Microsoft's annual report: Open-source mental block
In reading through Microsoft's annual report, I am struck by how far the company has come in appreciating the threat that open source brings to Redmond.
I'm also shocked by just how ill-informed the company continues to be with regard to open source as a business strategy. CEO Steve Ballmer has revealed this before in his quips, such as open source "doesn't pay the bills in this company." But here Microsoft has managed to enshrine its ignorance in a public document:
Our business model has been based upon customers paying a fee to license software that we develop and distribute. Under this license-based software model, software developers bear the costs of converting original ideas into software products through investments in research and development, offsetting these costs with the revenue received from the distribution of their products. Certain "open source" software business models challenge our license-based software model...
A number of commercial firms compete with us using an open source business model by modifying and then distributing open source software to end users at nominal cost and earning revenue on complementary services and products. These firms do not bear the full costs of research and development for the software. Some of these firms may build upon Microsoft ideas that we provide to them free or at low royalties in connection with our interoperability initiatives. To the extent open source software gains increasing market acceptance, our sales, revenue and operating margins may decline.
Yes to that last point, but no to Microsoft's earlier point about R&D costs. (And no to its throwaway line that open source is building on Microsoft's ideas. This is undoubtedly true in some areas, but it also goes the other way, which Microsoft fails to acknowledge.) Unless Microsoft is reserving that commentary exclusively for Red Hat and Novell and others like them that build on a community-developed platform like Linux, Microsoft's comments couldn't stray any further from the mark.
For most open-source companies, we spend significantly more of our money on research and development than Microsoft and its proprietary ilk. That's one of the primary selling points for open source: we spend less on sales and marketing and more on developing our products.
Microsoft's response to competition from open source?
Although we believe the breadth of our businesses and product portfolio is a competitive advantage, our competitors that are focused on narrower product lines may be more effective in devoting technical, marketing, and financial resources to compete with us.
In addition, barriers to entry in our businesses generally are low and products, once developed, can be distributed broadly and quickly at relatively low cost. Open source software vendors are devoting considerable efforts to developing software that mimics the features and functionality of our products, in some cases on the basis of technical specifications for Microsoft technologies that we make available. In response to competition, we are developing versions of our products with basic functionality that are sold at lower prices than the standard versions.
What Microsoft fails to mention is its own reliance on mimicking the features and functionality of others' products (Apple, WordPerfect, Sony PlayStation, etc.). This is how the world works, Microsoft. It's how we progress as an industry instead of being forced to reinvent the wheel over and over. Microsoft has benefited from this as much as any other company, if not much more so.
Microsoft is a strong company. It makes good products. It doesn't need to resort to half-truths to compete. As it notes, the breadth of its product line is its single-biggest differentiator right now, but it's also a potential Achilles' heel. Even so, as long as Microsoft continues to push forward rather than making a fetish of hoarding old markets, it will be fine.
But if it continues to sacrifice the Web to protect its desktop hegemony (while it fends off attacks from Apple and Google) and if it throws out the open standards and open source that drive successful Web companies, it will rightly dwindle in importance and eventually die, however long that might take.
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(quote)
2005
http://www.sec.gov/Archives/edgar/data/789019/000119312505174825/d10k.htm
Challenges to our business model may reduce our revenues and operating margins. Our business model is based upon customers agreeing to pay a fee to license software developed and distributed by us. Under this commercial software model, software developers bear the costs of converting original ideas into software products through investments in research and development, offsetting these costs with the revenue received from the distribution of their products. We believe the commercial software model has had substantial benefits for users of software, allowing them to rely on our expertise and the expertise of other software developers that have powerful incentives to develop innovative software that is useful, reliable, and compatible with other software and hardware. In recent years, a non-commercial software model has evolved that presents a growing challenge to the commercial software model. Under the non-commercial software model, open source software produced by loosely associated groups of unpaid programmers and made available for license to end users without charge is distributed by firms at nominal cost that earn revenue on complementary services and products, without having to bear the full costs of research and development for the open source software. The most notable example of open source software is the Linux operating system. There is a wide variety of other open source software available, such as Open Office.org and Eclipse. While we believe our products provide customers with significant advantages in security and productivity, and generally have a lower total cost of ownership than open source software, the popularization of the non-commercial software model continues to pose a significant challenge to our business model, including recent efforts by proponents of open source software to convince governments worldwide to mandate the use of open source software in their purchase and deployment of software products. To the extent open source software gains increasing market acceptance, sales of our products may decline, we may have to reduce the prices we charge for our products, and revenue and operating margins may consequently decline.
We face intense competition. We continue to experience intense competition across all markets for our products and services. Our competitors range in size from Fortune 100 companies to small, single-product businesses that are highly specialized and open source community-based projects. While we believe the breadth of our businesses and product portfolio offers benefits to our customers that are a competitive advantage, our competitors that are focused on a narrower product line may be more effective in devoting technical, marketing, and financial resources to compete with us. In addition, barriers to entry in our businesses generally are low. The Internet as a distribution channel and non-commercial software model described above have reduced barriers to entry even further. Non-commercial software vendors are devoting considerable efforts to developing software that mimics the features and functionality of various of our products. In response to competitive factors, we are developing versions of our products with basic functionality that are sold at lower prices than the standard versions. See Part I, Item 1 of this report for additional information about our competitors. These competitive pressures may result in decreased sales volumes, price reductions, and/or increased operating costs, such as for marketing and sales incentives, resulting in lower revenue, gross margins, and operating income.
We may not be able to protect our intellectual property rights against piracy, infringement of our patents by third parties, or declining legal protection for intellectual property. We defend our intellectual property rights and combat unlicensed copying and use of software and intellectual property rights through a variety of techniques. Preventing unauthorized use or infringement of our rights is difficult. Piracy of our products represents a loss of revenue to us. While this adversely affects U.S. revenue, the impact on revenue from outside the United States is more significant, particularly in countries where laws are less protective of intellectual property rights. Similarly, the absence of harmonized patent laws makes it more difficult to ensure consistent respect for patent rights. Moreover, future legal changes could make this even more challenging. Throughout the world, we actively educate consumers about the benefits of licensing genuine products and obtaining indemnification benefits for intellectual property risks, and we educate lawmakers about the advantages of a business climate where intellectual property rights are protected. However, continued educational and enforcement efforts may not affect revenue positively, and revenue could be adversely affected by reductions in the legal protection for intellectual property rights for software developers or by compliance with additional legal obligations impacting the intellectual property rights of software developers.
Third parties may claim we infringe their intellectual property rights. From time to time we receive notices from others claiming we infringe their intellectual property rights. The number of these claims may grow. Responding to these claims may require us to enter into royalty and licensing agreements on less favorable terms, require us to stop selling or to redesign affected products, or to pay damages or to satisfy indemnification commitments with our customers including contractual provisions under various license arrangements. If we are required to enter into such agreements or take such actions, our operating margins may decline as a result. We have made and expect to continue making significant expenditures to acquire the use of technology and intellectual property rights, including via cross-licenses of broad patent portfolios, as part of our strategy to manage this risk.
We may not be able to protect our source code from copying if there is an unauthorized disclosure of source code. Source code, the detailed program commands for our operating systems and other software programs, is the most significant asset we own. While we license certain portions of our source code for various software programs and operating systems to a number of licensees, we take significant measures to protect the secrecy of large portions of our source code. If an unauthorized disclosure of a significant portion of our source code occurs, we could potentially lose future trade secret protection for that source code. The loss of future trade secret protection could make it easier for third parties to compete with our products by copying functionality, which could adversely affect our revenue and operating margins. Unauthorized disclosure of source code could also increase certain risks described in the next paragraph.
Security vulnerabilities in our products could lead to reduced revenues or to liability claims. Maintaining the security of computers and computer networks is an issue of critical importance for us and our customers. There are malicious hackers who develop and deploy viruses, worms, and other malicious software programs that attack our products. While this is an industry-wide phenomenon that affects computers across all platforms, it affects our products in particular because hackers tend to focus their efforts on the most popular operating systems and programs and we expect them to continue to do so. We devote significant resources to addressing these critical issues. We are focusing our efforts on engineering even more secure products, enhancing security and reliability options and settings when we deliver products, and providing guidance to help our customers make the best use of our products and services to protect against computer viruses and other attacks on their computing environment. In addition, we are working to improve the deployment of software updates to address security vulnerabilities discovered after our products are released. We are also investing in mitigation technologies that help to secure customers from attacks even when such software updates are not deployed. We are also advising customers on how to help protect themselves from security threats through the use of our online automated security tools, our published security guidance, and the deployment of security software such as firewalls, antivirus, and other security software. The cost of these steps could adversely affect our operating margins. Despite these efforts, actual or perceived security vulnerabilities in our products could lead some customers to seek to return products, to reduce or delay future purchases, or to use competitive products. Customers may also increase their expenditures on protecting their existing computer systems from attack, which could delay adoption of new technologies. Any of these actions by customers could adversely affect our revenue. We devote significant resources to improving the security design and engineering of our software. Nevertheless, actual or perceived vulnerabilities may lead to claims against us. While our license agreements typically contain provisions that eliminate or limit our exposure to such liability claims, there is no assurance these provisions will be held effective under applicable laws and judicial decisions. [http:// . . . |http:// . . . ]
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What Microsoft fails to mention is its own reliance on mimicking the features and functionality of others' products (Apple, WordPerfect, Sony PlayStation, etc. etc.). This is how the world works, Microsoft. It's how we progress as an industry instead of being forced to reinvent the wheel over and over. Microsoft has benefited from this as much as any other company, if not much more so."
Don't forget Xerox's Graphical User interface. They were a predecessor to Microsoft's Windows....
The section was on Risk Factors, not a give and take on borrowing ideas.
I think you're blowing this all out of proportion. The comments on companies benefiting from them was not a shot at all open source companies and their R&D spending. It was saying that some companies may develop complementary services which piggy-back on Microsoft efforts. And it's true. How often it happens is irrelevant.
Calm down people.
These firms do not bear the full costs of research and development for the software
Which in many (most?) cases, is true - a lot of OSS depends on upstream innovation - but that doesn't mean the innovation is irrelevant. That is Balmer's mistake - the fact that innovation is freely available for others to build on is THE POINT.
Clearly, they don't write the annual report.
Sheds a certain light on the over-all corporate priorities, I guess.
"Which in many (most?) cases, is true - a lot of OSS depends on upstream innovation - but that doesn't mean the innovation is irrelevant. That is Balmer's mistake - the fact that innovation is freely available for others to build on is THE POINT."
Exactly right. Innovation comes from building on the best ideas of others.
"There *are* people inside Microsoft who get Open Source.
Clearly, they don't write the annual report.
Sheds a certain light on the over-all corporate priorities, I guess."
There are people inside MS who understand security.
There are people inside MS who understand software engineering.
And yes, there are people inside MS who understand open source.
So why is it that MS as a whole understand open source but can leverage it, can't create solid products, and can't produce a reasonably secure product?
Because those who control the company, its culture, and its products do not. That is people like Michael Howard(security guy) make no difference inside such a narrow minded company. He might as well spend he days talking to a wall, it would be as productive.
One thing is for sure with Windows OS not being open source you only have to worry about the major versions for compatibility issues, XP/win2k/Vista ect... If these were open source then you have to worry about all the different flavors of the major versions. To me that sounds like a nightmare. Open source maybe on different products but not the OS imop. I would much rather see collaboration between the top contenders in the market on one major OS than to have it open sourced to the general population to tweak.
http://www.eraserve.com
They didn't invent to Internet, the web, the browser, the word processor, the programming language, or the *nix operating system. But they did "borrow" like crazy from all these things to create their products.
Xerox would have done substantially better if they had gotten a "fair" share of the"Windows" revenue.