Ballmer Dismisses Linux Threat, Talks Up Intellectual Property

Published: February 28, 2007

by Timothy Prickett Morgan

Here's a metaphor for you. If you are Linux, a member of the open source family, then Microsoft chief executive officer, Steve Ballmer, is a bit like your mother in law: Every time he opens his mouth in what seems like an honest attempt to say something nice about you, some vitriol bubbles out and you get slapped with a backhanded compliment. So it was when Ballmer was hosting Microsoft's financial analysts meeting in New York last week.

Ballmer spoke on February 15 to Wall Street, talking about Microsoft, its products and market position, and its competition. (Had my wife and I not taken our young kids skiing in Taos, New Mexico, during New York City's winter school break, you would have been reading this story last week. The kids are old enough to build strong memories, to face adversity, and to enjoy real leisure now, so we went to Taos. And now my 5-year-old son skis a little worse than me--but only a little--and my 7-year-old daughter definitely skis better than I do. My wife always has and probably always will ski better than me. I actually had a Zuni Indian guide/ski instructor who kept me from killing myself on the steep slopes of Taos. It was quite an experience.) If you want to check out Ballmer's speech to Wall Street, you can read the full transcript here. I'll give you the high points here as they relate to Linux and open source software.

Ballmer explained that one of the issues that Microsoft is facing today is that the competition for software development and management talent is heating up, particularly now that Google has entered the picture. "I tell our people it's a little bit like people have used Linux five or six years ago," explained Ballmer. "We had a significant operating system competitor for the first time in a few years. We've obviously done very, very well against Linux over the last five years, either gaining or holding share, by and large, across the board. And we now have a significant single competitor again for talent, and when we go head to head, we're doing very well, but it's no doubt a more competitive market."

He told Wall Street that, despite the flattening trends that the IT trend watchers have been showing for all operating systems--including Windows and Linux--Microsoft intends to grow market share in the server space. "The server market continues to grow," said Ballmer. "We have very good opportunities to grow market share versus Linux over the next two or three years, which is very exciting. We have opportunities to add more value per server in some workloads. We're going to sell more management, we're going to sell more database. On the other hand, we're also going to sell more cheap servers, whether those are for high performance computing clusters or for big Web farms. There will be some upward and downward opportunities in terms of average price. But server units and market share growth is a huge opportunity for us."

Of course, after signing its SUSE Linux Enterprise Server distribution agreement with Novell last November, Microsoft itself is peddling Linux into its installed base. But don't get the wrong impression. In Microsoft's eyes, that deal was more about some vague notions it has about intellectual property than it was about giving Microsoft customers who wanted Linux an official conduit for support from both Microsoft and a reputable Linux vendor.

"The deal that we announced at the end of last year with Novell I consider to be very important," he explained. "It demonstrated clearly the value of intellectual property even in the open source world. I would not anticipate that we make a huge additional revenue stream from our Novell deal, but I do think it clearly establishes that open source is not free and open source will have to respect intellectual property rights of others just as any other competitor will."

Novell has said again and again that this is not what the deal is about, that it is about providing joint development for interoperability and joint customer support. And, of course, it is about getting a couple hundred million bucks in Microsoft money to help Novell balance its books. Ballmer has hinted that Linux has Microsoft's intellectual property in it, and that this deal means Linux customers do not need to fear any retribution from Microsoft's lawyers if they install Linux. Ballmer has not backed up any of these claims--much as the SCO Group has been unable to prove in the past four years that Linux contains Unix intellectual property that may or may not be under its control.

The big problem that Microsoft faces, and that no one at Microsoft wants to talk about, is that Linux and other open source software put the company's wares in the same relative market position that IBM's mainframes and AS/400s were in more than a decade ago. IBM had two very integrated commercial processing stacks of hardware and software that had the widest adoption of customers in the world. Then along came Unix and then Windows, and IBM's $20 billion mainframe and AS/400 business went into the tank, and it took its mainframe software business with it. Microsoft, after establishing Windows as a contender for revenue leader in the server space against the Unix collective (but still behind the combined Unix and Linux sales each quarter), is now talking about the fact that it has a higher price than Linux and open source stacks that run on them, but it provides better value. This argument works for many customers, but over time, it is hard to maintain, as IBM's history shows.

"Having a competitor out there who at least nominally looks to be close to free is always a challenge, and there always is a set of pressure on us, particularly on pricing," said Ballmer. "There's a set of pricing pressure that nobody should ignore. We are competing with a value equation. We are higher priced, but we bring greater value. But I don't want to eliminate in your minds the notions of risk of pricing that comes from competition from open source.

Whether or not Microsoft's top brass underestimates the power of open source, or just pretends that it is not a big deal, is anyone's guess. As one of the largest holders of software patents and the most profitable company in the world based on its desktop monopoly and dominant, volume position in servers, Microsoft ought to hate, loathe, and despise Linux and open source. Which makes the deal with Novell all more peculiar. In many ways, Linux is Microsoft's in-law, too.

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