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Oracle to challenge Red Hat in Linux services

The largest distributor of the open-source software sees its shares plummet on news of the added competition.

October 27, 2006|From Bloomberg News

Shares of Red Hat Inc., the world's biggest distributor of Linux computer software, took their largest fall in seven years after Oracle Corp. said it would begin offering competing services at a lower price.

The stock tumbled 24%, the biggest drop since the company went public in August 1999, on concerns that Oracle's decision to undercut Red Hat prices on support services for the Linux operating system would slice into sales and profit.

Oracle Chief Executive Larry Ellison, speaking at a conference in San Francisco, also said the Redwood City, Calif.-based company eventually would offer a complete "software stack" combining Linux, database software and programs to manage business tasks such as accounting and human resources.

"If you are a Red Hat customer, it just takes a couple of minutes to switch to Oracle," said Ellison, 62, during his keynote speech at the Oracle OpenWorld conference. Oracle is the world's third-largest software company after Microsoft Corp. and International Business Machines Corp.

Shares of Raleigh, N.C.-based Red Hat fell $4.68, or 24%, to $14.83.

The stock has lost 44% since Sept. 26, when the company reported second-quarter billings that fell short of estimates.

The move by Oracle threatens to take customers from its smaller rival and may require Red Hat to cut its prices to compete, said Jason Maynard, an analyst at Credit Suisse Inc. in San Francisco. Maynard said in a note Thursday that he expected billings to be about 15% lower the rest of 2006 and in 2007.

"Customers now have a viable way to drive down the cost of running Linux and are likely to use this information in contract negotiations even if they don't switch," Maynard said. He cut his rating on Red Hat's stock to "neutral" from "outperform."

Corporations have begun replacing expensive servers and programs to connect applications, choosing open-source software such as Linux, which runs on low-cost computers. Open-source programs use publicly available software code contributed by programmers.

Red Hat and other distributors typically offer the software at little cost and charge annual support fees.

Maynard faulted Red Hat for doing a poor job partnering with other companies to expand the Linux market. If it had, Oracle, which is trying to boost Linux as part of a strategy to combat Microsoft, probably wouldn't have taken this step, he said.

Red Hat competes with Novell Inc., the second-largest seller of Linux, and with Microsoft's Windows. Growth in spending on Linux servers slowed to 6.1% in the second quarter after 15 straight periods in which growth topped 10%, according to market research firm IDC.

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