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Microsoft $ impacted by Linux's Free Beer

By Sean Michael Kerner on August 5, 2009 9:49 AM

From the 'why buy the cow when you can get the milk for free?' files:

Microsoft has listed in its 10-K, open source software and specifically Linux as one of the risk factors that could negatively impact Microsoft's revenues.

This shouldn't be a surprise, but it's interesting to look at the specific language and the specific companies that Microsoft calls out.

"Our business model has been based upon customers paying a fee to license software that we develop and distribute," Microsoft states in the 10-K. "Under this license-based software model, software developers bear the costs of converting original ideas into software products through investments in research and development, offsetting these costs with the revenue received from the distribution of their products. Certain "open source" software business models challenge our license-based software model."

For it's operating system business Microsoft's 10-K specifically called out 'variants of Unix' among which it includes, Apple, Canonical, and Red Hat. Notice how Novell is not mentioned? There are similar omissions when it comes to the partners disclosure.

"The Linux operating system, which is also derived from Unix and is available without payment under a General Public License, has gained some acceptance, especially in emerging markets, as competitive pressures lead OEMs to reduce costs and new, lower-price PC form-factors gain adoption," the 10-K states. "Partners such as Hewlett-Packard and Intel have been actively working with alternative Linux-based operating systems. "

Notice here how IBM, Dell and AMD are not mentioned.

With the Novell omission, that's easy. Microsoft and Novell have a strategic multi-year partnership. It is curious that Microsoft would not specifically name its other partners (IBM, Dell and AMD) among those that also ship Linux.

Fundamentally though, a 10-K is all about disclosure. It is Microsoft's responsibility to its shareholder to identify all the material risks that is it aware off, and that's what Microsoft is doing.

Does that mean that Linux is actually eating into Microsoft's revenues? Maybe, but not necessarily. All this disclosure means is that Linux is a competitive risk to Microsoft and it's a risk that they accept and realize.

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