Wednesday, June 02, 2004

Microsoft claims to love the open-source concept

For years, Bill Gates and other top executives at Microsoft railed against the economic philosophy of open-source software with Orwellian fervor, denouncing its communal licensing as a "cancer" that stifled technological innovation.

Today, Microsoft claims to "love" the open-source concept, by which software code is made public to encourage improvement and development by outside programmers. Gates himself says Microsoft will gladly disclose its crown jewels--the coveted code behind the Windows operating system--to select customers.

"We can be open source. We love the concept of shared source," said Bill Veghte, vice president of the Windows Server Group. "That's a super-important shift for us in terms of code access."

Did Microsoft suddenly find open-source religion? Hardly. It was dragged there kicking and screaming by its customers, who are increasingly drawn to open-source software like Linux, whose inner workings of code can be seen by anyone and modified.
While small in scope, Microsoft's adoption of some key open-source tenets is monumental in meaning. It is an acknowledgement that the company sees the technology as its most serious competitor in years and is taking steps to make sure its Windows franchise can survive the attack.
The open-source movement also represents a larger threat to Microsoft that transcends any particular technology or company: The high-tech industry has undergone a psychological shift that encourages challenges to Microsoft, which for many years had been technologically possible but practically unthinkable.
For a combination of reasons ranging from the troubled economy to mistakes in Microsoft business strategies, many large companies are wondering, for the first time in maybe a decade, why they pay so much for its products and how they can get by with less.
"This is going to force Microsoft to look at how they structure their software architecturally, and how they package and market their products, and I think that's good," said Michael Cherry, an analyst with Directions on Microsoft.
Microsoft has itself to blame at least in part for strengthening the hand of its rivals. A controversial new software licensing policy, which raises prices for some customers and asks them to pay in advance for future releases, has angered many Microsoft customers and driven them to seek cheaper alternatives such as Linux.
While no one expects the open-source trend to affect Microsoft's profits immediately--the company is still ringing up record sales and has roughly $40 billion in cash--it is clear that the technology's popularity has forced the company to respond.

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"Microsoft hasn't yet been hurt by Linux in any absolute sense, but open source gives customers alternatives," said Jonathan Eunice, an analyst with market researcher Illuminata. "It means Microsoft has to devote some of its resources to thinking about how to combat it. It makes Linux and open source a strategic problem, not a 2002 revenue-loss problem."
Microsoft customers say the software giant has already made significant changes, such as sharing source code with large customers and launching a "trustworthy computing" initiative to button-up troublesome security holes in its software.

The company's next server version of Windows will ask clients to join online newsgroups for support and advice, following the community-based traditions of the open-source philosophy.
"With open source, I can make systems work where closed-source software just won't," said Phillip Windley, chief information officer of the state of Utah and a longtime Microsoft customer. "I can't always afford to wait for a software vendor to come around to my way of thinking."
Too little, too late?The question is, did Microsoft act too late? In just the past year, many companies have found that open-source software has gained a level of sophistication that makes it a viable alternative to Windows for server systems and Web site operations., Verizon Communications and Air New Zealand have all switched to Linux over the past 12 months to cut costs.

Initially, Linux was seen as a competitor to Windows only for server operating systems, used by roughly 27 percent of corporate servers and more than half of all Web servers, according to industry researcher IDC. Recent moves, however, have begun to strengthen Linux's appeal in desktop PCs when combined with open-source alternatives to Microsoft's Office, such as Sun Microsystem's StarOffice.

That's leading some longtime Microsoft customers to the next, once-unthinkable step: serious consideration of Linux and other open-source software as a replacement for Windows and Office on their desktop systems.

Satish Mahajan, chief information officer of American Automobile Association, is evaluating Linux for his server systems and beginning to eye the open-source software for his desktops as well. "When I talk to my colleagues, I hear more and more willingness to move a portion of their businesses to Linux. I'm still weighing the pluses and minuses, but it has moved up on my scale," he said.
Mahajan and others say cost is only one reason for the decision to evaluate Linux. In Microsoft's modern world, its products are seen by a growing body of corporate technology managers and even some of the world's governments as inflexible, expensive and bloated. Large companies and public agencies--some of Microsoft's best customers--are weighing Linux and open source to simplify their operations and get off the update-replace treadmill long prevalent in the computer business.
Microsoft executives acknowledge the rising threat but, mindful of the popularity of Linux and open source among their customers, have tempered their comments.

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"We need to take a balanced tone," said Microsoft's Veghte, the man assigned by CEO Steve Ballmer to come up with a competitive strategy toward Linux. "No matter how you look at it, Linux is a huge competitor and isn't going to go away."
Still, Ballmer--never known to mince words--is quick to point out where he sees Linux lacking. "The Linux client hardly runs any applications except a bunch of shareware stuff that’s not very good," he said. "There has yet to be any innovation, new features, new capabilities out of the Linux platform.

"First they cloned Unix, and there are people working on cloning some of our stuff. But it’s just a cloning OS. I don’t think anyone should expect anything innovative coming out of that world," said Ballmer.

The most difficult part of this competition is one of simple economics: Linux and other open-source technologies are licensed for free. That’s where Microsoft can’t compete, a point Ballmer willingly concedes. As Ballmer said at a recent conference in London, "We cannot price at zero, so we need to justify our posture and pricing."

But Ballmer thinks price is only one reason why companies are considering Linux. "People are going to look at Linux, whether our stuff costs $5, $50 or $100. So we have to work that value proposition every day." Numbers cause concernIn a recent survey of 225 chief information officers, 29 percent said they owned Linux servers and 8 percent are formally considering buying them. More troubling for Microsoft, 31 percent of those who recently purchased a new Linux server used it to replace a server running Windows.Many technology managers cite the controversy over Microsoft's new licensing plan in their reasoning.

"We're looking at Linux as a less expensive alternative to Windows and Office," said Alan Flint, systems applications manager at Richmond Wholesale, a food distributor in Richmond, Calif. "I'm looking for more simplification in my environment because I'm displeased with Microsoft's licensing programs."

Mahajan said Microsoft's licensing plan is also driving him to take a closer look at Linux. "The cost of Microsoft's software continues to increase and change from the old days, where you could buy Windows 98 and keep it for three years. That's not an option anymore. You have to pay."
Utah's Windley agrees, saying the new plan "just makes people more leery" of Microsoft. "I've got a whole group of IT workers in this state who are tired of the licensing headaches with Microsoft. They want OpenOffice (an open-source version of Sun's StarOffice) just to do away with the headaches."

Flint sees another trend driving large companies away from Microsoft: the company's practice of issuing frequent upgrades and new versions of its products, often ahead of its customers' willingness to buy those products. "Microsoft wants to lock in their revenue by having customers tied to subscriptions. I think they are changing their licensing because there aren't many features that users are clamoring for."

Cherry of Directions on Microsoft said these comments are echoed throughout the industry as technology buyers are much more price-conscious than they were in the 1980s and 1990s. "Linux is becoming more of a threat because customers used to be a lot less sensitive. Whether it was money or whether each version of Windows had enough compelling features, they were willing to upgrade even if it cost them more hardware," he said.

"Now they look at something like Windows XP and say, 'OK, it's more stable, but I have to buy new machines. I don't think Microsoft has ever made a version of its products that used less resources than the previous version.' Or, 'Windows 2000 Server looks really good, but all I need is a Web site, and I can take this old 486 and I can put Red Hat Linux and Apache on it and have a Web server up in no time at all,'" Cherry said. News.CommentaryLinux's foot in the doorForrester says CIOs can be confidentthey'll get first-rate Linux support.

Support from big gunsMoreover, technology buyers said Linux is getting better in quality and range, largely because of help from Microsoft's rivals. "Once folks like IBM and Sun started providing support for Linux, (they) made Linux better by plugging some holes and providing better support," Mahajan said.

That, coincidentally, is exactly how Microsoft got its foot in the door with Windows back in the 1980s. "Microsoft used the divide-and-conquer marketing tactic. They didn't go to IT managers--they went to business departments. And suddenly, the IS manager looked around and said, 'Man, we're running a lot of Microsoft stuff.' So I think that's going to happen with Linux," Cherry said.
Nevertheless, despite the significant challenge posed by Linux and open source, Microsoft hardly has its back against the wall. Linux may have become a bona fide competitor in the server market, but Microsoft still rules on the desktop.

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Industry veterans, including many Microsoft customers, note that it is extremely difficult--and expensive--to unseat the incumbent technology in large companies. One of the largest costs is retraining users.

"It would be very hard to convince the mainstream user in Utah state government that Linux is the right desktop choice for them. Most of the reason for that is not functionality--it's training," said Windley, who supports 22,000 desktops throughout Utah. As a CIO contemplating making such a huge change, he noted, "you have to be willing to fall on your sword, because you very well may expire doing it."

In addition, those companies that did agree to Microsoft's new licensing program have paid to use the company's products for up to three years in advance, making it unlikely that they will switch to a competitor.

But the mere existence of Linux will most likely benefit Microsoft's customers in the long term. In fact, many longtime analysts said that, with the slump in the technology business and the weakening of some key rivals, Microsoft needs Linux.
"The funny thing about this Linux thing is it might just end up being the perfect kind of threat for Microsoft," said Rob Horwitz, another analyst with Directions on Microsoft. "It's something that ain't gonna kill Microsoft, but it is something that will help it focus on who the enemy is and what they have to do."

Key to that battle plan is making its products more secure and reliable, customers say, as well as changing licensing policies to be less complicated. Otherwise, Microsoft will find itself the victim of a time-honored trend in the computing business: obsolescence.

"Linux is the end game in 'good enough' computing," Illuminata's Eunice said. "It's great stuff, it comes at little or no cost, and it's good enough to do the job. Just as Windows gave Unix makers fits in years past--and the Unix makers gave minicomputer guys fits, and minicomputer guys gave the mainframe makers fits--open source is giving Microsoft and Windows fits."

Monday, April 12, 2004

The Business of Free Software

IT vendors including Oracle, IBM, and Sun that traditionally have built offerings based on proprietary technologies are now investing billions of dollars into open source software—arrangements that are transforming in some ways the fundamental nature of technology strategy development, according to recent research at Harvard Business School.

In "The Business of Free Software: Enterprise Incentives, Investment, and Motivation in the Open Source Community," the authors—HBS professor Marco Iansiti and Gregory L. Richards of Keystone Strategy—examine what drives companies with large, proprietary software portfolios to invest in open source software (OSS) projects that can sometimes seem unrelated to their core business.

"This new reality upends the classic rules of strategy," Iansiti says, "and it's changing the way technology firms approach the development process. How much of your product do you share? Does your business model extract value from a core product or a portfolio of complementary products?"

Most academic research has focused on individual contributions to OSS, but this working paper is among the first to consider the impact of massive IT vendors like IBM and Oracle on the open source community.

Why are proprietary firms diving into open source? The answer (it's good for business) is hardly shocking. But the line from investing in OSS to profiting from a product is not as straight as one would expect.
Influencing what you don't own

"In a complex, sophisticated environment where so many products and services are connected, strategy has become, in large part, the art of influencing assets that you don't own," Iansiti observes. It's the old saw of the razor/razor blade business model, with many more options for profit. "For IBM, Linux is the razor, and WebSphere software and its related services are the razor blade," he says.

"The question of how you invest and extract money becomes much more interesting when you consider the different layers of the software 'stack' and how they can be leveraged," Iansiti adds. As a measure of IBM's commitment to open source, the company announced its intent to invest $1 billion to the development and promotion of the Linux operating system.
This new reality upends the classic rules of strategy and it's changing the way technology firms approach the development process.

In their paper, Iansiti and Richards divide a sampling of OSS projects into a "money-driven" or "community-driven" cluster. The former group has received over $2 billion in investment in technologies including Linux, Firefox, and OpenOffice, while support for the latter derives solely from the voluntary efforts of vendors' employees.

Not surprisingly, they find that the money-driven cluster consists mostly of high impact OSS projects that draw customers to a vendor's mainly proprietary, core businesses.

"OSS is a business tool that has been used by a variety of corporations for very logical purposes," notes Iansiti. "If you have an environment in which part of the service you provide and the product you sell can be given away for free, that changes the dynamics of the industry. As a company, you will most likely spend more time thinking about exactly what to give away and how to couple it with complementary products and services than you do anything else."
Wooing open-source developers

Another focus centers on determining how to make it easier for the open source community to work on projects that are consistent with your company's strategy.

"There are five or six million people in this space," Iansiti says of the open source community. "It's important to ensure they're doing something that helps your cause."

It makes sense to provide tools that help programmers develop applications that will make Linux more successful if it drives other aspects of your business. (And it doesn't hurt that you're also putting a stick in the eye of a competitor who makes money from the operating system layer of the software stack.)

"It changes the way we think about business development and alliances," Iansiti says. "Traditional alliances are formed between a business development executive and an individual company like IBM or Cisco. In the open source scenario, you could say that there's an alliance between IBM or HP and every Linux developer out there. And that alliance is being mediated by dynamics that are less investment-oriented than a traditional deal and more oriented toward indirect tools to make money."

The payoff

Sometimes the strategies software companies employ are so complex that it isn't immediately evident why a company is investing in a particular area, Iansiti notes. There can be a significant lag time between a company's investment and extraction of a profit.

"People can be too quick to point fingers, saying that one company is stealing while another is giving something away. In fact, the whole picture is often below the surface."
It changes the way we think about business development and alliances.

In another ironic twist, some developers who were motivated toward open-source software development in rebellion against huge proprietary software vendors now find themselves being paid for work from those very same companies.

While research indicates a large majority of those who contribute to the open source community do so in order to learn and share new knowledge and skills, over half cite direct payment for their work or the chance to improve their employability as motivating factors.

Iansiti is the David Sarnoff Professor of Business Administration. He is the author, with Roy Levien, of The Keystone Advantage: What the New Dynamics of Business Ecosystems Mean for Strategy, Innovation, and Sustainability.