AOL in deal with Red Hat to use Linux

By Adam Pasick

NEW YORK: AOL Time Warner has hired software firm Red Hat Inc to convert some of its computer systems to the open-source Linux operating system, according to sources close to talks between the two companies.

Terms of the deal were not immediately available and could simply involve support services for some portion of AOL's behind-the-scenes computer systems. Red Hat and AOL both declined to comment. Earlier this year, AOL Time Warner quashed rumors that it was in talks to buy Red Hat.

AOL, which has vowed to cut its operating costs, is likely considering the use of Linux as a way to trim expenses as well as to exploit the power of Linux as an alternative to more established software systems, industry analysts said. But, while Linux could provide cost savings, the operating system's open-source license may give AOL pause.

The license ensures that Linux is freely available, but also requires modifications to be shared with other developers, something a major company like AOL might be loathe to do.

"AOL has never really been known for giving up a lot of control over their systems," said Ross Rubin, a senior analyst with Jupiter Media Metrix. "It would be interesting to see, if they developed extensions to the core operating system, how they would share those changes."

Companies like Amazon.com have saved millions of dollars by using Linux, whose core workings are freely available to developers while operating systems like Microsoft Corp.'s Windows are kept under lock and key.

Red Hat stands to make money on technical services it supplies to install and maintain such systems, but the cost savings from Linux software license fees are still considerable for businesses, analysts said.

For example, if a company like AOL had 1,000 server computers running the Unix operating system, "they could be seeing software license fees of several thousand dollars per machine," said IDC software operating systems analyst Dan Kusnetsky. "With Red Hat, they would purchase one copy of the software and deploy it 1,000 times."

However AOL proceeds with Linux, it will most likely move cautiously. "It would be a slow, gradual process, and they would start with ... things like authentication servers, which do high volume but don't see a tremendous amount of traffic," Rubin said. "If that was successful, they would start importing other applications."

Shares of Red Hat closed at $6.70, down 5 cents, and AOL Time Warner closed at $27.28, up 83 cents, on Monday.

(Additional reporting by Reshma Kapadia)

(C) Reuters Ltd.