January 23, 2002

AOL-Linux? Why not!

Author: JT Smith

- By Jack Bryar -

Apparently the rumored AOL Red Hat "merger" was
little more than that -- a rumor, and a silly one at that. But you have
to figure that sooner or later AOL and Red Hat have to talk. If the two
of them worked together, they might be able to generate a real threat to
Microsoft in the consumer market. But could the Open Source community
stand it if they succeeded?

Ah, the mischief that can happen over a long
weekend.

The Washington Post's Alec Klein set off a
mini-firestorm on Saturday when he claimed
that AOL was in negotiations
with Red Hat to buy the company.
For the next three days, while the media executives slept at home
with TVs and computers off, the story ran wild. Commentators from O'Reilly
to The Register to
NewsForge's own Robin
Miller
rushed to get their two cents in.

Klein claimed that the discussions were fluid,
which is journalism-speak for "they're talking, but we don't know what
they're talking about." When AOL execs and PR types finally showed up
at 9 a.m. Tuesday morning, that's more or less what they said in a press
statement -- Klein didn't know what he was talking about.

"We are not in negotiations with
Red Hat," said AOL spokesman Andrew Weinstein. Of course,
negotiations about a purchase and discussions about how to work
together are entirely different things. If AOL wasn't having discussions
with Red Hat, they'd be crazy. They ought to have them with the entire
Linux community, and soon.

From the outset, the very idea that AOL would
consider buying Red Hat seemed nearly as crazy as having, say, Hewlett-Packard buying Compaq! Even with the contractions in its stock
price, Red Hat retains a market cap exceeding $1.4 billion. That means the
company is priced at roughly 12 times gross revenues, a huge premium, and
a price-to-sales ratio as staggering as Microsoft's over-inflated
numbers. Consider that, unlike Microsoft, Red Hat's year-to-year revenue
actually dropped over the last four quarters. The company has seen its short term
debt jump 250%, and it has burnt $80 million off its balance sheet in
the same period, $20 million of it in cash. Whatever Red Hat's
long-term prospects, those numbers make it a pretty unattractive acquisition
target.

When he heard about the rumored purchase, KeyCorp's
analyst Brent Williams voiced
sentiments heard across the entire investment community. He asked if this was
going to happen "before or after aliens bear Elvis's love child?"
It would taken an act of extraordinary bravery, not to say absolute
madness, for either AOL's outgoing CEO, Gerald M. Levin, or its incoming CEO,
Richard D. Parsons, to seriously consider an acquisition under the
circumstances.

That said, there are a ton of reasons for the two firms to figure out ways to work together. AOL needs help from someone to help it beat back Microsoft if it wants to stay in the Internet business. XP and its successor platforms are being designed as a platform to deliver services. That means big trouble for service-based companies such as
AOL. While analysts (and consumers) have scoffed at the poverty of media
offerings such as MSN, quality may not matter as much as the leverage generated
by a monopoly operating system.

As the number of PCs using IE6 and Windows XP
continue to grow, so have MSN's traffic numbers. Microsoft's new
platforms feature dozens of connections back to the MSN Web site. Everything from
XP's messaging software to its Internet browser features some sort of
connection back to MSN. For example, Microsoft takes a page from a trick seen
on some versions of Netscape, and instead of dumping a 404 not found
response to bad URLs, IE6 sends you to a MSN search page.

This redirection alone added 18 million hits to
MSN in November. That month, MSN's traffic jumped to nearly 75
million unique visitors
. It still has a way to go to beat AOL's 84
million visitors, but it is catching up, and is ahead of sites
like Yahoo (72 million) or Google (22
million).

As a number of grizzled veterans may recall, the
bad blood between Microsoft and AOL goes back to the beginning. In its
first iterations, AOL ran off its own platform, a run-time version of
GEOS that showed everyone that you could run a pretty decent graphical
interface off a PC or 286 machine. Even then, AOL executives realized that
Microsoft posed a strategic problem for the company as it went forward. Today,
the company continues to be full of people who would like nothing better than to challenge Microsoft's dominance as an operating platform. When the company acquired Netscape, it added more Microsoft haters to the payroll. When Mark Andreessen was still in charge of technology at Netscape he used to talk about creating a new
kind of Web-centric operating system
, and as that idea began
to die, he suggested that Netscape
and the Linux community
could achieve the same goal by working
together. It is one reason that Netscape was an early
financial backer of Red Hat
.

Why does AOL need Red Hat? Why can't they create
their own Linux distro?

The answer is simple: AOL doesn't have the management
or the attention span needed to support a sustained software
development effort or to promote the resulting products. Here are a couple of
examples. For years, AOLPress was second to none in its ability to write clean
compact Web pages that could be read by any browser. It was best-of-breed,
based on price (free) and performance. It was never promoted and eventually
abandoned. Winamp, the fine audio program hasn't met a similar fate so far.
However, there have been few if any resources dedicated to the product -- a
surprise given Time Warner's emphasis on media. The Netscape browser and the
Mozilla project was left to languish. It may be hard to see much revenue
potential in these products, but the AOL ignored software programs that could
have been real money makers. Ever heard of a potential Windows 2000 killer
called the Netscape Directory Services? Lots of major corporations did, but
many of them have walked away from the platform, frustrated by AOL's
inability to support the product or promote further development.

On the other hand, if AOL worked with Red Hat, perhaps paying them to support and improve these products and GPL those not already in the public domain, together they might create a truly robust competitor for Microsoft in the consumer marketplace. In its earlier dealings with PC equipment vendors, AOL has showed that it had the corporate
muscle to take on Microsoft and win. When Microsoft tried to run AOL off PC
platforms, the company drew on its enormous revenue base to subsidize the
placement of AOL icons on the bulk of North American PCs. It is the only company
in a position to do the same thing with an entire operating system,
especially if the OS was, effectively, free.

Would the Open Source community put up with a dominant, consumer version of Linux full of pointers back to AOL products and services? If not -- why not?

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