Shares of Red Hat tumbled 24 percent Thursday on the news that Oracle will move aggressively onto Red Hat's turf by selling maintenance services for Red Hat products.
Oracle's brawn threatens an undersized Red Hat, which has benefited from a relative shortage of competition in the Linux sector — until now.
"Red Hat needs a new business model fast," said Rob Enderle, principal analyst at the Enderle Group tech consulting firm. "Oracle's organization is vastly superior. They'll be providing a better product at a better price. Nobody can say right now whether Red Hat will even be able to survive."
Unlike Microsoft Corp.'s (MSFT) market-dominating Windows operating system, Raleigh-based Red Hat distributes the open-source Linux system for free. The company makes money by selling service and support.
Oracle CEO Larry Ellison announced Wednesday that his company will offer identical support services for Red Hat's products — at a roughly 50 percent discount.
"Oracle pretty much took Red Hat's entire business," Enderle said. "Of all the companies in software, Oracle's easily the scariest — they're just so aggressive."
Red Hat investors have long feared a hostile move from Redwood Shores, Calif.-based Oracle, which raked in $14.4 billion in revenue during its last fiscal year, dwarfing Red Hat's $278 million.
Oracle says it has 7,000 employees in support services alone; Red Hat says it employs a companywide total of 1,800.
When Oracle began hinting of a possible move into the Linux market — a step likely aimed at shoring up database market share being taken by Microsoft — Red Hat shares turned volatile.
Before Red Hat's stock plummeted $4.68 to $14.83 in trading Thursday, the shares were already well off their May high of $32.48 on the Nasdaq Stock Market.
Analysts issued a series of sharp Red Hat downgrades Thursday. Soleil Securities lowered its Red Hat price target to $11.50 from $19. Credit Suisse cut its outlook to $14 from $29.
Terry Tillman, an analyst with Suntrust Robinson Humphrey, said Red Hat may become a takeover target and suggested that Oracle could be the buyer.
"Is Red Hat's business under assault? Potentially. But because of the franchise they have, they'll survive," Tillman said.
Red Hat Chairman Matthew Szulik played down Oracle's threat, saying Ellison, if anything, had boosted Linux's credentials and acknowledged Red Hat's technical leadership.
The company also posted a response to Oracle's announcement on its Web site, trying to reassure customers and investors that Red Hat will be just fine alongside Oracle. But there was no mention of whether Red Hat would respond by lowering its prices.
"The opportunity for Linux just got bigger," the company wrote.
[Red Hat will not be cutting prices, Szulik told the CNBC business cable channel Friday, according to Reuters.
"The 2,000 men and women from Red Hat are prepared for this," Szulik added.]
While Oracle's move threatens the bulk of Red Hat's subscription business, Red Hat also provides support for a comprehensive array of open source products, including through the recently acquired JBoss, provider of "middleware" that connects varying Web applications.
Dennis Kekas, director of North Carolina State University's Network Technology Institute, which has a close relationship with Red Hat, said the company will have no trouble thriving in the ever-expanding open source market.
"There's a lot of room out there for a lot of players to participate in the open source movement," Kekas said. "Red Hat's just too sophisticated and too strong to be threatened. They have built such a strong reputation."