Microsoft Warns SEC of Open-Source Threat

By Peter Galli  |  Posted 2003-02-03 Print this article Print

Microsoft may in the future be forced to lower its software prices as a result of the growth of open source, the company cautioned in its latest filing with the SEC.

Microsoft Corp. may in the future be forced to lower its software prices as a result of the growth of open source, the company cautioned in its latest filing with the Securities and Exchange Commission. In its latest 10-Q quarterly filing, Microsoft said that the popularization of the open-source movement continues to pose a significant challenge to its business model. This threat includes "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 companys 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 said.
At the root of the problem for Microsoft is the challenge open-source software presents to its traditional business model—which is based on customers paying to license its software. Under this commercial software development model, software developers bear the costs of creating the software but receive license payments for its use. But the open-source movement has turned that model on its head. Now, software is produced by global communities of programmers, with the resulting software and intellectual property licensed to end users at little or no cost, the filing said. Microsoft also alienated many of its largest customers with its controversial new Licensing 6 and Software Assurance program, which took effect last year. The company has since tried to address some of the issues it faces resulting from the growing popularity of open source, by looking at new ways to make Licensing 6 more beneficial to small- and medium-size businesses, as well as by creating a new global initiative to provide governments around the world with access to Windows source code. This new security initiative, known as the Government Security Program, is designed to "address the unique security requirements of governments and international organizations throughout the world," Microsoft said. The governments of both the United Kingdom and Russia have signed up so far, as has NATO, and Microsoft is talking to more than 20 other countries about their interest in the program. Microsoft has been increasingly concerned by moves such as that of the German government, which announced last June that it was moving to standardize on Linux and an open-source IT model at the federal, state and communal levels. The German governments move followed more than 75 other government customers. The U.S. Department of Agriculture, the Federal Aviation Administration, the U.S. Department of Energy, the U.S. Air Force and Pinellas County, Fla., are all using Linux, as are agencies in the governments of China, Singapore and Australia. But the greatest open-source threat Microsoft faces is to its server business. In fact, research and consulting firm Meta Group predicted that Microsoft would begin moving some of its current proprietary application enablers, such as the components of its software-as-a-service .Net strategy, to the Linux environment in late 2004.

Peter Galli has been a financial/technology reporter for 12 years at leading publications in South Africa, the UK and the US. He has been Investment Editor of South Africa's Business Day Newspaper, the sister publication of the Financial Times of London.

He was also Group Financial Communications Manager for First National Bank, the second largest banking group in South Africa before moving on to become Executive News Editor of Business Report, the largest daily financial newspaper in South Africa, owned by the global Independent Newspapers group.

He was responsible for a national reporting team of 20 based in four bureaus. He also edited and contributed to its weekly technology page, and launched a financial and technology radio service supplying daily news bulletins to the national broadcaster, the South African Broadcasting Corporation, which were then distributed to some 50 radio stations across the country.

He was then transferred to San Francisco as Business Report's U.S. Correspondent to cover Silicon Valley, trade and finance between the US, Europe and emerging markets like South Africa. After serving that role for more than two years, he joined eWeek as a Senior Editor, covering software platforms in August 2000.

He has comprehensively covered Microsoft and its Windows and .Net platforms, as well as the many legal challenges it has faced. He has also focused on Sun Microsystems and its Solaris operating environment, Java and Unix offerings. He covers developments in the open source community, particularly around the Linux kernel and the effects it will have on the enterprise.

He has written extensively about new products for the Linux and Unix platforms, the development of open standards and critically looked at the potential Linux has to offer an alternative operating system and platform to Windows, .Net and Unix-based solutions like Solaris.

His interviews with senior industry executives include Microsoft CEO Steve Ballmer, Linus Torvalds, the original developer of the Linux operating system, Sun CEO Scot McNealy, and Bill Zeitler, a senior vice president at IBM.

For numerous examples of his writing you can search under his name at the eWEEK Website at


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