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MS beanies worry about Linux, suits, nasty governments

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We shouldn't get too excited over the worries about open source that Microsoft expresses in its latest Form 10-Q filing to the SEC. It's certainly progress for open source software to have made it into the Microsoft beanies' contingency worry/butt-covering list, but the subject is only dealt with briefly, in fairly guarded terms, and there are numerous much bigger worries to attend to anyway.

In a section headed "Challenges to the Company's Business Model" (surely this can't be the only one?), the company notes that in recent years there has been "a growing challenge" to the traditional software development model from "the Open Source movement."

Software under this model "is produced by global 'communities' of programmers, and the resulting software and the intellectual property contained therein is licensed to end users at little or no cost. Nonetheless, [yes, using this word right here baffles us too - why are they surprised that free stuff is popular?] the popularization of the Open Source movement continues to pose a significant challenge to the Company's business model, including recent efforts by proponents of the Open Source model to convince governments worldwide to mandate the use of Open Source software in their purchase and deployment of software products."

Although Microsoft doesn't specifically say so, that's probably what it sees as the most immediate threat. It can hold off challenges in the corporate market for quite a while yet, and although open source desktop market products are in the pipeline, they and their distribution strategies are really still being built, they're not a serious threat right now. But governments throwing tantrums over prices and licensing, and favouring/encouraging a switch to open source? This is all too conceivable - mandating it might look tidier, and give Microsoft a clearer 'trade war' target to shoot at, but the big threat is that increasing numbers of governments will just get pissed off and walk. If they hate you, it's effectively pretty much the same as being outlawed.

So what could this mean? Just a little light, guarded worrying here: "To the extent the Open Source model gains increasing market acceptance, sales of the Company's products may decline, the Company may have to reduce the prices it charges for its products, and revenues and operating margins may consequently decline."

But as we said, there's plenty more in there. You can currently pick up the filing in Word form from Microsoft here, and if it isn't around the SEC site already, it should be soon. Broader Microsoft filings can be found here.

The lawsuit worries are particularly extensive, and will surprise you if you thought it was all over. The estimated liability for the California case has been increased from $660 million to $870 million, and there's a long, long list of class actions, state actions, private actions, government investigations, patent suits... The European Commission one is likely to hit soon, and Microsoft says it is claimed "that Microsoft has failed to disclose information that Microsoft competitors claim they need to interoperate fully with Windows 2000 clients and servers and has engaged in discriminatory licensing of such technology, as well as improper bundling of multimedia playback technology in the Windows operating system. The remedies sought, though not fully defined, include mandatory disclosure of Microsoft Windows operating system technology and imposition of fines."

Microsoft says it's fighting this, but given that it's been making such a big noise about sharing its secrets with governments (the UK, a compulsive visitor to the shearing shed, signed last week), one wonder what the big deal with Samba and Sun might be.

As regards general finance, the filing tells us quite a lot we know already. That Microsoft is compensating for flagging PC sales by pushing licensing programmes harder, that Windows is intensely profitable despite the slump everywhere else in the industry, and that XP is more expensive. Didn't know that? Oh, what about this then:

"Additionally, certain OEM multinationals\x{2019} inventory accumulation in the first quarter of fiscal 2003 led to fewer licenses purchased in the second quarter of fiscal 2003. Offsetting these declines, were a continued mix shift to the higher priced Windows XP Professional operating system and recognition of unearned revenue from strong multi-year licensing in prior periods."

Some of that higher price comes from the eradication of Win9x from OEM sales, but it doesn't take much effort to read this as the company profiting from XP Home being virtually identical to Pro, but mysteriously broken in several key areas.

One of our other favourites is this little squib:

"In addition, the Company completed its transition to new OEM licensing terms under which OEMs are billed upon their acquisition of Certificates of Authenticity (COAs) rather than upon the shipment of PCs to their customers. This transition resulted in revenue related to COA inventory accumulation at OEMs."

Sneaky. So the OEMs now have to bear the inventory cost of the little bits of paper (or stickers, or whatever they are these days), in addition to their other woes. ®

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