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Ellison's venomous tongue devastates Red Hat shares

Thanks a lot, Larry

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Investors seem to be taking Oracle chief Larry Ellison as seriously as he takes himself. They've crippled Red Hat shares today simply because Oracle rolled out discounted support for Red Hat's server operating system.

Shares of Red Hat were down 26 per cent, at the time of this report, to $14.35. That's a hell of a drubbing, when you consider that Oracle's support play is thus far mostly talk.

Ellison yesterday unveiled a three-tiered support model for Red Hat Enterprise Linux. The support service starts out at $99 per year for a "basic" service and runs up to $2,000 for "premier" service. By contrast, Red Hat's support packages range from $349 to $2,499.

Oracle has rightly played on one of the industry's worst kept secrets. Red Hat charges a heck of a lot for support, especially when you consider that many open source savvy types find their own fixes. But Red Hat has not had much competition, so why shouldn't it try and milk its customer base for all their worth?

Rather than bothering with its own version of Linux, Oracle has decided to hit Red Hat where it counts. We predicted as much two weeks ago, and a number of you wrote in and called us mean names.

The reaction to Oracle's obvious play is nothing short of astonishing.

Investors have spent the last few months pushing Red Hat shares higher and higher as the company posted a couple quarters of better than expected earnings. Late last month, Red Hat sat at $26 per share.

Red Hat, however, has always underwhelmed careful observers with its inability to make all that much money off Linux. Hardware makers such as IBM, HP and Dell do just fine, as does VMware - $600m per year in revenue - which does little more than let you run multiple copies of Red Hat on a server.

But Red Hat investors have been easily impressed over the years, and are apparently easily unimpressed as well.

Jason Maynard, an analyst at Credit Suisse, suffered a religious experience at the hands of Ellison. His Red Hat price target collapsed to $14 from $29 per share on the basis that Oracle's support plan "is likely to create pricing pressure and some modest customer attrition."

Why the brash price cut for modest attrition, Jason?

The fact of the matter is that Oracle has a lot of work to do proving that this Red Hat support thing is more than a publicity stunt.

Many of you will remember the effect that Sun's application server machinations had on BEA's share price years ago. Sun warned that it would give away its application server, and investors pounded BEA, fearing that it would have no sales in a couple weeks time. Well, here we are years later, and Sun's place in the application server market is almost invisible and BEA still sells plenty of WebLogic.

Will Oracle be the first name that pops into Linux customers heads for support? We doubt it. Does Red Hat need a kick in the pants? Yes. And watching its market cap dissolve should do the trick. ®

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