Sources: AOL not bidding for Red Hat
Published: 22 Jan 2002 10:13 GMT
AOL Time Warner apparently is not making a bid to buy Linux manufacturer Red Hat, said sources familiar with the matter.
On Saturday, the Washington Post reported that the media giant was near to cutting a deal with Red Hat in a competitive strike against Microsoft.
Sources familiar with the situation emphatically insisted the two companies are not near an acquisition deal, nor have they discussed one.
Representatives for AOL Time Warner, Durham, North Carolina-based Red Hat and Microsoft declined to comment.
Still, even if the two companies are not considering a merger, AOL Timer Warner could license Red Hat for use on PCs or other devices for use with its online service. The AOL service currently is available only for Windows and the Macintosh, although the Netscape browser supports Linux.
Linux is a popular Unix derivative developed in 1991 by Linus Torvalds. Like Windows, Linux runs on Intel-based PCs, but uses a different licensing mechanism. While Microsoft controls the source code to Windows and charges a fee for every copy sold on PCs, Linux uses an "open source" model, where companies also have the right to install as many copies of the operating system as they wish.
On the surface, competing with Microsoft in the operating system market would seem to make sense, especially as AOL Time Warner increasingly knocks heads with the software giant in the market for Web services leveraged off the desktop.
Gartner predicts that next year 80 percent of companies developing platform software, such as operating systems, will support Web services architectures.
But Linux, which has some traction in the server market, has negligible share on the desktop, making the acquisition of a company like Red Hat a potentially long-term losing strategy, analysts warn.
"Linux in the desktop market in the US is basically a non-starter," said Chris LeTocq, industry strategist with Sage Circle. "The applications in the US apart from servers tend to be OEM set-top boxes. For desktop or set-box use in the US, it makes more sense to get an OEM license. There's no need to purchase a company that's in the distribution services business."
Outside the United States is "another story", LeTocq said.
A Linux OS and online service package could be sold for much less than Windows because of the licensing model, also leveraging AOL's monthly billing model.
"A desktop vendor in Latin America or especially China, if they can save 50 to 60 bucks on a PC that's a big deal," LeTocq said. "It's conceivable that a Linux alliance with a media company could work in that environment."
Knocking heads
The merger rumours come as competition intensifies between AOL Time Warner and Microsoft. Earlier this month, for example, the media conglomerate responded to Microsoft's .Net Alerts service by launching AOL Alerts. Both services use instant messaging to deliver customised stock quotes, auction updates or other information to computers, handhelds and cell phones, among other devices.
The companies started knocking heads openly last summer, when negotiations collapsed to include a version of AOL software with Windows XP. AOL Time Warner responded by cutting separate deals with PC makers that ensured desktop placement alongside Microsoft's MSN.
While the AOL service has grown its subscriber base, MSN continues to add members more slowly. AOL subscribers swelled from 9 million in autumn1997 to 33 million at the beginning of this year. In December alone, AOL gained 1.9 million new subscribers, the company said. MSN, by contrast, foundered for years, going from 2.5 million subscribers in 1997 to 7.7 million in December.
But the AOL service is largely dependent on Windows, where Microsoft increasingly leverages its monopoly operating system against AOL Time Warner.
Windows XP, for example, has multiple hooks--messaging, media playback, online authentication and photo processing, among others--that tie back to MSN.
"Microsoft has a clear advantage with Windows XP and driving traffic to MSN," said Gartner analyst Michael Silver. "It's the foundation for their Web services strategy."
In the future, Microsoft plans to offer paid services through its MSN Web site, some which are expected to require use of the online service component. Like AOL, Microsoft already charges a monthly fee for MSN online access, something it is expected to do with MSN Web services leveraged off the desktop.
From this perspective, AOL Time Warner could benefit from a Linux deal, particularly as Microsoft sees some real gains from its desktop-tied-to-the-Web strategy.
Internet Explorer, which is integrated into Windows XP and available separately for older Microsoft operating systems is a good example. Internet Explorer 6 replaces the more typical "page not found" with an MSN search page. That tactic helped Microsoft claim that MSN had beat out Yahoo! for Internet searches during November.
But Market researcher Jupiter Media Metrix, which tabulated the data, concluded the "page not found" redirections accounted for about half of the MSN searches. MSN search pages led Yahoo! in November, 36.6 million to 31.9 million visitors, according to Media Metrix.
"If you look at how much traffic the auto-search redirection generated from MSN, it's almost 50 percent," said Media Metrix analyst Michael Gartenberg. "That's a huge number they essentially picked up for free by being the default."
Whether AOL is looking at Linux or not, the company must find away to neutralise Microsoft's desktop advantage, say analysts. "As long as Microsoft can drive services off the desktop, they're going to have an advantage over AOL," Silver said.
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