Microsoft From Hunter to Hunted

Posted by on March 26, 2008 in Cloud Computing, competition, Microsoft, Open Source | 2 comments

timebomb.jpg In what should have been recognized about 2 years ago, Microsoft finally comes to grips with. And it originates in a most unusual form — a forward looking statement on their 10-K report. Excerpt here –

Challenges to our business model may reduce our revenues and operating margins. Our business model has been based upon customers paying a fee to license software that we developed and distributed. 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. In recent years, certain “open source” software business models have evolved into a growing challenge to our license-based software model. Open source commonly refers to software whose source code is subject to a license allowing it to be modified, combined with other software and redistributed, subject to restrictions set forth in the license. 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 have to bear the full costs of research and development for the software. A prominent example of open source software is the Linux operating system. Although we believe our products provide customers with significant advantages in security, productivity, and total cost of ownership, the popularization of the open source software model continues to pose a significant challenge to our business model, including continuing 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.

Another development is the software-as-a-service business model, by which companies provide applications, data, and related services over the Internet. Providers use primarily advertising or subscription-based revenue models. Recent advances in computing and communications technologies have made this model viable and enabled the rapid growth of some of our competitors. We are devoting significant resources toward developing our own competing software plus services strategies. It is uncertain whether these strategies will prove successful.

Now note the date, June of 2007. Microsoft knew then that FOSS was going to be a problem. I presumed that they attempted their usual FUD and it did not work. Its hard to beat an organization that has no stock, has no ROI and has no institutional investors to answers to. Observations in two parts –

1) The FOSS bandwagon will continue to move forward. The only thing that can stop it is some sort of governmental action which is highly doubtful. FOSS has an empirical advantage at this point with R&D. Not about spending big bucks but for not needing to. When you are running a shoestring operation to come out with a new embedded device most garage startups now reach for the Linux Uc as it saves them money and time. Once the foot is in the door the need for proprietary OS’s lessen.

2) The same can be said for services as well. Many of the ‘Network as Desktop’ are running a variant of Linux on the server side for all the reasons we listed in (1). It is very hard to justify a MS Office + SharePoint scheme with its Cal licensing vs say the pure services play of something like ThinkFree. Microsoft itself seems to have doubts about this very thing — It is uncertain whether these strategies will prove successful.

Microsoft 10K.
ThinkFree website.


  1. Actually, I hope Microspft hangs around. Their business practices have been a real force in accelerating the growth of open source.

  2. Oh I think they will be around long enough to see the demise of their bread and butter. But MS is too big to just disappear. A smaller MS could survive on the MS embedded os and cellular biz.