How IBM REDHAT Secretly Controls The Worlds Servers

REDHAT 

Servers are something that most people never give much thought to. They’re simply the background machines that make the modern world go round. But the world of servers is actually far more fascinating than you might think. The global server market is worth $90 billion and a lot of household names serve the cloud and server market as well. 

This includes Amazon, Google, Microsoft, Dell, Oracle, and Cisco. With this many big players, you would think that the server market is cutthroat and extremely competitive, especially given that their entire customer base is other sophisticated companies as opposed to the general public. 

But what if I told you that the server market has also been monopolized, not by any of the common culprits like Google or Amazon but actually IBM. 

You see, 96.3% of the world’s top web servers all use the same OS Linux. For perspective, even Windows and Android only have 70% market share. Now, traditionally, Linux is an open source operating system that isn’t owned by any one entity and is completely free to use. 

But this is not the sort of Linux that companies use. Instead, companies prefer to use an enterprise version of Linux. There are a couple of popular distributions in this market like Ubuntu, Mint, and Fedora. But one distro rises above everyone else: Red Hat. 

Red Hat Linux is basically the default choice for companies and especially large companies. In fact, over 90% of the Fortune 500 uses some sort of enterprise solution from Red Hat. For the longest time, Red Hat was just a background shadow company that the general public had no clue about. 

But, 4 years ago, IBM decided to change that by purchasing the entirety of Red Hat for a cool $34 billion. So, now, it’s IBM that controls basically the entire enterprise server OS market. 

But how did we even get here? How did one company end up getting so much control over the entire world’s tech infrastructure? Well, join me as we take a look back at the monumental rise of Red Hat and the landmark deal that has put IBM back on the map. 

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HUMBLE BEGINNINGS

Speaking of legacy products making a comeback, a classic investment that’s making a comeback is bonds. You've probably heard about stocks - buying a share of ownership in a company. Bonds are different - you loan money to governments and companies and they pay you back with interest. 

Normally, bonds are seen as a boring investment for old people because while they’re generally safer than stock investing, they also come along with lower returns of 1-3%. But this has all changed with the new high interest rate environment. 

The US federal government themselves are paying 5% for bills that are as short as 1 month to bonds that are as long as 30 years. And companies are paying even more. The story of Red Hat dates back 30 years to a bum named Robert Young. Robert had huge ambitions of running his own company and making it big in the business world. 

But, the reality was that Robert was unemployed and broke, working on “companies” in his wife’s sewing closet. His latest endeavor was running a computer supply catalog business. To get the word out about this business, Robert would regularly attend local tech conferences and try to network with as many people as possible. 

It was during one of these networking events that Robert would run into a man named Marc Ewing. Marc was your classic 1980s geek software engineer. He spent his childhood summers attending computer camps and writing programs for Apollo and Commodore computers. 

Within his local community and especially his college community, he would naturally become known as the tech guy. Given that he liked wearing red hats, people would begin referring to him as the man in the red hat and the name stuck. 

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Marc wasn’t necessarily looking to start a massive company like Robert's though. In fact, it seems like he preferred the traditional path as he would turn around and get a job at IBM after college. In his free time though, he would continue meddling with side projects like trying to customize Linux for enterprise use. This project is what would lead Marc to the fateful conference where he met Robert. 

Robert would convince Marc to let him sell Marc’s Linux distros through his new computer supply catalog business and this marked the beginning of a legendary partnership. At first, it was simply a distribution deal, Robert would sell Marc’s Linux CDs but Robert would end up selling out of these CDs so often that he knew that Marc was onto something. 

So, in 1995, the two decided to join forces and create Red Hat Software with Robert serving as the CEO. Despite forming a company and having profit incentives, though, the duo never really strayed away from their roots. 

They didn’t just go out and file a bunch of patents and trademarks. Instead, they continued to support the open source community as they believed that open collaboration was the best way to create software. This turned out to be a great decision not just from a community perspective but from a reach perspective. 

Being open source gave Red Hat quite a bit of notoriety within the tech community, leading to a lot more adoption. By 1999, RedHat would grow to just over $10 million in annual revenue. It was a solid 8 figure business that was realistically worth $30 to $50 million but combine this with the dotcom bubble and things would go insane. 

They would launch the IPO at a share price of $14 but by the end of the first trading day itself, the share price would rocket to $52. And by the end of the second day, the share price would rocket to $72, giving the company a valuation of $4.8 billion. 

Red Hat had gone from being a company where Robert ran from his closet to a multi-billion company within just a matter of years. It almost seemed too good to be true and that’s because it was. Moving into the 2000s, Red Hat would face an existential crisis as the company came back down to reality. 

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A HARSH REALITY CHECK: 

The bottomline was that Red Hat was A Harsh Reality Check is extremely overhyped and overvalued, at least from a stock perspective, and it’s no wonder why. Many investors saw Red Hat as the Windows of servers and they weren’t wrong. 

Red Hat ended up becoming way more dominant than even Windows in terms of market share, but there’s two major differences. First of all, Microsoft was already way bigger than just Windows and two, there was a lot more money to be made in the consumer market. And when the market realized this, Red Hat stock would get annihilated down to just $4 per share. 

To make things worse, both Robert and Marc would leave Red Hat in 1999 and 2002 respectively. They didn’t leave on bad terms or anything, they actually left on satisfied terms. Sure, they didn’t become the next Bill Gates or Steve Jobs but they had already made hundreds of millions each and they were ready to enjoy life. 

You can’t really blame them but they kind of did leave RedHat and all of its employees out to dry. If all of this wasn’t bad enough, Red Hat would also start to see new competitors pop up. SUSE Linux Enterprise, for example, came out in 2000. Ubuntu came out in 2004, and Oracle would follow up with their own version in 2006. 

The value proposition of Red Hat was starting to disappear despite them continuing to win a bunch of awards. For example, they won the Operating System Product of the Year award 4 years in a row. They would also be ranked number 1 for value 2 years in a row. But, while tech media continued to be nice to Red Hat, they knew that they had to do something different if they really wanted to stick around. 

They started thinking about their distro less as a piece of software and more as a solution because well the software itself doesn’t give them a very big moat. Luckily for Red Hat, everyone was already using their software, so the question wasn’t: how do we get more customers but rather, how do we keep the customers that we already have. 

And from that perspective, the answer was easy: by offering world class support. Support may not seem like a big deal from a consumer perspective, but it’s everything from an enterprise perspective. Keep in mind, Red Hat is what’s keeping the entire tech infrastructure of companies like Google and Amazon up and running. 

And for companies on this scale, even an hour of downtime is tens of millions of dollars lost. So, keeping the backend in pristine condition and getting immediate support when it’s not is of utmost importance. This is quite ironic given that support was something that Red Hat initially neglected. 

In fact, in the early days, Robert would joke about how the only way to reach Red Hat support was through email, which was counterintuitive given that if your computer needed support, you probably couldn’t email. 

But moving into the 2000s, Red Hat would approach support in a completely different light. In fact, they would add a bunch of pricing tiers to their software that were directly linked to the level of support they came with. 

And let’s just say this gets pretty expensive, as much as $2500 per license. But with that being said, most large corporations view this as a necessity and Red Hat very much does live up to their price. They truly do offer 24x7 first class white glove tech support. It’s easy to spin off another enterprise version of Linux but matching the support and presence of Red Hat is extremely difficult, and this made way for a new wave of prosperity for Red Hat. 

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RESURRECTED DOMINANCE

After this change in approach, Red Hat would return to setting record after record. In 2009, they would be added to the S&P 500 and just 3 years later, they would become the first open source company to reach a billion dollars in annual revenue. By 2015, they would reach $2 billion and by 2018, they would reach nearly $3 billion. 

Red Hat was no longer the Dotcom boom story that it was back in the 90s. By the late 2010s, Red Hat was a massive tech company offering critical solutions to other massive companies, making billions in the process. In the business world though, when a company reaches extraordinary heights, it’s only a matter of time until someone else wants a piece of the pie. 

In the case of Red Hat, it was the worn-down legacy giant, IBM. What IBM really needed was a face lift, a new way to appeal to and attract customers because almost no modern company really considered IBM as a serious solution. 

They all flocked to AWS, Azure, Google, and even Oracle Cloud before they considered IBM. So IBM decided to target a different demographic, a more legacy demographic. Companies like Anthem, American Airlines, Honeywell, Panasonic, Deloitte, and Exxon. 

According to Arvind Krishna, the CEO of IBM, most of these non-tech companies are only about 20% converted to cloud. So the idea behind buying RedHat for $34 billion is that this would make IBM a one-stop shop for legacy companies who just want a simple, straightforward and reliable solution. 

They don’t need the best performance or the fastest response times or any of that. All they want is a stress-free migration to the cloud and that’s exactly what IBM is looking to offer. Things have been working out decently well from IBM’s perspective, but many would argue that the same cannot be said about Red Hat. 

It’s not that IBM is making purposefully bad choices with RedHat or anything like that. In fact, you could argue that IBM is genuinely trying their best to respect the opensource nature of RedHat while also trying to improve IBM cloud as much as possible. 

As such, the problem seems to be much more holistic and qualitative. Many would argue that the bureaucratic old school ways of IBM or simply rubbing off on RedHat and bringing down the company. 

Much of RedHat’s leadership has left the company following the acquisition and the people who are left frankly only care about their own compensation. They don’t know the users and they don’t care about the product because they’ve never even used it. This has led to some really unpopular decisions like pushing out unstable upstreams. 

With that being said though, this does seem to be more of a case of incompetence as opposed to any sort of malicious intent. And as such, we have yet to see any sort of large scale movement against Red Hat. But the vocal minority has already started raising several valid red flags, and if IBM continues running Red Hat in the same manner, a shift away from Red Hat may very well be on the cards. 

So, the ball is really in IBM’s court. They’ve somehow been able to covertly overtake an extremely powerful piece of software, but will they be able to maintain Red Hat’s ubiquity and dominance or will they fumble the ball, only time will tell.

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