AOL Time Warner Inc. is in talks to buy Red Hat Inc., a prominent distributor of a computer operating system, an acquisition that would position the media giant to challenge arch rival Microsoft Corp., according to sources familiar with the matter.
Red Hat, a publicly traded firm based in Durham, N.C., sells products and services based on the Linux operating system, the freely available software developed collaboratively by volunteers. Linux is designed for a wide variety of gear, running corporate computer servers and consumer devices such as personal computers, cell phones and video games.
The Red Hat negotiations -which are still fluid - are the latest indication that AOL Time Warner, the world's largest media company, is looking for alternatives to software made by Microsoft, whose Windows operating system runs 90 percent of the world's PCs. The longtime competitors have fought over an array of rival consumer technologies lately, including online subscription services, instant-messaging systems and Web-based video and audio players.
Officials of AOL, Red Hat and Microsoft declined to comment.
To counter Microsoft's desktop hegemony, New York-based AOL Time Warner could use the deal to couple its America Online software, the market leader with more than 33 million Internet subscribers, with Red Hat's operating-system technology, sources said.
The AOL online software, which consumers can install for free from the Web or a compact disk, is now designed to run on Microsoft's Windows operating system. But the AOL software could be configured to override Windows and launch a version of Red Hat's Linux operating system, sources said.
With such a move, AOL Time Warner could potentially make significant inroads into Microsoft's bread-and-butter business. An even graver challenge to Microsoft would be for AOL Time Warner to develop a rival operating system that works exclusively with the media giant's own Internet service provider, its Web browser or proprietary content.
This is not the first time AOL Time Warner has explored alternatives to Windows. There were rumblings last year, during a flash point in the rivalry between the two tech titans, when AOL Time Warner was scouting for an acquisition or partnership with a firm that could provide a competing operating system.
AOL Time Warner has already tried to counteract Microsoft on other fronts, including rebuilding its Netscape Web browser business to better compete against Microsoft's dominant Internet Explorer. Netscape technology has been incorporated into a Gateway Inc. tabletop Internet terminal and Sony Corp.'s PlayStation 2 video-game console. Linux also runs the Sony product.
It was unclear yesterday what price tag Red Hat could fetch. With a market capitalization of about $1.45 billion and about 600 employees worldwide, Red Hat reported $68.2 million in revenue in the nine months ended Nov. 30, down 10 percent over the same period a year earlier.
The software company reported a profit of $1.8 million, or a penny per share, in the nine months, compared with a loss of $10 million, or six cents a share, in the year-ago period.
Red Hat makes its money by packaging Linux for commercial and consumer use and by providing services and support to customers who use it. The operating system itself is freely available on the Internet - thanks to an initiative by a programmer named Linus Torvalds who organized volunteers to write the original source code. Unlike Microsoft, which does not fully divulge its code, the blueprints to Linux are available to anyone who agrees to make modifications publicly available.
Linux has yet to be adopted widely by consumers, largely because it requires some technical proficiency to install. But it is popular with the tech crowd and, according to industry estimates, runs about 30 percent of all computers servers -the powerful computers that function as hubs on a network.
Red Hat has claimed such big clients as Amazon.com Inc. and International Business Machines Corp., providing software and support for IBM servers that use the Linux operating system.