Oracle Makes Play for Red Hat's Support Contracts

In a strange twist on its existing customer support arrangement with leading Linux producer Red Hat, Oracle today made good on pledges -- which many interpreted as threats -- by its CEO, Larry Ellison, last summer. This morning, his company is inviting Red Hat's existing contracted support customers to switch to Oracle's new "Unbreakable Linux" support, in some cases for substantially lower fees, plus credit for remaining time on their Red Hat contracts.

Customer support, rather than software license fees, provides the basis for a Linux provider's livelihood. Over the past four years, as Red Hat has shuffled its various support tiers, some customers have seen increases in their annual fees as much as sixfold.

As customers raised serious inquiries about the high price of "free," Ellison last July publicly speculated, in a Q&A published by Forbes, that conceivably any company -- including his own -- could compete to provide similar levels and qualities of support, for a product whose intellectual property isn't tied to one company, anyway.

When asked by Forbes about whether he'd be interested in acquiring Red Hat -- either the company or its product -- Ellison responded last July that Oracle didn't have to.

"The interesting thing about open source is that the intellectual property is available to all of us," he said. "So what that means is that any company can take the Red Hat Linux and use it at no cost, so long as they're willing to support themselves. Well, that actually includes us. We could take the Red Hat Linux, as long as we're willing to support it. In fact, we can redistribute it to others and provide support. So why would we buy Red Hat Linux, when we can just take it for nothing?"

In point of fact, Oracle was already providing some product support for Red Hat anyway. As Red Hat's own support page states, "Oracle in collaboration with Red Hat provides support for the entire software stack including the operating system. Our integrated support model, with a single point of contact, ensures the highest level of support and availability for customers."

The "single point of contact" was presumably being provided by Red Hat, though with Oracle continually working with integration issues regarding its database and Red Hat, the database company was apparently providing some know-how to the operating system company anyway. Oracle's move this morning, however, is a play to move that point of contact over to Oracle, along with the influx of cash.

According to a new Oracle brochure (PDF available here), Oracle's top tier of support for Enterprise Linux customers will sell for an annual fee of $1,999 per system. This is a per-system license, not per-CPU, as most modern servers have multiple CPUs. Top-tier Unbreakable Linux customers would also be privy to bug fixes made by Oracle to earlier Red Hat Enterprise Linux releases, as well as Lifetime Support for Oracle's own products.

Reports currently estimate Red Hat's top-tier support fees at an average of $2,500 per system per year, though for more sophisticated servers, its fees reportedly rise well into the five-digit range. The high cost of Linux customer support has been cited by analysts estimating the total cost of ownership for systems running all the major operating systems.

Some leading analysts project Linux systems' TCO as higher than that for Windows systems, though less than for Solaris-based systems.

The question now is whether Oracle could face a legal challenge, and whether Linux' own GNU licensing scheme could lead to the unraveling of its business model. Ellison's case is essentially that Red Hat cannot hold exclusive claim to the rights to support a product it does not own - and a great many Linux proponents would likely agree.

Red Hat was already in trouble leading up to today's news. Late last month, it reported quarterly profit figures dropping by 34% year-over-year and significantly reduced cash flow, despite subscription revenues up 52% from a year ago.

Although Oracle's Ellison made his overtures in July, his waiting until now -- after Red Hat posted its numbers -- to make his move, may be a bit like Lucy waiting for Charlie Brown to kick the football. With the ball now firmly snatched away, Red Hat's stock value plunged on the NASDAQ exchange as much as 27% by mid-afternoon, at about $14.30 per share.