Digital and Compaq: A cautionary tale for IBM and Red Hat

Big mergers bring big risks: Compaq and Digital Equipment Corporation, a tragicomedy

Compaq proved in the early 1980s you could buy non-IBM hardware and not get fired in the process by creating a portable PC that could be lugged around by weightlifters. Ultimately, Compaq struggled trying to move up the stack into the peer-to-peer networking space, as Dell and Gateway undercut Compaq’s undercutting of IBM PC price points, and made a big acquisition of Digital Equipment Corporation to buy enterprise server direct sales and services. But culturally, Compaq choked off the very assets the company desired by imposing volume business sales cost controls onto an enterprise-selling organization. In the end Compaq wound up being absorbed by Hewlett-Packard Co. (HP), which has acquired many hardware companies over the years.

What are the lessons learned for IBM-Red Hat?

IBM has decided to invest one-third of its market cap in acquiring Red Hat for $34 billion. Essentially IBM bought the ecosystem engine necessary to create the flywheel effect of IP services and support. There are synergies, to be sure, on the support of open foundations that have accelerated product commoditization in ways that benefit customers and pressure technology vendor business models across the entire technology spectrum. At issue will be which pieces of two different cultures and business best practices prevail, for, as Peter Drucker famously said, “Culture eats strategy for breakfast.”

What can IBM learn?

Red Hat pioneered the business model of monetizing services around free products. This stands diametrically opposed to the best-in-class blue suit selling model made famous by IBM and increasingly less relevant in the digital economy. Red Hat generates 75% of its revenue through the channel. Given that scale matters less, IBM has to improve its downmarket selling motions. Red Hat best practices should be imported into the current IBM selling motions as quickly as reasonably possible.

Red Hat also has near-zealous support among the developer community. Again, allowing Red Hat leadership to help shape new developer programs, run the Red Hat way from the wealth of IBM assets, will be critical lest those supporters migrate to another Linux distro such as Suse or Canonical.

What can Red Hat learn?

IBM has enterprise trust to solve critical technical integration problems soundly and securely. It likewise has access to more CxO decision makers in the enterprise. Success of the proposed acquisition will be as much adding more product to an existing sales channel as it will be to tailor messages to the decision makers while preserving the uniquely ardent support Red Hat has with the teams writing the code.

More to follow from TBR

A more extensive TBR Business of One special report, IBM-Red Hat economic implications: Is disruptive state the new steady state?, will be out shortly, written with Professional Services Practice Manager Patrick Heffernan. Recent commentaries are also available by Cassandra Mooshian, Big Blue opens its arms, and its wallet, to Red Hat; and Michael Soper, Red Hat can save CSPs from themselves.

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