Thursday, November 16, 2006

Microsoft has Operating System Patents; Linux has None

This post was also published in CNET News.

The uproar in the open-source community over Microsoft's embrace of Novell says a lot.

It reveals that many open-source backers fundamentally don't understand the software business. When vendors compete, customers win. This is good.

Contrary to the numerous rants in the open-source community, the recent deal between Microsoft and Novell--in which the companies have agreed to interoperability, reselling and patent protection--is actually an excellent business deal and a good thing for the open-source community.

Microsoft is growing up after its antitrust issues. It is actually listening to its customers. Chief information officers have been telling Microsoft for years that they are sick of interoperability issues and that Microsoft has to stop acting like a big baby and learn to play well with others. The good news here is that Linux is now woven into the business fabric of every major company.

The reality of the technology business is that virtually every deal between big companies includes bilateral patent protection. Company A cross-licenses its patents with Company B. Neither acknowledges that the other is ripping off any intellectual property. Rather, each now has a finger on a legal atomic football that threatens to blow up both businesses if either goes to court to litigate for some bogus market advantage.

What usually keeps these companies from suing each other over patents is this legal notion of mutually assured destruction, since each company has patent libraries that overlap the other's cash cow products. When these companies do deals with each other, it is standard operating procedure to codify this presumptive way of doing business into the agreement--hence bilateral patent protection.

Microsoft's first deal in this new era of cooperation was with Sun Microsystems. Sun dropped its antitrust complaint (accepting a $2 billion check from Microsoft as part of the deal), and the companies pledged interoperability between their products. This deal quite naturally also included bilateral patent protection between Microsoft and Sun.

It did not, however, cover open-source developers. So let's say you download an open-source project like the NetBeans tool from Sun, add some cool features and redistribute your version of the tool. You have now violated hundreds of Microsoft patents on tools, and they can come after you.

It should be of no surprise to anyone that Microsoft holds numerous patents that Linux violates--it's just that polite company in the software industry won't say this aloud. You see, Microsoft hired folks like Dave Cutler out of DEC to build Windows NT, and it is actually an industrial-class operating system.

It originally included things like HAL (the hardware abstraction layer) that let it run on multiple processors including the PowerPC. I'm not a lawyer, and I'm not claiming that Linux violates any specific multiple-processor patent for Microsoft, but the odds are pretty much 100 percent that a good attorney from Redmond could build many different infringement cases that could go a long way in our court system.
In the Novell and Microsoft deal, many industry insiders are whining about commercial implementations, but I don't know what people expect Microsoft to do. Should they indemnify everyone who downloads and extends the Linux kernel from Novell from all of its patents?

If they did that, Red Hat could start getting the Linux kernel from Novell, be indemnified from all Microsoft operating-system patents and then sue Microsoft for the relatively few operating-system patents it has. Many of the whiners overlook what is significant about this deal. For the first time, one of these patent agreements also covers individual open-source developers.

A lot of people are saying Novell is paying "royalties" to Microsoft. Microsoft is paying Novell $108 million for Novell's patents, and Novell is paying Microsoft $40 million for Microsoft's patents. Or if you can do simple math, Microsoft is paying Novell $68 million for the patent agreement and then hundreds of millions more for Novell Suse Linux licenses and marketing expenses. Novell definitely came out on top here.

While the devil will be in the details, this deal is a good thing, and Red Hat should also do a similar deal with Microsoft. The interoperability commitment and bilateral patent protection is a good thing for customers that run Linux and Windows (every large technology customer). The patent protection is a good thing for open-source developers that extend the open-source projects covered under the agreements, since they now get more protection than they had before.

And I predict that this announcement has already forced every other major software company (BEA Systems, IBM, Oracle, SAP and others) to now consider similar deals to offer customers and developers some form of patent protection and indemnification. They have to do something, or the competitors that move first will take business away from them. Whether they announce these deals in public news conferences or offer similar protections quietly in the background to their customers, they'll have to do something.

Linux has won, and it's time to let the next phase begin. The days of kumbaya, where vendors are locked arm in arm singing open-source love songs to "grow the market" through co-opetition are over.

The software business is a ruthless business. Linux is now so important that technology vendors are fighting for competitive advantage over their peers. It's ugly. It's competition. And it's good for customers.

Tuesday, November 14, 2006

GPL Java: Thank You, Sun!

Eight months ago, I wrote an open letter to Jonathan Schwartz asking him to open source Java. Of course this instigated the typical reactionary troll war on blogs and such. A lot has changed since then. Jonathan went from being the COO of Sun to the CEO of Sun. And now Jonathan has decided to release Java under the GPL license. As many of you know, I am not a big fan of the GPL license, but GPL makes a lot of sense for core platforms such as operating systems and virtual machine layers directly above those operating systems, since GPL enforces that no one can own that layer or extend it in proprietary ways.

When I left Sun in 2003, it was a lumbering, rudderless ship that was taking on a lot of water. In just the past year we have seen a commitment to AMD x64 chips in addition to SPARC chips, endorsement of scripting languages on the Java platform, and now a GPL Java. For those of us that are Sun alum that left as part of the brain drain of 2002-2005, we are seeing a lot of the ineffective middle and upper management that caused us all to leave in the first place getting ejected from the company.

There is even talk of GPL'ing Solaris, which would enable the best Solaris features to be ported over to Linux and create a hybrid operating system. I would not be surprised if there is a movement away from NetBeans to Eclipse and further adoption of x64 chips over SPARC chips (perhaps even a SPARC to x64 microtranslator!).

Sun could have easily gone the way of SGI and is changing itself instead. By fixing its core problems of competing with commodity technologies, it is freeing itself to compete with innovation on top of those technologies. So while many may continue to snipe, I offer kudos to Jonathan Schwartz and Sun. Well done!

Thursday, November 02, 2006

Googlology - Avoiding the Steamroller

This post was also published in VentureBeat.

It used to be de rigueur in Silicon Valley to stay out of the way of Microsoft’s product road map – even areas Microsoft hinted they might pursue. Nowadays, venture folks more commonly ask, “What are you going to do about Google?”

The reality of the marketplace is that unless a startup builds a huge community, Google pays only around $50 million for a company (if you’re lucky) and then only if they want to jumpstart a feature by buying a startup.

At this point, Google has trounced Yahoo with consumers. Google expanded its offerings by acquiring several YAW2 (Yet Another Web 2.0) companies with no viable business models, such as wiki software producer JotSpot, Upstartle (maker of the online word-processing program Writely) and of course YouTube. As a result, almost no gaps are left in Google’s consumer portfolio… and no $50+ million opportunities remain for startups other than in “Social Networking,” where Google might buy an existing community such as Facebook (estimates vary between $1 billion and $2 billion).

Google has clearly figured out that the advertising market is not big enough to justify its stock market valuation. The entire U.S. advertising market is $140 billion a year – that’s less than Google’s current market cap of $151 billion.

Which takes us to the Small-to-Medium Business (SMB) market. To grow, Google clearly is going after Microsoft’s SMB business. The chart below describes Google’s current product offerings, many of which have been filled by small acquisitions, with an educated guess as to where they are going in both the consumer and SMB markets.

Why is Microsoft vulnerable in SMB? Late to the Internet, Microsoft never really caught up. Its proprietary technology is archaic in a Web 2.0 world where systems can be easily “mashed up,” or tied together with lightweight integration techniques, using open technologies. Microsoft’s Windows Live is a nonstarter.

Within a year or two, companies with fewer than 100 employees will have no need to buy anything from Redmond other than perhaps Windows XP Home; within five years, the same will go for firms with under 1,000 employees.

The critical play for Google, in my opinion, is to acquire Intuit (current market cap of $12 billion). That would give Google a channel to a hosted accounting and inventory system and a majority of small businesses. In particular, the inventory functionality can tie directly into the local business search and mapping engine, Google Local. Also affordable to Google would be (current market cap of $5 billion), though that’s more of a stretch due to the personalities involved.

Web 2.0 consumer and SMB startups that do not have large communities will be valued at a build vs. buy (i.e. an acquisition that doesn’t cost much) and have a maximum upside of $50 million. After Google’s failed Enterprise Search product, the consumer search giant will leave the enterprise alone for quite a while as it target its guns on the SMB market.

The clearest short-term opportunity for startups to avoid the steamroller is in the enterprise space, which commands relatively high valuations (e.g., 25 times annual revenues for open source companies like JBoss).

Although some may be happy with $50 million paydays after a seed and A round, if you want a shot at making some real money, best to stay out of Google’s way.