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Revealed – Microsoft's Munich sweeteners

Burghers showered with discounts, visits from Chief Executive Klaxon - report

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Over at USA Today, Byron Acohido has unearthed the paper trail that reveals how hard Microsoft fought to prevent the city of Munich from defecting to Linux. The decision was hailed as a landmark for the open source movement, as it struck deep into Redmond's home turf: with Munich's aldermen agreed to moving 14,000 desktop PCs running Windows to Linux supplied by SuSE and IBM.

Acohido's report contains the remarkable fact that Microsoft's bid undercut the Linux bid from SuSE/IBM by $12 million dollars: a substantial sum for a city budget. Other sweeteners included free services and support, and extending the grace period for upgrade discounts, dipping into its now notorious 'slush fund'. In addition to offering lower licensing fees, Microsoft also had the technical advantage, the consultancy called in by Munich concluded.

Of course, Redmond could have afforded to be so generous even without a "special marketing fund", because the gross margins on Microsoft's chief cash cows Office and Windows are so high: 80 per cent. Those margins are only so high - at "bubble" levels - because Redmond hasn't had effective competition for its desktop franchise, and just as every bubble has its "correction", Microsoft can afford to cut further and deeper because to date, there hasn't been a serious pin in sight.

In what proved to be the clincher, Ballmer himself dropped into town after what his handlers originally claimed was a skiing trip, and dined with the mayor. (After exposure at such close quarters to Fester's klaxon-level decibels, even hunting horns must have sounded sweet). All, alas, to no avail.

Munich concluded that for "strategic" reasons the upgrade path from NT4 was Linux. That route afforded, as far as we can tell, less opportunity for future license extortion. Well, good luck with those IBM Global Support contracts, a cynic, or Scott McNealy would correctly point out.

Corridor Warriors

One defection does not signal a trend, however. What ought to disturb the company's guardians is the management's reaction to it.

After news of the deal broke, the Chief Executive Klaxon himself declared that Linux had ''no center of gravity''. A puzzling statement that we dare not take literally. But Linux clearly is gaining a sympathetic hearing on philosophical grounds quite apart from software licensing costs or the technical merits. It's a question of trust, and Microsoft management are aware that after Licensing 6.0, the company is reaping the consequences of an unnecessarily cynical and confusing strategy.

Secondly, a software license fee implies several things, one of which is value. Our Friends at Microsoft are deeply convinced that much of what the company offers is superior to the competition, and perplexed that a cheap UNIX™ clone could even merit consideration.

But just as IBM's corporate culture grew both insular - convinced of its innate superiority, and paralyzed by in-fighting (it sacrificed, for example, leadership in the relational database leadership which it had earned) - so too has business at Redmond.

Microsoft could comfortably redeploy many of what it styles as "corridor warriors" - employees whose sole purpose only ever seems to be to have meetings about meetings - towards the exit door, without impacting its software development processes too drastically. In fact, it's hard to see what could affect its software processes negatively, given the long delays to key products such as Yukon and Longhorn.

The other half of the trust relationship with customers is that they'll actually be delivered something that's measurably an improvement in the timescale promised. Licensing and software delays are two sides of the same coin: one that on this occasion, fell into IBM's pocket. ®

Related Link

USA Today investigation

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MS 'slush' fund provides big discounts to stop Linux - email
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