AOL in Negotiations to Acquire Red Hat

Stephen D. Williams
Sat, 19 Jan 2002 14:00:01 -0500

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Now, this is interesting.


AOL in Negotiations to Acquire Red Hat
Deal for Distributor of Linux Operating System Could Lead to a New 
Challenge of Microsoft



_____AOL Time Warner_____

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By Alec Klein
Washington Post Staff Writer
Saturday, January 19, 2002; Page E01

AOL Time Warner Inc. is in talks to buy Red Hat Inc., a prominent 
distributor of a computer operating system, an acquisition that would 
position the media giant to challenge archrival Microsoft Corp., 
according to sources familiar with the matter.

Red Hat, a publicly traded firm based in Durham, N.C.,sells products and 
services based on the Linux operating system, the freely available 
software developed collaboratively by volunteers. Linux is designed for 
a wide variety of gear, running corporate computer servers and consumer 
devices such as personal computers, cell phones and video games.

The Red Hat negotiations -- which are still fluid -- are the latest 
indication that AOL Time Warner, the world's largest media company, is 
looking for alternatives to software made by Microsoft, whose Windows 
operating system runs 90 percent of the world's PCs. The longtime 
competitors have fought over an array of rival consumer technologies 
lately, including online subscription services, instant-messaging 
systems and Web-based video and audio players.

Officials of AOL, Red Hat and Microsoft declined to comment.

To counter Microsoft's desktop hegemony, New York-based AOL Time Warner 
could use the deal to couple its America Online software, the market 
leader with more than 33 million Internet subscribers, with Red Hat's 
operating-system technology, sources said.

The AOL online software, which consumers can install free from the Web 
or a compact disk, is now designed to run on Microsoft's Windows 
operating system. But the AOL software could be configured to override 
Windows and launch a version of Red Hat's Linux operating system, 
sources said.

With such a move, AOL Time Warner could potentially make significant 
inroads into Microsoft's bread-and-butter business. An even greater 
challenge to Microsoft would be for AOL Time Warner to develop a rival 
operating system that works exclusively with the media giant's own 
Internet service provider, its Web browser or proprietary content.

This is not the first time AOL Time Warner has explored alternatives to 
Windows. There were rumblings last year, during a flash point in the 
rivalry between the two tech titans, when AOL Time Warner was scouting 
for an acquisition or partnership with a firm that could provide a 
competing operating system.

AOL Time Warner has already tried to counteract Microsoft on other 
fronts, including rebuilding its Netscape Web browser business to better 
compete against Microsoft's dominant Internet Explorer. Netscape 
technology has been incorporated into a Gateway Inc. tabletop Internet 
terminal and Sony Corp.'s PlayStation 2 video-game console. Linux also 
runs the Sony product.

It was unclear yesterday how much money Red Hat could fetch. With a 
market capitalization of about $1.45 billion and about 600 employees 
worldwide, Red Hat reported $68.2 million in revenue in the nine months 
ended Nov. 30, down 10 percent over the same period a year earlier.

The software company reported a profit of $1.8 million, or a penny per 
share, in the nine months, compared with a loss of $10 million, or six 
cents a share, in the year-ago period.

Red Hat makes its money by packaging Linux for commercial and consumer 
use and by providing services and support to customers who use it. The 
operating system itself is freely available on the Internet -- thanks to 
an initiative by a programmer named Linus Torvalds who organized 
volunteers to write the original source code. Unlike Microsoft, which 
does not fully divulge its code, the Linux code is available to anyone 
who agrees to make modifications publicly available.

Linux has yet to be adopted widely by consumers, largely because it 
requires some technical proficiency to install. But it is popular with 
the tech crowd and, according to industry estimates, runs about 30 
percent of all computers servers -- the powerful computers that function 
as hubs on a network.

Red Hat has claimed such big clients as Inc. and 
International Business Machines Corp., providing software and support 
for IBM servers that use the Linux operating system.