem of third-party providers.

"Look at commercial open-source companies. How different is Red Hat's business model from Microsoft's? I'd say it's pretty marginal," said Jason Matusow, Microsoft's director of corporate standards, in a recent interview.

Some people, including Don Dodge, an executive in Microsoft's emerging business group, note that only a small number of open-source companies have made the same impact as Red Hat, MySQL or JBoss.

Yet MySQL CEO Marten Mickos last week said he is convinced a billion-dollar open source company will arise with the same market influence as existing software providers.

"Red Hat is the grandfather...and all the rest of the open-source companies are emulating their business model," Mickos said. "It's important for people behind to see that there's a healthy business ahead."

Martin LaMonica writes for CNET News.com