The following was sent to US DOJ today, to express KEI’s opposition to the IBM acquisition of Red Hat.
13 March 2019
Bindi R. Bhagat
U.S. Department of Justice
Technology and Financial Services Section
Dear Ms. Bhagat,
Thank you for taking our call today, regarding the International Business Machines Corporation (IBM) effort to buy Red Hat, Inc. As discussed, Knowledge Ecology International (KEI) is opposed to IBM acquiring Red Hat.
At present, Red Hat controls the most important Linux distribution for Internet and cloud servers.
The important metrics in this area include, but are not limited to, the share of Internet traffic supported by Red Hat server installations, as well as the revenue that Red Hat realizes for maintaining and customizing Linux server software, compared to other Linux server distribution companies or organizations.
Red Hat is an important contributor to the Linux kernel and to the code that is used in many elements in the broader GNU/Linux platform of free software programs that are used by server platforms, including the many non-Red Hat Linux distributions.
IBM is proposing to pay a large premium for Red Hat. Prior to the acquisition offer, Red Hat was valued at approximately $20.5 billion. IBM is proposing to buy Red Hat for $34 billion, a premium of about 67 percent of the previous value.
IBM could have invested in Red Hat stock at a much lower price, if the objective was simply to share in the expected profits of Red Hat, continuing its current business offerings. What IBM gains from its acquisition of Red Hat is control, and the ability to shape the direction of its software development efforts, to favor IBM’s own cloud services.
Today Red Hat is considered a neutral partner for many companies offering or developing cloud services. If IBM acquires Red Hat, the trust in Red Hat will be eroded, and IBM will have powerful incentives to influence Red Hat’s software development efforts towards providing special functionality and benefits to IBM and the IBM cloud services, and even to degrade the functionality of services to companies that compete directly with IBM, or fail to buy services from IBM.
The Department of Justice (DOJ) should consider the impact of the merger on the incentives that Red Hat will have, post merger, to undermine competition and degrade the benefits of a more level playing field, for this critical Internet resource and platform.
Our concerns are shaped to some degree by the detrimental decision made by the DOJ in approving the Oracle acquisition of Sun Computer’s open source assets, including the MySQL database program. At the time, DOJ viewed the MySQL software as unimportant, because the revenues were small, relative to other database programs. Most users of MySQL did not pay any fees to use the software. Our organization, KEI, used MySQL to support our Joomla, Drupal and WordPress content management systems, and did not pay fees to Sun Computer, along with countless other businesses, non-profit organizations and individuals who also used the free version. We were concerned, at the time, that Oracle would degrade and slow the development of the capacities of MySQL, in order to protect Oracle’s very expensive proprietary database services. We believe that our concerns about Oracle have unfortunately been borne out, by the blunting of the rate of innovation and ambition for MySQL, the fact that Open Office (another program gained in the acquisition of Sun Computers) is no longer an important free software client for office productivity, and Oracle’s aggressive litigation over copyright and patent claims related to Java.
The DOJ might consider conditions on the merger that would provide greater assurances that Red Hat will not be used to create an unlevel playing field that favors IBM’s own cloud services. We are willing to suggest such conditions, relating to governance, licensing and other issues. For example, the DOJ could require IBM to show how it will ensure the continued policy of ensuring that Red Hat’s patents are only used for defensive purposes. Conditions on this issue should be durable, and avoid predictable loopholes.
IBM’s competitors and existing customers of Red Hat will have more informed suggestions as to specific conditions that would protect IBM’s competitors. But overall, the best decision would be to reject the merger, on the grounds that is is fundamentally designed to create an unlevel playing field.
Red Hat is not just another technology company. It is one of the main reasons the Internet functions as well as it does.
Knowledge Ecology International (KEI)
1621 Connecticut Avenue, Suite 500
Washington, DC 20009