Archives » February 5th, 2003

February 5, 2003

The Open Source Threat

Microsoft is more and more feeling the pressure from Linux and other Open Source movements. In their quarterly filing to the SEC, they outline the problem under “Issues and Uncertainties”. The original document is here, as a 30+ page MS Word file, so let me quote the relevant part. Under the heading Challenges to the Company’s Business Model they say:

Since its inception, the Company’s business model has been based upon customers agreeing to pay a fee to license software developed and distributed by Microsoft. Under this commercial software development (“CSD”) model, software developers bear the costs of converting original ideas into software products through investments in research and development, offsetting these costs with the revenues received from the distribution of their products. The Company believes that the CSD model has had substantial benefits for users of software, allowing them to rely on the expertise of the Company and 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, there has been a growing challenge to the CSD model, often referred to as the Open Source movement. Under the Open Source model, software is produced by global “communities” of programmers, and the resulting software and the intellectual property contained therein is licensed to end users at little or no cost. Nonetheless, the popularization of the Open Source movement continues to pose a significant challenge to the Company’s business model, including recent efforts by proponents of the Open Source model to convince governments worldwide to mandate the use of Open Source software in their purchase and deployment of software products. To the extent the Open Source model gains increasing market acceptance, sales of the Company’s products may decline, the Company may have to reduce the prices it charges for its products, and revenues and operating margins may consequently decline.

It’s the section where they say they may have to reduce their prices to compete with Linux that’s the really interesting part. Until now, Linux has just been a little gnat buzzing around their face, nothing more than an annoyance. But now they’re discovering that the little gnat has a big sting. Once upon a time MS effectively killed Netscape by giving away Internet Explorer for free. Now they see what it’s like on the other side of the fence.

Hat tip: eWeek.