All Things Digital

Get this: A new report from the Standish Group claims that FOSS–free and open source software–is decimating the software market. To wit:

Open Source software is raising havoc throughout the software market. It is the ultimate in disruptive technology, and while to it is only 6% of estimated trillion dollars IT budgeted annually, it represents a real loss of $60 billion in annual revenues to software companies.”

Quite a claim. A contentious one too, since, according to research outfit IDC, Linux software actually contributed $10 billion to the market and is expected to contribute $31 billion by 2011. The 2011 forecast for spending on the entire Linux ecosystem? More than $49 billion.

Oh, and in case you were wondering, a Web search for “Standish Group”+Microsoft+”sponsored by” didn’t return any documents.

Back in 2005, word on the street had it that the Mozilla Foundation was making as much as $30 million annually from the Google search box in its open-source Firefox Web browser.

Turns out, that number probably wasn’t too far off. According to an independent auditor’s report, Mozilla made $66.8 million in revenue in 2006, quite a bit of it from Google (GOOG). As former Mozilla Corp. CEO Mitchell Baker explained in a post to MozillaZine:

As in 2005 the vast majority of this revenue is associated with the search functionality in Mozilla Firefox, and the majority of that is from Google. The Firefox user base and search revenue have both increased from 2005. Search revenue increased at a lesser rate than Firefox usage growth as the rate of payment declines with volume. Other revenue sources were the Mozilla Store, public support and interest and other income on our assets.”

But those “other revenue sources” are piddling in comparison to Google’s contribution, which apparently accounts for a full 85% ($56 million or so) of Mozilla’s revenues.

So it’s supremely ironic then to hear Mozilla CEO John Lilly criticize Apple (AAPL) for distributing its Safari browser for Windows and OS X through its Software Update utility. “What Apple is doing now with their Apple Software Update on Windows is wrong,” Lilly said in a blog post on Friday. “It undermines the trust relationship great companies have with their customers, and that’s bad–not just for Apple, but for the security of the whole Web. … Apple has made it incredibly easy– he default, even–for users to install ride-along software that they didn’t ask for, and maybe didn’t want. This is wrong, and borders on malware distribution practices. It’s wrong because it undermines the trust that we’re all trying to build with users. Because it means that an update isn’t just an update, but is maybe something more. Because it ultimately undermines the safety of users on the Web by eroding that relationship. It’s a bad practice and should stop.”

Now, Lilly may have a point. But he’s hardly the best guy to be making it. As ZDnet’s Larry Dignan notes, Safari–like Firefox–features a Google search box, for which the search giant also presumably pays a placement fee. A sudden gain in market share for Safari at Firefox’s expense could have financial implications for Mozilla. “Let’s say Safari grabs 10% market share and Firefox falls to about 25%,” Dignan writes. “That’s fewer searches and less revenue for Mozilla. Sure, you can argue about whether Apple’s Safari move is above the board. You can also question the security implications and a bevy of other issues. But in the end, Apple’s Safari update and Mozilla’s reaction is like any other story. To truly understand it you have to follow the money.”

UPDATE: John Lilly wrote to me earlier today with a few comments about this post. Here’s what he had to say:

Hi John –

Wanted to follow up on your post just now about us and Apple and Google.

Take this for whatever it’s worth, but revenue and market share didn’t enter my mind when I posted. At Mozilla we obviously care about having enough resources to keep the lights on and pay people, and we care about having enough market share–because it means that we’ve built products that people really care about.

But competition is good and healthy, and essential. Without competition we’d all be in a pretty bad world–sort of like AT&T in the bad old days.

I’ve got zero issues with Apple using their channel to distribute other products–I think that’s a perfectly fine thing for them to do. What I worry about is that users need to trust the security updates they get from their vendors–because if they don’t–if they think there’s an ulterior motive other than keeping software up-to-date–that’s a problem for everyone.

Anyway, I respect your right to write what you think and to be skeptical of the motives of folks like me, but I do say sincerely that in this case, revenue has nothing to do with it.”

Microsoft (MSFT) made a “significant” company announcement this morning, one thankfully unrelated to its bid for the much diminished Yahoo (YHOO) Inc.

But what is there for the software giant to talk about these days other than Yahoo, really? Why that old saw, software interoperability, of course. In a statement issued this morning, the software giant announced changes to its technology and business practices intended to “increase the openness of its products and drive greater interoperability, opportunity and choice for developers, partners, customers and competitors”–which translates roughly as “appease European antitrust officials.”

Among the key changes:

• Microsoft will make the protocols and APIs in its high-volume products openly available to the developer community.
• Microsoft will indicate which protocols are covered by Microsoft patents and will issue licenses to those patents on “reasonable and nondiscriminatory terms, at low royalty rates.”
• Microsoft will implement a covenant not to sue open-source developers for development or noncommercial distribution of implementations of those protocols.
• Microsoft will support open standards and work with developers and standards-setting bodies to enable the transfer of user data from Microsoft applications to apps designed by third-party developers.

“Customers need all their vendors, including and especially Microsoft, to deliver software and services that are flexible enough such that any developer can use their open interfaces and data to effectively integrate applications or to compose entirely new solutions,” Ray Ozzie, Microsoft’s chief software architect, said in a statement. “By increasing the openness of our products, we will provide developers additional opportunity to innovate and deliver value for customers.”

Quite a move for a company whose leadership once likened Linux to “cancer” and derided open-source licensing models as “Pacman-like.” Though it’s not like we haven’t seen this all before.

“They are not making the source codes open, but they are opening the gates that allow you into the compound,” said Matt Asay, a general manager at open-source management company Alfresco. “It’s a great first step. … It’s a bold move by Microsoft. It’s a good indication of Microsoft’s self-confidence that it feels it can open up what effectively are its crown jewels and not lobotomize its company at the same time.”

Looks like Samba is the first beneficiary of the European Commission’s antitrust sanctions against Microsoft. To comply with the terms established by the EC’s 2004 antitrust ruling, the software giant has signed an agreement with Samba that will give the company the protocol documentation its developers need to make its open-source software inter-operate with Windows.

“Today the Samba team announced that they’re satisfied with the agreement, and are taking a Work Group Server Protocol Program trade secret and copyright license,” Microsoft Director of Platform and Technology Strategy Sam Ramji wrote in a post to the Microsoft Port 25 blog. “This will give them access to Microsoft specifications for the protocols in WSPP (such as file, print, and user and group administrative services) and allow the Samba team to create, use and distribute implementations. I expect this will significantly improve the process of Samba development, and produce better quality inter-operation between Windows and Linux/Unix environments. … This is an historic moment, and one that I’m proud of.”

As he should be. Even if it did come under duress.

Samba, which has been struggling valiantly for years to support Windows server protocols, was understandably overjoyed to finally ink such a deal. “They’re giving us all the documentation to make everything work,” Jeremy Allison, co-author of Samba, told InfoWorld. “We will have no more excuses to suck … if we don’t have something, we won’t be able to say it’s not our fault we don’t know how to do it.”

(Incidentally, you’ll find Microsoft’s Holiday Gift Guide here. And boy, is it ever something: Traditional calendars for Excel! Three dozen Outlook add-ins! Oh, and thanks for the photo, “Encyclopedia Brown.”)

The desktop has become a lot like teenage sex: A lot of people are talking about it but not many people are doing it.”

–Matthew J. Szulik, Red Hat CEO, October, 2005

I’d argue that a worldwide monopoly, enforced by business practices that a federal judge has found to be predatory and anticompetitive, probably has more to do with killing innovation than anything the open source movement could ever do.”

–Szulik on Microsoft’s 2001 claim that Linux “stifled innovation”

Matthew Szulik, Red Hat’s wisecracking chief executive officer, is stepping down after nearly a decade on the job. He’ll remain with the company as chairman of the board, but Jim Whitehurst, a former Delta chief operating officer (yes, an airline exec), will take on the CEO role.

Szulik, who’s been with Red Hat since just a few months after its IPO in 1999, said he’s giving up the CEO job because of a family crisis. “For many months, my family has been challenged by serious health issues,” Szulik said during a conference call to discuss the company’s strong third-quarter financial results. “It became clear to me that I needed to direct the same level of attention and effort in support of my family at this time that I have invested in Red Hat for nearly a decade.”

And hopefully–no, presumably–that will be enough to resolve whatever crisis it is that Szulik faces (and all of us here at D wish you the best, Matthew). Under his stewardship, Red Hat reported yesterday that third-quarter profit surged 39% from a year ago, to $20.3 million. Revenue rose 28% to $135.4 million.

“For many years, my face has been pressed up against the windshield trying to look into the future,” Szulik wrote in a farewell posted to the Red Hat blog. “Learning and adapting to an evolving Red Hat community, culture and marketplace. Red Hat associates past and present, along with members of the open source community and our customers and partners, picked up their brushes, dipped them into a paint palette of color to create this artwork called Red Hat. I take pride when customers and industry types comment to me that the people of Red Hat are ‘different.’ Not like the cylons who have come to dominate the industry of technology. Through our actions, the open source community and the people of Red Hat are defining a modern economic relationship between developer and customer. Collaboration. Transparency and value delivered. Our customers and marketplace are responding as evidenced by our financials and strong market potential. What was once considered a joke in 1998 no longer is. Today governments and industry are responding to the values and practices of open source as evidenced by their support of OLPC [One Laptop Per Child] and the broad open source education initiatives in India, South America and parts of Africa.”

Looks like European Competition Commissioner Neelie Kroes is going to go down in history as the person who finally humbled Microsoft. This morning Microsoft admitted defeat in its nine-year battle with the European Commission, agreeing to comply with key elements of the EC’s 2004 antitrust order against it.

“At the time the Court of First Instance issued its judgment in September, Microsoft committed to taking any further steps necessary to achieve full compliance with the commission’s decision. We have undertaken a constructive discussion with the commission and have now agreed on those additional steps,” Microsoft said in a statement. “We will … continue to work closely with the commission and the industry to ensure a flourishing and competitive environment for information technology in Europe and around the world.”

Quite the change of heart for a company that once trashed the European Union for dreaming up “new laws” that could hurt others in the technology industry.

And so, after more than three years of legal wrangling and nearly $1.43 billion in fines, Microsoft will license key “interoperability information” to rivals who need it to make their software compatible with Windows, which will likely have huge ramifications for the industry.

“Now that Microsoft has agreed to comply with the 2004 decision, the company can no longer use the market power derived from its 95% share of the PC operating system market and 80% profit margin to harm consumers by killing competition on any market it wishes,” Kroes said. “These changes in Microsoft’s business practices, in particular toward open-source developers, will profoundly affect the software industry. The repercussions of these changes will start now and will continue for years to come.”

It’s been a year since Microsoft CEO Steve Ballmer first claimed the Linux operating system infringes on Microsoft’s intellectual property and six months since the company’s general counsel, Brad Smith, and vice president of intellectual property and licensing, Horacio Gutierrez, told Fortune magazine that Linux and other open-source software projects between them violate 235 Microsoft patents.

Such anti-Linux declarations being biannual, it’s clear we were about due for another one, which Ballmer dutifully provided last week at a company event in the United Kingdom.

… Our battle is not sort of business model to business model. Our battle is product to product, Windows versus Linux, Office versus OpenOffice.
The only other thing I would say that is probably germane is, we spend a lot of money, the rest of the commercial industry spends a lot of money on R&D. We’ve spent a lot of money licensing patents, when people come to us and say, ‘Hey, this commercial piece of software violates our patent, our intellectual property,’ we’ll either get a court judgment or we’ll pay a big check. And we are going to–I think it is important that the open-source products also have an obligation to participate in the same way in the intellectual property regime.

“That’s why we’ve done the deal we have with Novell, where not only are we working on technical interoperability between Linux and Windows, but we’ve also made sure that we could provide the appropriate, for the appropriate fee, Novell customers to also get essentially the right to use our patented intellectual property. And I think it’s great the way Novell stepped up to kind of say intellectual property matters. People who use Red Hat, at least with respect to our intellectual property, in a sense have an obligation to eventually compensate us.”

So according to Ballmer, if you’re a Red Hat customer you may have an “undisclosed balance-sheet liability” to deal with in the near future. And if you’re not, you probably want to stay away from free software entirely. Because, as Groklaw’s Pamela Jones suggests, Microsoft apparently plans to eradicate it.

Ballmer “has just clearly outlined how Microsoft intends to extinguish Linux as we know it,” Jones writes. “Microsoft knows full well that in any intellectual-property regime based on software patents, particularly when used as weapons against innovation to protect and reward the old, no one can compete with Microsoft. They have all the money. FOSS is written by individuals who don’t have a pile of gold under the bed to go to court and get a court judgment or pay ‘a big check.’ Ballmer of course knows that. So this is the anticompetitive plan, under the guise of everyone having to play by the same rules.”

If billionaire investor-provocateur Carl Icahn wants to put enterprise software company BEA Systems on the block, he’d best prepare himself for another Time Warner-style siege.

According to Kevin Faulkner, the company’s senior vice president of investor relations, BEA isn’t for sale. And what’s more, even if Icahn is able to use his 8.5% of the company’s outstanding shares to force a sale, he may not be able to find a buyer. The company plans to restate as much as $390 million in costs for backdated stock options, and its license revenues are shrinking.

“You’re not seeing a whole lot of excitement there,” said analyst Rob Enderle. “And this class of software, because of open source, it’s much harder to get people interested in it unless you’re doing phenomenally well in sales–which BEA has not been.”

The laundry rooms at Sun Microsystems and Network Appliance must be on the fritz, because the two companies have begun washing their dirty laundry in public. Yesterday, NetApp sued Sun, alleging that its ZFS storage software, a key element of its Solaris operating system, violates seven NetApp patents. Dave Hitz, co-founder of NetApp, explained the rationale for the suit in a post to his blog:

Like many large technology companies, Sun has been using its patent portfolio as a profit center. About 18 months ago, Sun’s lawyers contacted NetApp with a list of patents they say we infringe, and requested that we pay them lots of money. We responded in two ways. First, we closely examined their list of patents. Second, we identified the patents in our portfolio that we believe Sun infringes.

“With respect to Sun’s patent claims, our lawsuit explains that we do not infringe, and–in fact–that they are not even valid. As a result, we don’t think we should be paying Sun millions of dollars.

“On the flip side, our suit points out that Sun’s ZFS appears to infringe several of NetApp’s WAFL patents. It looks like ZFS was a conscious reimplementation of our WAFL file system, with little regard to intellectual property rights.”

Obviously, Sun disputes NetApp’s claims. It says NetApp approached it looking to acquire the patents at issue in the case, but later decided to try to have them invalidated instead. In a post to his own blog, Sun CEO Jonathan Schwartz described NetApp’s lawsuit as an attack on the open-source community.
“First, Sun did not approach NetApps about licensing any of Sun’s patents and never filed complaints against NetApps or demanded anything,” Schwartz wrote. “NetApps first approached StorageTek behind the cover of a third-party intermediary (yes, it sounds weird, doesn’t it?) seeking to purchase STK patents. After Sun acquired STK, we were not willing to sell the patents. We’ve always been willing to license them. But instead of engaging in licensing discussions, NetApp decided to file a suit to invalidate them. To be clear, we never filed a complaint or threatened to do so, nor did anyone, to the best of my knowledge, in the ZFS community.”

“There’s No Free Lunch — or Free Linux.” That was the title of SCO CEO Darl McBride’s keynote address at the Computer Digital Expo in Las Vegas back in 2003, and it signaled the beginning of what would become a long and acrimonious legal battle.

Claiming its proprietary Unix software had been misappropriated and incorporated into Linux (”SCO = UNIX,” said McBride), SCO embarked on an intellectual-property war with the open-source operating system. “For the last several months, we have consistently stated and maintained that our System V code is in Linux,” McBride explained. “The claims SCO has are both broad and deep. These claims touch not just IBM but other vendors as well. They also touch certain industry consortia and corporate Linux end-users. Our claims aren’t trivial. The violations of our intellectual property are not easily repaired. It is our intention to vigorously protect and enforce SCO’s intellectual property, System V source code and our copyrights. We’re now fully prepared to do that.”

And they did. SCO filed a $3 billion lawsuit against IBM, claiming that the computing giant illegally used its Unix trade secrets to improve Linux. It filed another against auto giant DaimlerChrysler. It sent threatening letters to 1,500 of the world’s largest corporations warning they could be liable for using Linux. And it filed a “slander of title” suit against Novell, when the company publicly asserted that it, not SCO, was the rightful owner of the Unix copyrights.

Pity, then, that a U.S. District Court judge in Utah ruled Friday that SCO does not, in fact, own the copyrights to Unix. Pity, too, that he said Novell can force SCO to abandon its claims against IBM if it so chooses. His ruling has effectively gutted SCO’s legal campaign against Linux users and developers. “The court’s ruling has cut out the core of SCO’s case and, as a result, eliminates SCO’s threat to the Linux community based upon allegations of copyright infringement of Unix,” said Joe LaSala, senior vice president and general counsel of Novell. “We are extremely pleased with the outcome.”

Clearly the same cannot be said of SCO. “The company is obviously disappointed with the ruling issued last Friday,” SCO said in a statement denying, with the Pythonesque insistence for which it’s known, that the case is over. “… [T]he court did not dismiss our claims against Novell regarding the noncompete provisions of the 1995 Technology License Agreement relating to Novell’s distribution of Linux to the extent implicated by the technology developed by SCO after 1995. Those issues remain to be litigated. Although the district judge ruled in Novell’s favor on important issues, the case has not yet been fully vetted by the legal system, and we will continue to explore our options with respect to how we move forward from here.”

Ah. ‘Tis but a flesh wound, right? Not by the looks of the company’s recent stock performance.