Azure is the OS. Red hat's stuff is the application.
And different Linux flavors were already on Azure as "applications" prior to this deal.
But now RedHat is getting the official stamp.
If Azure the OS only had Windows the App, that would be a great failing. MS is smart and playing Azure out to not just promote other MS products. Expanding it as an ecosystem for various OSes is a Good Thing.
I say this as someone who works for an ISV that is single-handedly responsible for the only Linux servers most of our customers have.