Oracle move gets Red Hat worried

By Jim Finkle

BOSTON (Reuters): Red Hat Inc. lost nearly a quarter of its market capitalization on Thursday after software giant Oracle Corp. offered half-price technical support to lure away the smaller company's customers.

Red Hat shares plunged 24 percent, or $4.68, to close at $14.83 on Nasdaq, suffering their biggest one-day share drop since the leading distributor of open-source Linux software went public in 1999.

Oracle Chief Executive Larry Ellison on Wednesday said his company will offer bug fixes, maintenance and support at a sharp discount to businesses that use Red Hat's version of Linux, raising the specter that Red Hat could lose substantial market share.

"This is clearly a giant move by a formidable software company and it is easy to see why this is a negative headline for Red Hat," Merrill Lynch analyst Kash Rangan said in a note to investors.

Oracle, with revenue expected to top $17 billion in the current fiscal year, dwarfs Red Hat, which is projected by analysts to post annual sales of about $400 million.

Analysts had expected Oracle to enter the Linux market - the most popular operating system using open-source code and available for free download over the Internet - but Rangan said Ellison's move made a bigger splash than anticipated.

Oracle released endorsements of its new service from some of the biggest technology companies, with which it already has marketing partnerships. They include International Business Machines Corp., Intel Corp., EMC Corp. and Dell Inc.

Red Hat and rival Novell Inc. provide standardized versions of Linux and sell maintenance, upgrades and technical support services for their versions of the operating system.

Novell shares fell 2.6 percent, or 16 cents, to $5.94. Oracle's announcement did not have as much of an impact on Novell because Ellison said his company is specifically going to market its services to businesses that use the Red Hat version of Linux.

Still, Oracle left the door open for an attack against Novell. Chief corporate architect Edward Screven said on Wednesday that Oracle "will happily consider offering support for other distributors."

In theory, the steep discounts offered by Oracle run afoul of U.S. antitrust law if they are deemed predatory. But such cases are extremely difficult to bring because courts typically view cutting prices as pro-competitive, said Washington antitrust lawyer Mark Schechter.

Courts could view a price cut as predatory only if it were shown the move made no business sense except to drive a rival firm out of the market, Schechter added.

"If it's a price reduction in order to more effectively compete, then that's precisely what the antitrust laws are designed to protect," said Schechter, a partner at the firm Howrey LLP.

(Additional reporting by Franklin Paul in New York and Peter Kaplan in Washingon)