Microsoft Warns SEC of Open-Source Threat

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.