Microsoft Pursues Linux

The day after the October 26 announcement that Oracle would distribute and support Red Hat Linux Linux Magazine had this to say, “Oracle was predicted to make a big Linux announcement this week and you would be hard pressed to make a bigger one than this.” If that is the case this week’s announcement by Microsoft and Novell that they would be working together on Linux must run a close second. The Wall Street Journal sums up the deal, “The deal effectively makes Microsoft a reseller of Suse Linux, Novell's version of the operating system, and kicks off a broad technology collaboration between the two companies. At the heart of the deal is a ‘patent covenant’ under which Microsoft agreed not to file patent-infringement charges against users of Suse Linux, and Novell agreed not to sue users of Windows.” (Red Hat has agreed to offer its users similar indemnification protection against intellectual-property lawsuits.) In financial terms Microsoft will make two separate up-front payments to Novell; $240 million in subscription fees and $108 million for use of patents. Beyond the financial arrangements, it was revealed that, the two companies will work together on at least three projects. According to Bloomberg’s report, “The companies will jointly develop a compelling virtualization offering for Linux and Windows,” the result of which would, “enable Windows to run under Linux and Linux to run under Windows;” the two companies will be working together on Web Services; and finally there will be an effort to create interoperability between Microsoft Office and OpenOffice.org file formats. In regards to the Microsoft Novell agreement, Piper Jaffray analyst Eugene Munster told Bloomberg, “I was actually shocked . . . This is like the sign of the apocalypse here that Microsoft is actually endorsing the Linux platform. Things are changing in the world of software.”

On the surface it may seem that Microsoft’s deal is a knee-jerk reaction to the move made by Oracle; indeed when Oracle made its announcement some wondered about what the response from that company’s chief rival would be. The New York Times quotes Gary Beach, publisher of CIO magazine, as saying, “As of last week, Oracle essentially got in the operating system business . . . This is Microsoft’s response.” However, the spokesmen for both companies, Steve Ballmer for Microsoft and CEO Ron Hovsepian for Novell, insist the deal had been in the works since April when Novell initiated talks. Rather than couching this as a response to Oracle both companies, although each has different things to gain from the pact, say that it was a move based on both customer and competitive needs. In an eWeek piece, Hovsepian puts it this way, “Too often technology companies ask their customers to adapt to them. Today we are adapting to our customers.” In an official document released by Novell on November 2, the company states, "Both Novell and Microsoft realize that the data center of the future will have both Linux and Windows as significant platforms . . . This agreement is all about making those two platforms work together.” Without a doubt there is much truth to that, however, both companies were looking for a bit more out of this bargain.

Novell’s interest in partnering have gathered less scrutiny than Microsoft’s, “There's little downside for Novell in getting the cooperation of Microsoft,” says BusinessWeek which then goes on to report that Novell’s stock price rose 16 percent after the announcement. Bloomberg notes that this is the most Novell shares have risen in four years and agrees that Novell “will get the biggest benefit” from the deal. It is easier to suggest that the little guy comes out on top, but exactly how is unclear. BusinessWeek suggests that the deal will help Novell boost demand for Suse Linux Enterprise, and states that, “The improved interoperability and patent protection offered under the agreement should assuage customers wary of Microsoft's role in the partnership.” However, they also quote Citigroup analysts Brent Thill and associates, “Other than Microsoft upfront payments we see little meaningful revenue upside.” Perhaps the big win for the little guy is that it keeps the giant at bay, at least until 2012 when the agreements expire. Linux may be making inroads into the enterprise but not enough, by any means, to take the top spot. More questionable is Microsoft’s interest.

At the press conference when the announcement was made Steve Ballmer stated that the two companies were still competitors and if asked what the best solution is he would insist, “Windows, Windows, Windows.” However, the fact that the two companies came to an accord means that Microsoft felt that there was at least an inkling of a need for it on their end. Bloomberg points out that, Linux software was the, “biggest threat to Microsoft's Windows Server;” and that last year Linux took more than 11 percent of overall server sales and was growing faster than Windows. Though they may be pushing Windows, this deal indicates that Microsoft sees a need to have another option for their customers. In this light it may be seen as a concession by Microsoft; the my-way-or-the-highway approach may not be best. It could also be, though denied, a reaction to Oracle essentially moving into the operating system business; with their biggest competitor moving into that arena Microsoft may want to have an open source one of those on hand as well. The New York Times also points out that, “Analysts said Microsoft’s move might well help its fast-growing server software business by reassuring corporate technology managers that they could make continued investments in Windows and Linux.” Ultimately it may be that Microsoft thinks there is nothing to lose; by supporting customers who wish to use Linux they will at least retain these customers, rather than losing them altogether as numbers indicate is happening. If this is true, then the two companies’ reasons for shaking hands are quite similar. Novell’s Linux is slowly increasing its stake in the enterprise but not at a pace fast enough to win, on the other hand Microsoft is keeping ahead, but not enough to shake off the threat. Both companies are looking for some breathing room.

However, as BusinessWeek notes, Microsoft’s move to support a rival operating system to keep it at bay is not without risk, “Corporate customers, for example, may be more inclined to try Linux, or use it more broadly, now that Microsoft is providing its own vote of confidence. That could take away revenues from Microsoft, as it's pushing hard to keep up its growth rate.” BusinessWeek concludes that Microsoft’s benefit, “may be customer goodwill;” and by, “acknowledging that the rival operating system will remain part of customers' computer operations and making its own software work smoothly with Linux, Microsoft may make customers more satisfied with its own products.” As with the move by Oracle there are those that argue that with the entrance of players like Oracle and Microsoft the open source movement is being threatened and there are those that argue the opposite, that such entrants are justifying Linux.

Since the agreement between the two companies states that Microsoft will not sue noncommercial Linux developers and users of Suse Linux those in opposition think there is a chance Microsoft may take legal actions against non-Novell Linux development. InfoWorld points out that, “some worry that this move leaves the door open for the company to sue other Linux companies or even Linux users.” InfoWorld quotes well-known Linux advocate Bruce Perens as saying, “This is actually really bad news . . . It sets up Microsoft to assert its patents against all commercial open source users. The deal is going to be, 'You have to buy Microsoft-licensed Linux distribution from Novell or there is an implicit threat that Microsoft will assert their patents against you.” In the Inquirer, open source developer Tom Wickline, says “A logical next move for Microsoft could be to crack down on ‘unlicensed Linux’ and ‘unlicensed Free Software,’ now that it can tell the courts that there is a Microsoft-licensed path. Or they can just passively let that threat stay there as a deterrent to anyone who would use Open Source without going through the Microsoft-approved Novell path.”

Those on the other side of the aisle base their support on two main points. First of all, proponents say that removing the threat of legal action by Microsoft will make those wishing to use Linux feel more comfortable about doing so; this will help Linux expand its footprint in the enterprise. The Wall Street Journal points out that the moves by Oracle and Microsoft could, according to industry experts, “instill more confidence in businesses that have held back investment in open source . . . Concerns over patents and general competition with Oracle and Microsoft hampered some potential users of the software.” The Wall Street Journal goes on to quote Stuart Cohen , chief executive of the Open Source Development Laboratory, “There were always customers that were concerned about whether there would be a backlash with Microsoft . . . They just took that off the table.” Those in favor also believe the news is validation of Linux. The fact that a giant like Microsoft was willing to concede to its customers that Linux, though not favored, is acceptable shows the strength that Linux has and is continuing to build. This is what Red Hat would want users to believe.

As it did after Oracle’s announcement Red Hat is looking at the Microsoft Novell deal in a constructive fashion. ZDNet wrote this, “Red Hat moved quickly on Friday to pour cold water on fellow Linux software maker Novell's partnership with Microsoft. It published a response on its Web site within hours of the agreement between Microsoft and Novell, proclaiming that the deal was a victory for Linux rather than just Novell.” When Oracle announced their support of Red Hat for a lower price Red Hat stood its ground, refusing to drop their own pricing. Similarly Red Hat is standing firm now, vowing that it will not make a deal with Microsoft as Novell has. Unfortunately, however, as it did after the Oracle announcement Red Hat’s stock price dropped and analysts painted a less than rosy picture. Rob Enderle, an analyst with San Jose, California-based Enderle Group told Bloomberg, “Now Microsoft is in Novell's court, putting many of their resources behind Novell in this fight, and it looks like Red Hat is the person left standing after the music stops.” Bloomberg goes on to say that, “The Novell deal also ensures that Red Hat's products won't become the default standard to Linux.”

At this point the most analysts can do is speculate. In doing so, perhaps it is best to keep the words of Linus Torvalds, the creator of the Linux kernel in mind. He said in an email message, “I prefer to be an optimist, and will happily take the option that not everybody needs to be enemies . . . Let's see how it all pans out.”

A more complete version of this posting, with accompanying journal articles, and research reports can be found at the website of Analyst Views Weekly.

More information on this topic can be found in the Linux & Open Source section of Northern Light's Software, Computers, & Services Market Intelligence Center

And in the following articles:

Microsoft, Novell Reach Accord on Linux
The Wall Street Journal, November 3, 2006
Microsoft Corp. reached a rapprochement with a major seller of the Linux operating system, a deal that makes a kind of peace between two opposing camps in the software industry. The deal with Novell Inc. is designed to make it easier for customers to use both Linux and Microsoft's Windows software. It puts new pressure on Red Hat Inc., a Linux seller whose shares were recently roiled when Oracle Corp. announced plans to offer its own technical support for Red Hat's products.

Linux Advocates Wary of Novell-Microsoft Tie
InfoWorld, November 3, 2006
Novell investors may be cheering the Linux vendor's historic partnership with Microsoft, but Linux advocates had an entirely different reaction Thursday, expressing concerns that the deal may hint at future patent lawsuits and possibly even violate Linux's software license. "Excuse me while I go throw up," wrote Pamela Jones, the editor of the Groklaw.net blog, which tracks legal issues in the free software community. "I gather Microsoft no longer thinks Linux is a cancer or communism. Now it just wants a patent royalty."

Linux Linkup for Microsoft, Novell
BusinessWeek, November 3, 2006
In a surprising development, Microsoft on Nov. 2 entered into a broad partnership with longtime rival Novell and agreed to provide some support to Linux, the open-source operating system that competes with its own Windows operating system. Linux, which is developed by a community of software developers who share their code, has long been viewed as one of the most serious threats to the lucrative Windows franchise.

Red Hat Couches Microsoft-Novell Pact as a Linux Win
ZDNet, November 3, 2006
It published a response on its Web site within hours of the agreement between Microsoft and Novell, proclaiming that the deal was a victory for Linux rather than just Novell. Red Hat also distanced itself from the possibility that it might strike a similar deal with Microsoft. On Thursday evening, Microsoft struck an alliance with Novell, saying it would promote Novell's Suse Linux portfolio for businesses that want an environment that mixes Microsoft's proprietary software with open-source software. The two companies are also due to work together on virtualization, Web services and open-source document formats.

2 Giants in a Deal over Linux
New York Times, November 3, 2006
Microsoft acknowledged the influence of the Linux operating system on Thursday by striking a deal with Novell, a longtime rival, to ensure that Novell’s version of Linux could operate together with Windows in corporate data centers. In an industry known for strange bedfellows, the two companies said they were collaborating on technical development and marketing programs. They also took steps to ensure that Microsoft’s intellectual property was protected as it modifies its software to work with the operating system Novell acquired in January 2004, known as SuSE Linux.

Microsoft, Novell Make Peace over Linux
eWeek, November 2, 2006
Microsoft and Novell announced on Nov. 2 a set of broad collaboration agreements to build, market and support a series of new solutions that will make Novell and Microsoft products work better together. Perhaps the biggest news is that Novell and Microsoft announced an agreement to provide each other's customers with patent coverage for their respective products. These agreements will be in place until at least 2012.

Microsoft and Novell Make Windows, Linux Compatible
Bloomberg, November 2, 2006
Microsoft Corp. and Novell Inc., rivals in the market for software that runs server computers, agreed to make their products work together, the companies said. The companies will jointly develop and market software that lets the Windows and Novell's Linux operating systems co-exist on the same machine, Microsoft Chief Executive Officer Steve Ballmer said at an event in San Francisco today.