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Open Source: A 'Growing Challenge' to Microsoft

Open source software topped the list of business "risk factors" outlined in Microsoft's annual 10-K report to the U.S. Securities and Exchange Commission.

• By Kurt Mackie
• 08/05/2008

Microsoft's 10-K report depicts an unlevel playing field. Competitors distribute open source software at "nominal cost," making money off services instead of the software. Moreover, these open source software companies, unlike Microsoft, "do not have to bear the full costs of research and development for the software," the report alleges.

Microsoft lately has made some peace offerings to the open source world and even joined the open source Apache Software Foundation, but the report depicts open source software mostly as a potential competitive threat.

"In recent years, certain 'open source' software business models have evolved into a growing challenge to our license-based software model," the reports states.

The report also suggests that Microsoft's recent publication of protocol documentation for its core products could have an overall damaging effect on the company.

"The availability of protocol licenses may enable competitors to develop software products that better mimic the functionality of Microsoft's own products which could result in a reduction in sales of our products."

Microsoft had initially described its plans to make the protocols publicly available as a major software interoperability policy change. That shift, first announced in February, has led to the release of thousands of pages of protocol documentation to potential competitors. For the most part, Microsoft was compelled to open its protocols as a result of government antitrust legal actions.

Could Microsoft's new openness actually hurt the company? Microsoft may have a point in suggesting so.

For instance, London-based Alfresco Software late last month released "the first open source fully compatible SharePoint repository," called Alfresco Labs Beta 3. This enterprise content management system serves as an "open source alternative to Microsoft SharePoint," according to Alfresco's press release.

Alfresco points to regulatory action as paving the way for the product's release: "Microsoft released the SharePoint protocol as part of its compliance with the European Commissions' decision issued on March 24, 2004," the press release explains.

Another risk factor for Microsoft is that governments themselves may turn toward adopting open source solutions.

"…The popularization of the open source software model continues to pose a significant challenge to our business model, including continuing efforts by proponents of open source software to convince governments worldwide to mandate the use of open source software in their purchase and deployment of software products," the report states.

If open source software gains market share, Microsoft might lose revenues or have to lower its prices, the report adds. Some other risk factors on the horizon for Microsoft, according to the report, include protecting its intellectual property and source code, future lawsuits, ensuring software security, research and development costs, and more.

Microsoft's annual 10-K filing can be accessed here.