Oracle (ORCL - Annual Report) CEO Larry Ellison announced the company will offer steeply discounted rates for the follow-on support customers need after installing (for free) the Linux operating system from vendors such as Red Hat (RHAT). Widely perceived as an attack on Red Hat, Yahoo! Finance notes:

The threat triggered a 16 percent decline in Red Hat’s stock price, reflecting investors worries that the pricing war will destroy one of the most successful businesses in the open-source software movement.

“Oracle has outsmarted Red Hat,” said industry analyst Trip Chowdhry of Global Equities Research.

Oracle’s challenge comes just a few months after Red Hat trumped the much larger company by buying open-source software maker JBoss Inc. for $350 million.

Ellison said he is more interested in accelerating the open-source movement than crushing Red Hat.

Because much of Oracle’s propriety software is designed to run on the Linux operating system, Ellison believes the company will make more money if more major corporate customers embrace open-source software.

For Oracle, taking a bite out of Red Hat’s few-hundred-million in annual sales is chicken feed. As CNet reported back in April, Oracle’s vision for the future is to control a complete software stack (complete set of software needed to implement solutions, from operating system to applications):

Oracle CEO Larry Ellison told the Financial Times that he would “like to have a complete stack.” Oracle makes billions of dollars selling databases and business applications. In recent years, the company has bought up many other companies, including rivals like PeopleSoft and Siebel Systems.

“We’re missing an operating system. You could argue that it makes a lot of sense for us to look at distributing and supporting Linux,” Ellison told the newspaper.

The CNet article also includes a table comparing how various software makers “stack” up:

By now it is practically cliche that new technologies can be disruptive to traditional business models. However, there is one new technology that is proving disruptive to technology business models. The new technology in question: multi-core processors. These semiconductors are divided into several “cores” that each act as mini-processors, speeding performance and lowering power use when running software designed to take advantage of the design. The problem, as noted by ComputerWorld:

Enterprise software vendors have traditionally priced software per processor. But now that some server processors have two cores (and soon will have four cores, followed by eight- and 16-core versions), one processor delivers the power and speed of several. That means customers will purchase servers with fewer processors to handle bigger workloads — and software vendors won’t make as much money if software continues to be priced traditionally.To compensate, IBM recently announced it will begin charging for software based on how fast it runs, not the number of processor cores on which it’s running. The company has developed a complicated chart to show how it will price software for different processors.

As the basis for this model, IBM created a new license-pricing unit called the “processor value unit.” IBM will set software prices using this scheme beginning with the release of Intel Corp.’s quad-core Xeon server processor, which is expected to be available later this year.

Oracle Corp. unveiled its own multicore pricing plan in July 2005. Oracle’s method defines each processor core on a multicore chip as 25% to 75% of a processor, depending on the type.

However, Microsoft Corp. hasn’t hopped on this train yet; it plans to continue to charge per processor for software, not per core or using a performance-based method. This gives the software giant a slight edge over competitors, analysts say, because customers gain cost consistency.

This is just the kind of thing to make CIO’s decide to spend less. Who needs to worry about a “complicated chart” or what percentage of a processor each core on a given chip represents. While high switching costs and inertia should prevent any wholesale switching away from IBM or Oracle, the companies have a limited amount of time to figure out how to serve their customers. The article continues:

Forrester Research Inc. analyst Julie Giera said she expects to see not only confusion but also frustration among customers in the next six to 12 months as software pricing continues to be “fluid” due to the growing prevalence of dual-core and multicore servers.

Another strategy for CIOs, suggested Giera, would be to consider using open-source software as an alternative to commercial software during the transition period.

That would focus the minds of software executives.

We knew Oracle was doing much better in applications after having had trouble digesting acquisitions. We know their main target is SAP. But open source models are something of a threat to all of the existing software vendors, so today’s disappointing Red Hat performance, attributable in part to their acquisition od JBoss. As Marketwatch noted:

Early this month, Red Hat bought JBoss for around $350 million in cash and stock. The deal aimed to help accelerate a shift towards service-oriented architecture.

JBoss was a maker of open-source middleware products, which are designed to help different software applications work together. The products, including application servers, compete against offerings from the likes of Oracle Corp. (ORCL), BEA Systems Inc. (BEAS) and International Business Machines Corp. (IBM - Annual Report).