The day open source became big business is the day that open-source development exploded. Yes, open source predates the moneyed interests hankering to use it to competitive advantage, but it really wasn't until IBM dropped $1 billion on Linux that companies began paying employees to write free software that the movement saw broad adoption.
That's when open source became more than an efficient way to develop software, and also became a great way to build a business.
However, adding open source to one's business is not magical pixie dust that guarantees its viability. As IBM's Bob Sutor explains:
The basic principles around revenue, profit, loss, taxes, payroll, overhead, accounting, sales, incorporation, health care, and human resources all apply. You can be a starving open source software entrepreneur as easily as a starving proprietary software entrepreneur. No one will excuse basic business failures and screw-ups just because you use open source. Make sure that you will produce a product that people want and in some way will pay for, no matter how indirectly.
Sutor's counsel applies to any company or individual that wants to build a business around open-source software, but arguably some of the industry's best projects are not the product of any one company, but rather of several. Linux, Mozilla, Apache Software Foundation, Eclipse, and other collaborative communities represent an interesting way to use open source to competitive advantage.
In many ways, open source has become a critical component of the software industry because the market has largely moved from vertical businesses (i.e., companies controlling all aspects of production, distribution, etc.) to horizontal markets (i.e., companies focusing on their core competencies and depending on others for complementary functions).
Linux: Peace, love, & squeezing Microsoft
But this business control system has a inherent risk. Should an organization monopolize a specific segment of a value chain system they can extract a higher percentage of its total proceeds. If the product, or service, in question is price elastic than those additional proceeds will come from other participants in the value chain system.
Case in point? Windows. By owning the operating system, Microsoft threw a wrench into the collective cogs of horizontally oriented software firms like Intel, IBM, and others.
The industry's response--Linux--is a classic example of the open-source approach to mitigating individual choke holds within an industry, as Prentice goes on to write:
What then does a CEO do when facing a squeeze on their profits because a direct, or downstream, supplier is dominating a segment of the value chain system? Besides negotiating a better deal - if they can - they've been left with little choice but to get directly into that segment of the value chain system themselves. But by doing so their organization is distracted from focusing on its own core competency.
The risk of such an undertaking can be mitigated if there is a collective response by similarly affected members of the value chain system. After all, it is usually a shared problem. But collective responses have always had an inherent, and often fatal, flaw. Who owns the resulting assets? Either organizations enter into complex joint venture agreements to sort this out or run the risk of shifting the distortion in the value chain system to another organization.
Again, Linux offers the perfect example. IBM, Intel, Red Hat, and others aren't investing in Linux because they're all chums at the country club together, but rather because they're looking for ways to reduce Microsoft's hold on their own businesses through its control of personal computer and server operating systems.
As an added benefit, it's a great way for companies to collaborate without running afoul of antitrust laws. It's collusion without the collusion.
Intriguingly, even Microsoft is getting into this game. Microsoft's partnership with open-source ad serving company OpenX indicates that Microsoft, too, is figuring out how to use open-source complements to loosen strangleholds competitors like Google may be hoping to throw in its way.
This is why open source is growing so much faster than the rest of the industry, as IDC finds. It's not because we love each other more. Quite the opposite. It's because proprietary vendors have figured out that open-sourcing key complements to their core businesses can be strategically decisive in hurting competitors while helping themselves.
The European Union undoubtedly believes it is taking a principled stance against the specter of antitrust as Oracle attempts to buy Sun Microsystems. As I've written, however, the EU's delay threatens to gift Sun's customers to IBM and other competitors while doing little to no good for its MySQL business. Worse still, the EU may be paving the way for Oracle to drop its bid, only to return to scoop up Sun's software assets at a rock-bottom price.
Think this is far-fetched? Consider the following (increasingly likely) scenario:
Let's say the EU holds up Oracle's acquisition of Sun by four months. In the technology world, this is an eternity. The lack of clarity around the business has already contributed to two woeful quarters from Sun, with Q4 revenue down 31 percent year-over-year.
Sun's revenue drop is bad, but it will almost certainly get worse the longer the EU drags out its "in-depth investigation." How much worse? Perhaps 50 percent. Heck, perhaps as bad as 80 percent. IBM and HP, in particular, have been crowing about hundreds of Sun customers jumping ship in the wake of Oracle's beleaguered acquisition. Thirty-one percent may come to seem like the good ol' days.
The sad thing is that the EU will almost certainly bow to the inevitable and withdraw its objections. It will look silly for holding up a deal on the specious grounds of MySQL's health (it's doing just fine, thank you, and isn't in danger of being lobotomized by Oracle, which likely will prove to be a better manager of this asset than Sun was).
The EU, unfortunately, is likely not to notice just how silly its stance was, and we'll see other companies go through the same rigamarole.
Regardless, Oracle isn't a silly company, and isn't going to pay top dollar for a diminished asset. It would not be surprising to see Oracle drop its offer by as much as 50 percent, claiming it's actually a premium as revenues are down by more than that. (There is precedent for this in Oracle's various offers for PeopleSoft.) Sun, ruined by this point, would have little choice but to capitulate.
All of which would make Oracle's acquisition of Sun's software business even better than before. As Larry Augustin noted, Oracle's $7.4 billion offer for Sun effectively valued the software at $0.00. Getting a better price on the hardware business and still buying the software business for $0.00? That sounds like a sweet deal.
After all, Oracle is primarily interested in Sun's software assets. Getting Sun for $3.7 billion would make it even easier to quickly flip Sun's hardware business to Fujitsu or HP at a profit, which some speculate is waiting in the wings to buy Sun's hardware business and which I noted back in March was considering a joint-bid on Sun with Oracle.
"Angelic" may not be the word most often associated with Oracle. "Shrewd" is more apt, and low-balling Sun after the EU scuppers its value is shrewd business indeed.
EU competition commissioner Neelie Kroes probably means well by holding up Oracle's acquisition of Sun, but the only group she's helping with the investigation is Oracle, which may end up getting Sun for half what it planned to pay. I'm sure Ellison will give her a ride on his yacht for her troubles.
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I suggested on Monday that Dell should acquire Red Hat to build its software business with open source. While there is a range of valid concerns about such a move, perhaps the biggest complaint was, "What if Microsoft doesn't like it?"
This concern seems to be all-conclusive for some, but I'm not sure why. In case no one has noticed, the days of kowtowing to Microsoft's desktop dominance are, or should be, over. Apple is the best example as to why.
The media is fond of calling out the Mac's rising fortunes against Windows, but many apparently forget that a little more than 11 years ago, Apple was on the ropes and had to humbly accept a $150 million investment from Microsoft. Microsoft, largely playing to the U.S. antitrust authorities, made a big deal of porting Office, Internet Explorer, and other applications to the Mac platform. This move would pave the way for Apple's resurgence just a few short years later.
Surely, if anyone was in a position to cater to Microsoft's whims, it would have been Apple, whose very existence largely depended on the good graces of Microsoft. How many of us would have been able to switch to the Mac, had Office not run natively on it?
And yet Apple fought. Slowly but surely, Apple began to make announcements that must have irked Microsoft, like the Safari browser in 2003, eventually taking its applications like iTunes and Safari to Microsoft's door by porting them to Windows in a bid to make Windows users comfortable with a Mac experience.
Today, Microsoft continues to improve its applications for the Mac platform, announcing this week, for example, the Microsoft Document Collaboration Companion for Mac to improve the SharePoint experience for Mac users. Apple? Well, let's just say that it continues to stick its finger in Microsoft's eye.
Apple did what few besides Google have dared to do: defy Microsoft. Apple, more than most, was dependent on Microsoft, and yet it still refused to pull any punches against its benefactor. Judging from the company's market share gains, I'd call its strategy an unqualified success.
For those who insist that Dell and others set themselves up with an umbilical existence to Microsoft's whims, I suggest that you take a close look at Apple. Companies that try to placate Microsoft and avoid ruffling its feathers often find that Microsoft has no such compunctions about avoiding stepping on their toes.
Microsoft is a big company, one that must grow by expanding into new markets, thereby competing with its one-time partners. Today, Dell serves a complementary market to Microsoft. Tomorrow? Well, everything is on the table for tomorrow's competition.
Over the past few years, the technology industry has discovered that those pesky bureaucrats in Washington, D.C. actually wield a lot of power. Microsoft, in particular, learned years ago that a little money goes a long way to stave off antitrust lawyers, as suggested by The New York Times.
It's therefore not surprising to see Microsoft, Google, Yahoo, and others actively lobbying Congress for a wide variety of things, including H1-B visa expansion, Net neutrality, etc.
What is perhaps surprising is how much Microsoft is outspending its rivals, as The Seattle Post-Intelligencer reports.
Indeed, as the Associated Press notes, Microsoft's "tab of almost $2 million for the third quarter alone nearly equaled the amount its rival Google Inc. spent in the first nine months of the year."
There are good reasons for this: Microsoft has spent quite a bit of time (and, apparently, money) this year trying to convince Congress to put the kibosh on the Google-Yahoo advertising deal, as reported in The New York Times, and ultimately succeeding. Last week Google abandoned the deal in the face of an antitrust fight, one no doubt founded in part on Microsoft's lobbying cash. Microsoft learned the hard way that money can make Washington, D.C. work for it...with just a few million dollars' worth of influence.
Gone are the days of two entrepreneurs in a garage, changing the world. As technology becomes a critical part of the global economy, lobbying and lawyers have become de rigueur. This year Microsoft is the big spender on Capitol Hill, but as Google comes under fire for privacy and other concerns, it will no doubt be next.
Microsoft has been slow in complying with the US Department of Justice's 2001 order for Microsoft to provide documentation on how its programs interoperate, but it's now promising to have them delivered by March 2009.
Whatever. It has taken Microsoft many years and it still can't - or, rather, won't - provide documentation that it must already have internally?
Come on, Microsoft! Many software vendors would like to see their applications - open source and otherwise - work even better on Windows or with Office. This intransigence doesn't just hurt you. It hurts your would-be partners. It hurts your customers. Start acting like a grown-up that can share the sandbox.
As I was pining for the good ol' days of predatory Microsoft, I read that the Jekyll side of Microsoft never really left. From All Things D:
In a status report filed with Federal antitrust regulators yesterday, Microsoft said it had done much to comply with its 2002 antitrust consent decree....
In the states, perhaps. But apparently not in Asia. Because not 24 hours later, China's State Intellectual Property Office said it's investigating the software giant for discriminatory pricing. And according to the Shanghai Securities News, it may sue Microsoft under a new antitrust law scheduled to go into effect Aug. 1.
Let me make sure I understand this: China has long benefited from stealing Microsoft's software. Now it's considering suing because Microsoft charges too much for the software it pirates?
Apparently, China's State Intellectual Property Office may be organizing a group of companies to sue Microsoft for using its market power to charge high prices in China, where the cost of Microsoft's software can easily exceed the hardware costs for a new PC.
But isn't this the land of piracy, where Microsoft's software is basically free, whatever the list price may say? Microsoft has used piracy as a strategic weapon in China. It's somewhat ironic to see China complaining about Microsoft's pricing. Does the government have an alternative in mind?
UPDATE: China's anti-piracy agency is now denying an investigation into an antitrust suit against Microsoft, the AP reports.
"Our office has never conducted research on monopoly behavior aimed at any enterprises," the [agency] said. "And at present we have no plan to conduct this work."
Right hand, meet left hand.
Last week Apple decided to try its hand at bundling. Tying is just around the corner.
Apple already has a place on the desktops of many Windows users through iTunes. Like Microsoft before it, Apple figured this was a great Trojan Horse to start pushing its other software. Like Microsoft before it, Apple stepped over the line, as John Lilly, CEO of Mozilla, suggested:
What Apple is doing now with their Apple Software Update on Windows is wrong. It undermines the trust relationship great companies have with their customers, and that's bad -- not just for Apple, but for the security of the whole Web.
John then goes on to say he's not against Apple's use of iTunes to push the Safari browser. He's wrong. Larry Dignan suggests John's complaint stems from Mozilla trying to protect its lucrative search relationship with Google. He's wrong, too.
If a browser had anything to do with iTunes, this wouldn't be so egregiously bad. But it doesn't. No, Apple's move bears the imprint of a would-be monopolist that cares more about its market position than its customers. I'm guessing it has little to do with Safari and much to do with...the iPhone.
... Read moreIt's tough to please the European Commission on matters of antitrust. But then, Microsoft hasn't tried very hard.
The Commission just hit Microsoft with a $1.35 billion fine for being "unreasonable" over its proposed patent fee structure:
"Microsoft was the first company in fifty years of EU competition policy that the Commission has had to fine for failure to comply with an antitrust decision," said European Competition Commissioner Neelie Kroes. "I hope that today's decision closes a dark chapter in Microsoft's record of noncompliance with the Commission's March 2004 decision and that the principles confirmed by the Court of First Instance ruling of September 2007 will govern Microsoft's future conduct."
News.com Poll
Now, why would she think that? The Commission has dinged Microsoft before with fines, to no effect. Clearly, it is using the wrong tools or perhaps has the wrong argument. The ironic thing is that Microsoft could reduce its patent fees from its initial 3.87 percent to 0 percent, and it wouldn't affect its business one iota.
... Read moreWow. Microsoft is nothing if not brazen. When you think of Microsoft you normally don't think of these words, at least not together, yet these words came from Microsoft's general counsel, Brad Smith, in response to Google's complaint that a Microsoft and Yahoo! tie up would be bad for the Internet:
Microsoft is committed to openness, innovation, and the protection of privacy on the Internet.
Microsoft? Committed to openness? Microsoft has been committed to destroying openness over the years, and Brad Smith has played an integral role in that strategy, defying the US Justice Department and the world's consumer. I think highly of Brad, but I find this guile to be galling in the extreme.
Google is exactly right in calling out Microsoft's cheek:
... Read moreA letter from the top two ranking members of the Senate Subcommittee on Antitrust, Competition Policy, and Consumer Rights, Democrat Herb Kohl and Republican Orrin Hatch, seeks to chill Google's proposed acquisition of DoubleClick on antitrust grounds:
Antitrust regulators need to be wary to guard against the creation of a powerful Internet conglomerate able to extend its market power in one market into adjacent markets, to the detriment of competition and consumers.
This might not have seemed like much of a threat, even a year or two ago, but as the online world increasingly merges with the offline world, the threat becomes more palpable.
My primary concern with the deal isn't about advertising market share, but rather about privacy, as the senators also call out:
... Read more
