Financial Details Emerge in Microsoft-Novell Deal

Published: November 15, 2006

by Alex Woodie

When Novell and Microsoft unveiled their landmark partnership two weeks ago, one of the details left to the imagination was the amount of money that would be changing hands. Following a filing Novell made to the Securities and Exchange Commission, the scale of this momentous, multi-year pact becomes clear. And because questions have ensued, Novell also reiterated that the deal is in line with the GNU General Public License.

The announcement between Microsoft and Novell two weeks ago was unexpected and pleasing; unexpected, because Microsoft had waged such a fierce and bitter battle to discredit the Linux operating system, and pleasing because it signaled the end of that campaign is within sight. The deal highlights three areas of cooperation --technical, marketing, and legal--which the companies will use to resolve the differences between Microsoft Windows and Novell's SUSE Linux Enterprise Server (SLES).

On the legal front, the companies committed to not sue each other's customers for patent infringements. On the technical front, the companies made several promises. They include making their operating systems run well together in virtualized environments; ensuring their operating environments can be managed with a common set of tools (which will utilize Web service technology and be delivered by third-party ISVs); building translators that ensure compatibility of Microsoft Office and OpenOffice document formats; and integrating their respective directory products, Microsoft Active Directory and Novell's eDirectory. In terms of marketing, Microsoft pledged to buy 70,000 licenses of SLES, which it plans on distributing to its customers.

According to Novell, Microsoft will make a lump sum payment to Novell in the amount of $240 million, which will buy Microsoft 70,000 subscription certificates for Novell's SUSE Linux Enterprise Server. The plan calls for Microsoft to distribute these coupons to its Windows Server customer base so they can acquire and run SLES in virtual partitions using the upcoming "Viridian" hypervisor that will debut with Windows Server "Longhorn," according to Novell's SEC filing. It also pays for all SLES maintenance and support from Novell.

Microsoft also committed to spend $12 million per year for marketing and promotion of joint Linux-Windows virtualization scenarios. The software giant also promised to spend $34 million over the life of the agreement to build a marketing force devoted primarily to sales of the combined offering. The agreement between Microsoft and Novell is good through 2011.

According to the SEC filing, the deal stipulates that, for the first three years of the pact, Microsoft cannot enter into an agreement with any other Linux distributor to encourage the adoption of Linux certificates and joint Linux-Windows Server virtualization scenarios similar to the one that Novell and Microsoft have put together. That means Red Hat, the other major Linux distributor in the U.S., is out of the party until at least 2009.

Microsoft will also pay Novell a lump sum amount of $108 million as part of the patent cooperation agreement. For its part in the patent cooperation deal, Novell says it will pay Microsoft at least $40 million over the course of a five-year span. The exact number will be based on a percentage of the revenues Novell realizes for its Open Platform Solutions and Open Enterprise Server products, the company says.

That brings Microsoft total commitment on this Windows-SLES deal to $442 million, whereas Novell has promised to pay a total of $40 million.

Meanwhile, Novell said it has been flooded with questions from the open source community about how the deal will affect Novell's reliance on the GPL. According to Novell, which published a set of FAQs on the topic, the deal does nothing to endanger its customers or contradict the GPL.

"Many people want to know whether this agreement is compatible with Novell's obligations under the GPL, especially section 7. This was an important consideration for us as well," said Joseph LaSala, senior vice president and general counsel for Novell. "Our agreement does not affect the freedom that Novell or anyone else in the open source community, including developers, has under the GPL and does not impose any condition that would contradict the conditions of the GPL. Therefore, the agreement is fully compliant with the GPL."

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