Inside the Microsoft-Novell deal

The uproar in the open-source community caused by proprietary poster-child Microsoft's deal with Linux provider Novell shows no sign of abating. For many, it's a betrayal of the fundamental ethos of free and open software — a pact with the devil. But even though the arrangement is seen by some open-source enthusiasts as on par with wartime collaboration with the enemy, in reality, community-developed providers are only secondary targets.

In line with the old saying that the enemy of my enemy is my friend, experts claim the deal is really about joining forces to pursue Unix and the mainframe. If Novell can gain an edge on rival Red Hat, the leading Linux distributor, then that's all good for Novell.

"Both Novell and Microsoft have one target that they're absolutely dead focused on and that's the data centre. It's where the two have a common enemy and it's about wanting to push the mainframe and Unix out," explains Laurent Lachal, open-source research director at Ovum.

As a result, even though the two companies have spent the last decade battling each other, Novell's chief executive Ronald Hovsepian found it in himself to approach a contact at Microsoft last year, after a boardroom shake-up in June 2006 saw him replace then incumbent, Jack Messman.

Hovsepian's aim of starting a dialogue was aided, however, by some of Microsoft's major financial services customers making it clear that they were going to use Linux whether the vendor liked it or not. The reality is that enterprise customers want the vendors to start playing nicely together in order to deal with the resultant interoperability issues.

Organisations such as Goldman Sachs, Credit Suisse, HSBC, Deutsche Bank, Wal-Mart and AIG Technologies have since purchased coupons from Microsoft that provide them with a one-year subscription for maintenance and updates to Novell's Suse Linux Enterprise Server (SLES), along with a mix of priority and standard support services.

As part of the five-year arrangement between the two suppliers, which was announced in early December 2006, Microsoft agreed to pre-pay Novell $240m in return for selling on 70,000 SLES coupons per annum at an unspecified price. This equates to 350,000 coupons by 2012, and Microsoft had already sold three-quarters of its 2007 quota to the five companies listed above by March.

As Michael Goulde, a senior analyst at Forrester Research, points out, while part of the appeal could be that customers are obtaining discounted services, they all also have mixed environments and "are relieved to see co-operation between two important suppliers rather than continuing to have them criticise each other and point fingers". But he adds: "Novell can only recognise revenue at the point that the customer starts using the coupon, so revenue is the thing to track to see how quickly customers are really taking this up."

Terms of the deal
Meanwhile, under the terms of the deal, Microsoft will also officially recommend Suse Linux to its customers, while at the same time creating a joint research facility with Novell. The aim here is to have personnel from both organisations work together to improve interoperability between the open-source operating system and Windows and to create new products in three areas: document formats, virtualisation and web services.

In the first instance, the two companies will enable Novell's OpenOffice and Microsoft's Office users to share documents more smoothly. One of the mechanisms for doing this is by making translators available to improve interoperability between Microsoft's OpenXML format and the industry standard Oasis OpenDocument Format for Office Applications (ODF).

While this part of the agreement would appear straightforward, IBM has been critical of the underlying motivations. Goulde explains: "[IBM is] concerned that people are going to be lulled into thinking that it's a reasonable approach to use a Microsoft format and then simply convert their documents into ODF as required. But if you go with the Microsoft specification, you're still locked into Microsoft and the concern is that at some point, you'll end up getting stranded and not be able to convert back to ODF at all."

In the area of virtualisation, meanwhile, the two vendors have agreed to come up with a Windows-based offering that simultaneously runs Suse Linux as a guest operating system. Staff will also develop web services to make it easier for customers to manage physical and virtual servers in a mixed Windows and SLES environment, while likewise enabling Microsoft Active Directory to communicate with Novell's eDirectory.

Forrester's Goulde sees this chunk of the deal in particular as reminiscent of the one Microsoft struck with Sun in April 2004, even if the latter was motivated by settling anti-trust litigation rather than by taking on common enemies.

Although there are obvious benefits to Microsoft, Novell and their customers...

...in federating the directories and improving interoperability on the identity-management side of things, Microsoft has other tricks up its sleeve.

"Microsoft is emerging as the common denominator in multiple strategies for identity management, which is not completely altruistic and could have strategic benefits by putting it in a stronger position at the hub of identity management across several providers' product lines," Goulde says.

Interestingly, in the case of the Sun deal, the software giant was also happy to fork out significant amounts of money to seal the pact. Microsoft paid Sun $700m upfront to resolve anti-trust issues, a further $900m to lay various patent matters to rest and $350m in royalties. Sun also agreed to pay Microsoft royalties on an ongoing basis for including some of its technology in its servers.

All of this means, ironically, that Microsoft has now paid out large sums to help out two competitors at times in their lives when an injection of cash certainly hasn't gone amiss.

"The money didn't hurt Novell, which is roughly running at break-even these days. It's not keeping it afloat, but it didn't hurt the balance sheet and the Microsoft revenue that it's recognised will help to manage the decline in NetWare [its flagship network operating system]," Goulde explains.

Again Goulde sees similarities with the Sun agreement, a company that is and was transitioning from Sparc to Intel-based servers and "a somewhat more Microsoft-friendly strategy". Goulde explains: "It could be interpreted that maybe someone at Microsoft wanted Novell to go in a similar direction, to transition out of the NetWare market to Microsoft’s benefit. And it saw that it could help that happen in a more gracious way."

Quocirca analyst Clive Longbottom also agrees that Microsoft's investment and coupon subscriptions have provided Novell with "that little extra" to "carry it through the bad times". But he adds: "Linux is Novell's future. NetWare is a cash cow on the maintenance front and the whole kit and caboodle has now been bet on the throw of the Linux dice."

What the deal means to Novell
Novell unveiled its repositioning strategy last year when it revealed that version 6.5 of NetWare would be the last independent release. The plan was to come out with a first version of its new Open Enterprise Server that ran both Suse Linux and NetWare alongside each other in a move that is worryingly reminiscent of the company's doomed SuperNOS initiative of the early 1990s.

This saw Novell attempt to combine NetWare and its UnixWare purchase on the same platform, but the effort cost it dear in both money and perception terms and contributed to its decision to sell UnixWare to the Santa Cruz Operation (now the SCO Group) in 1995, a mere two years after purchasing Unix System Labs and Unix SVR4 (which it productised into UnixWare) from AT&T Bell Labs.

With revenues of about $1bn today, the fallout of this debacle is that the company is still only about half the size it was after buying Unix in 1993 and WordPerfect's personal productivity applications in 1994, all of which was part of its disastrous bid to take on Microsoft.

As for the present day and Novell's new Open Enterprise Server initiative, customers were given the option of whether to run NetWare or SLES along with some services from the other operating system in the initial transition release. In the second release, which is due out in the middle of 2007, however, NetWare will disappear in the sense that it will no longer run as a physical operating system but as a virtual one on top of Linux.

The environment will also provide a framework for all of Novell's other products to fit into, including its identity management and Zenworks management products, which are considered crucial services alongside Linux and key planks in its strategy to restart growth.

"The idea is to enable NetWare to take advantage of the hardware and drivers that Linux supports because it's fallen behind here. Also Linux can run all of NetWare's network services so the migration from NetWare to Linux will be much smoother. Open Enterprise Server is at the centre of everything — that's how important this is to Novell," explains Ovum's Lachal.

And it also explains why the deal with Microsoft is so important to Novell. While Novell generated only $53m from its Suse Linux desktop and server business last year (out of total revenues of $967m) compared with...

...$45m the year before, in the first fiscal quarter of 2007 alone, its Linux Platform Product sales jumped a healthy 46 percent to $15m, while invoicing was up a phenomenal 659 percent to $91m.

"In answer to how important this deal is to Novell, Novell is taking Microsoft's money all the way to the bank. The deal is very lucrative for it despite initial market cynicism about the coupon arrangement," says Lachal.

Longbottom takes it a step further, however. Because Linux rival Red Hat has been more successful than Novell to date and Novell has been making losses on most of its other lines for a while, he believes that this new Linux strategy simply "has to succeed". Therefore, in his opinion, the deal with Microsoft is crucial to the organisation's survival, not least because it makes Novell a more credible rival to Red Hat.

Neil Macehiter, a partner at analyst company Macehiter Ward-Dutton, explains: "Novell can leverage this in marketing terms and it will reduce barriers in some customer accounts because it'll be able to talk a stronger interoperability story."

Nonetheless, Macehiter does not expect Red Hat to suffer too much in the short- to medium-term. "Where it might hit it is in accounts that are seriously considering a Linux strategy and where Microsoft is a significant supplier. And that's not to say there's not a lot of people in this situation because there are," Macehiter says. "But even so, I think Red Hat will do what it takes to win deals, and it already has a strong presence in the enterprise Linux market with a lot of major suppliers such as IBM and HP behind it."

Microsoft's motivations
As to how the deal benefits Microsoft, meanwhile, the answer is based in pragmatic business realities. The vendor's hope is that the move will help lower any barriers to selling more products generally, and more units of its new Vista operating system specifically, as the software market becomes increasingly commoditised — not least due to the appearance of open-source offerings in various functional areas, which tends to hit pricing.

Jon Collins, a service director at Freeform Dynamics, explains: "The commoditisation of software is a threat to Microsoft and, largely, the whole gravy train period is over. So the vendor can no longer maintain its old position of Microsoft or nothing and is having to do a lot to enable its technology to work with other people's, while trying to ensure that customers prefer it."

Over the past couple of years, this has seen Microsoft bang the interoperability drum to the extent that it created an Interoperability Customer Executive Council in June 2006 and has continued to initiate various pacts with third parties to collaborate in areas such as web services.

In relation to its great bugbear Linux, however, increasing levels of pressure from customers buying both Windows and its open-source alternative have gradually seen Microsoft reach the stage when it could stonewall no longer.

This left the supplier with three theoretical options — it could support one of the leading Linux distributions such as Red Hat or Novell. It could support a second or third tier one such as Debian or, as Goulde points out, it could support "a Microsoft concoction of straw-man pseudo Linux", which was unlikely to wash.

"Microsoft took a good look at the situation and realised that Red Hat probably wouldn't have the conversation. Since it acquired JBoss, it's got a very strong middleware strategy and is bent on competing directly with .Net. So even if Red Hat had been willing, Microsoft didn't want to put it in a stronger position to advance its middleware strategy," Goulde says.

Novell, on the other hand, does not have a middleware strategy of this ilk and has taken a neutral stance on what customers run on top of its platform — even if the Mono open source project that it sponsors is taken into consideration.

Mono provides developers with tools to build and run .Net client and server applications on Linux, Solaris, MacOS/X, Windows and Unix and also enables existing binary code to run on Linux.

However, Goulde says: "Mono isn't widely adopted and you can't build a strong strategy with it today. It has real customers, but it doesn't really pose a serious threat to Microsoft. Also historically a lot of Novell customers are Microsoft customers and vice versa so there's an affinity there, which isn't necessarily the case with the smaller Linux distributors."

Another piece in the jigsaw, however, was Microsoft's comprehension that...

...Novell could act as a useful bridge to the open-source community, which it has been quietly collaborating with for some time anyway. It has, for example, worked with JBoss (middleware), Xen (virtualisation) and SugarCRM (enterprise applications) to enable them to run on Windows.

The goal here is to ensure that, even if customers don't purchase the vendor's closed-source equivalents, at least they may choose to run its operating system cash cow and other related tools.

Ovum's Lachal explains: "The company is slowly but surely coming to terms with open source and has been going through the five steps to grieving, which starts with anger and denial and eventually leads to acceptance. And this was an opportunity to get more involved because, while Linux is more a Unix than a Windows killer, open source more generally is growing to be a threat."

This is why Microsoft pushed for the third part of its deal with Novell. The two have signed up to a cross-licensing covenant and negotiated a patent indemnity arrangement, which involves agreeing not to sue each other's mutual customers for any breaches of intellectual property (IP) in perpetuity.

To this end, the software giant paid Novell $108m upfront to use its IP while, like Sun, Novell will pay various royalties, which are expected to amount to about $40m, over five years.

Although Microsoft has refused to specify which IP is involved here, Novell attests that it still holds the rights to all copyright and patents for Unix. This is despite having sold the operating system to the SCO Group over a decade ago, although SCO is still disputing Novell's claim in the courts. Microsoft, meanwhile, still has a Unix operating system called Minix and has, in the past, claimed that it contributed IP to the development of Unix SVR4.

This tangled web means that it is unclear how much cross-fertilisation of IP has taken place, potentially across multiple platforms, and not least in relation to Linux. This is because, despite vigorous denials from the open source community, Linux has at various stages been described as a Unix clone and as being unclean code.

The scenario has infuriated the open-source and free-software communities on several counts. On the one hand, the software giant's aim, of replicating its patent deal with Novell among other open-source vendors in order to have them pay for using what it claims is its IP, is against everything these communities stand for.

Ovum's Lachal explains: "The open-source people see this as a Trojan Horse and have rejected the whole thing. Microsoft felt, rightly or wrongly, that other companies are infringing its IP and wanted to get money out of them without having to sue them. It just wanted to create momentum behind this, with Novell being its first, but it misunderstood the reaction of the open-source community, which is intent on not paying it anything."

As a result, it would appear that Microsoft has managed to score an own goal in its bid to improve relations and thus interoperability efforts with the open-source community by using Novell as its mediator.

Fear, uncertainty and doubt
On the other hand, Microsoft has succeeded in furthering its campaign of spreading fear, uncertainty and doubt in order to frighten customers away from using open source in general, and Linux in particular, by intimating that they may be infringing its patents.

Refusing to clarify which patents might be involved only serves to muddy the waters still further, however, and means that the open-source community is unable to take action to resolve any infringements if, indeed, Microsoft's claims are true.

This already-tense situation was made considerably worse by Steve Ballmer, Microsoft's chief executive, a couple of weeks after the Novell deal was signed. He said: "Novell pays us some money for the right to tell customers that anybody who uses Suse Linux is appropriately covered. It's important to us because we believe every Linux customer basically has an undisclosed balance-sheet liability."

This confirmed the open-source community's worst fears of dirty tricks being afoot and led Eben Moglen, general counsel of the Free Software Foundation, which controls the GNU Public License (GPL) under which Linux is distributed, to say that the Novell deal signalled the start of "significant patent aggression by Microsoft".

Yet another thorn in the side of the open-source and free-software communities, however, is that, while the cross-licensing and patent indemnity covenant...

...may be consistent with the letter of the GPL, it is certainly not felt to be in keeping with its spirit. It is instead considered to be a clever but discriminatory trick to get round it.

Brett Smith, licensing compliance engineer at the Free Software Foundation, explains: "The patent aspects of the deal undermine many of the defences that the free software community has built up over the years. Now that Microsoft has paid a royalty for free software that it didn't develop and distribute, it means that there's pressure on everyone else to pay royalties too."

Moreover, the organisation continues to believe that users should not be required to pay royalties to use free software and felt that "it was surprising that a free software distributor would be willing to undermine the community in this way".

As a result, to try and tackle these issues, the Free Software Foundation has amended the forthcoming third version of the GPL (GPLv3) in two ways, which are currently being debated by the community. The first revision stipulates that, if patent protection is provided to some code recipients by an individual, organisation or third party, the same protection should automatically be extended to all.

The second amendment suggests that anyone involved in a patent deal similar to that engaged in by Microsoft and Novell will be prohibited from distributing software under GPLv3.

Smith acknowledges that the latter proposal has been controversial because "some companies involved in the free-software community are afraid they'll be punished for cross-licensing deals they've done in the past that aren't harmful to the community. But if we discover that it has this effect, we'll limit the timeframe for prohibition to ensure that no-one is hurt by the new terms."

Echoes of the 'Unix wars'
The impact of this clause on Novell, if it were made retroactive, would be that "as more and more free software is written and published by the development community under GPLv3, Novell wouldn't be able to include it in its distribution and so would lose its technical advantages". While the vendor could continue distributing Suse Linux under version 2 of the GPL licence, such a scenario would obviously dent its open-source credentials considerably.

The move also illustrates the Free Software Foundation's intent to remedy what it considers a dangerous situation. "If the clause is retroactive, it has quite serious repercussions for Novell, but if not, the patent protection is extended to all free software users so we're covered both ways," explains Smith.

In Goulde's opinion, this all has rather worrying echoes of the old Unix wars of the 1990s, which were exacerbated by Microsoft throwing Windows NT into the mix. In fact, he believes that the industry could be witnessing the start of the Linux wars, not least because of Red Hat's refusal to support the Linux Foundation's Linux Standards Base to try and standardise the various distributions. Again he sees this move as reminiscent of attempts to standardise Unix under the Open Group's Spec1170 initiative.

"It's an interesting dynamic. Novell is competing against Red Hat, while Oracle has fired a shot across Red Hat's bows with its Unbreakable Linux initiative. Microsoft is battling for its own business at the operating system level and to some extent has fired a shot across Red Hat's bows with the Novell deal too," he says.

Moreover, just to make things even more fraught, Red Hat, Oracle and Microsoft are all competing for dominance at the middleware level as they bid to lock customers into their own environments and ensure that third-party offerings are simply add-ons.

"The question is, is the Linux Foundation going to become a venue for the Linux wars? We'll be watching what happens there very closely," Goulde concludes.