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Linux Deal: Too Good to Last?

It was a shocker of a reconciliation -- Microsoft Corp. teaming with Novell Inc. on a Linux deal. But Steve Ballmer couldn't let things stand. Within days after the two companies announced the historical agreement, Microsoft's CEO started talking about what it meant for intellectual property, and the resulting furor left the newly strategic partners issuing dueling statements on each of its Web sites.

Within a month of the agreement, announced in early November, partners were left scratching their heads. Should they study the Microsoft-Novell agreement to map out a business strategy leveraging the new alliance, or head to the Microsoft Partner Portal for the old documents on competitive selling against Netware, Groupwise, Novell's directory and Linux?

The most contentious portion of the five-year deal is an agreement between Novell and Microsoft to provide patent protection from each other to each company's mutual paying customers. On the Linux side, the arrangement applies only to Novell's SuSE Linux Enterprise, theoretically strengthening that distribution's market strength.

Other terms include about $450 million in payments from Microsoft to Novell for the rights to at least 350,000 SuSE Linux Enterprise subscriptions, joint marketing and advertising, a joint sales force and a patent-agreement payment. Novell will pay Microsoft at least $40 million before the deal expires on Jan. 1, 2012. The companies are also supposed to work together on Windows-Linux interoperability in such areas as virtualization, Web services management and document translation, according to summaries of the deal.

Jupiter Research analyst Joe Wilcox offered a succinct summary on his Microsoft Monitor blog for what the deal does for the two companies: "The arrangement is a makeshift way for the two companies to work around their oil-and-water licensing models."

Then Ballmer threw down a glove during a Q&A session after his keynote speech at the Professional Association for SQL Server (PASS) Community Summit in Seattle in mid-November. "The fact that [Linux] uses our patented intellectual property is a problem for our shareholders," Ballmer was quoted as saying. "You could say anybody who has got Linux in their data center today sort of has an undisclosed balance sheet liability."

Suddenly Ballmer was making it look like the deal meant that Novell was paying protection money on behalf of the Linux community.

Novell CEO Ron Hovsepian fired back in an open letter on Novell's Web site. "Importantly, our agreement with Microsoft is in no way an acknowledgment that Linux infringes upon any Microsoft intellectual property. When we entered the patent cooperation agreement with Microsoft, Novell did not agree or admit that Linux or any other Novell offering violates Microsoft patents," Hovsepian wrote.

To Al Gillen, an analyst with Framingham, Mass.-based research firm IDC, the episode brings back some bad memories. "We went through a period of time when the hype machine at Microsoft was generating [messages that] 'open source is bad, Linux is bad, it's destroying IP.' Steve Ballmer was beating this drum about six years ago," Gillen says. "They've moved away from that message very dramatically. They shifted to competing on operating costs and business value rather than on fear, uncertainty and doubt."

Now, Gillen says, Microsoft is once again "putting some uncertainty about Linux in customers' minds. Ballmer's rhetoric now is similar to what we had six years ago."
IDC's position is that cooperation between Microsoft and Novell on Windows-Linux interoperability could be good for the industry, and Novell is probably Microsoft's best partner for such a project. "Red Hat believes that the only good code is open source code. Novell takes the idea that there's value in open source, there's value in proprietary and there's value in making them both work together," Gillen says.

Microsoft Customer Landscape
Following is a breakdown of Microsoft's global customer-company population:
  Characteristics Number worldwide
SMALL BUSINESS
Fewer than 25 PCs
1-49 employees
40 million
MIDMARKET
25-500 PCs
50-1,000 employees
1.2 million
CORPORATE
500-1,000 PCs
1,000-5,000 employees
16,000
ENTERPRISE
More than 1,000 PCs
More than 5,000 employees
2,000

As a Microsoft partner, how seriously should you take this deal? Analysts George Weiss and John Enck of Stamford, Conn.-based research firm Gartner had some solid advice in a research note for IT that applies equally well to partners. "Consider the publication and execution of a joint Microsoft-Novell roadmap as the critical missing piece of this agreement, with the potential to make or break its long-term value," the pair wrote.

The companies promised a first roadmap in March. If there's no document by then, look elsewhere for your next opportunity.

Executive Editor Anne Stuart contributed to this report.

About the Author

Scott Bekker is editor in chief of Redmond Channel Partner magazine.

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