Cutting Deals With Redmond

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What’s the story with Microsoft, Novell and a small matter of a cool $100 million? It seems the boys at Redmond agreed to spend up to that amount buying coupons from Novell that can be exchanged for maintenance and support for SLES Linux Enterprise Server (SLES) from Novell. This follows a similar deal in November 2006 when Microsoft agreed to spend up to $240 million buying coupons from Novell. Microsoft then sells these coupons to its own customers.

The whole thing seems like a pretty good deal for Novell. Microsoft hasn’t been giving away the coupons for free, but it has been selling many of them for less than their market value, from what I’m hearing at least. And that means Microsoft is effectively subsidizing SLES by making support cheaper for Novell’s customers than it would otherwise be and giving SLES a competitive advantage against Red Hat (and others).

Perhaps it’s a coincidence, but SLES’s share of the paid server operating environment market rose from 26.1 percent to 29 percent during 2007, according to IDC. Novell CFO Dana Russell was quoted as saying in May last year that 25 percent of the revenue it received from Linux came from deals associated with the Microsoft agreement. Novell would probably have gotten some of that revenue anyway, but at the margin there were likely some customers that went with SLES rather than someone else because of the subsidy.

So the Microsoft association certainly hasn’t hurt.

But why is Microsoft doing these deals? $340 million isn’t a huge sum for Microsoft (after all, it is spending a similar amount getting Jerry Seinfeld just to tell people to buy Vista a bit more), and if it is reselling the certificates to customers it is getting at least some of that money back anyway. Even so, why would it spend any money subsidizing a competing operating system?Bill Gates may give money away from the goodness of his heart, but Microsoft most certainly doesn’t. If it is handing Novell up to $440 million in total, you can be sure it expects to get some benefit, from someone, in return.

Microsoft would have you believe that this is all about its heartfelt desire to meet its customers’ IT requirements. As part of the deal, it promised not to enforce its intellectual property rights against Novell customers. You’ll remember a while back Microsoft muttered darkly to anyone willing to listen that Linux violated hundreds of its — unspecified — patents, presumably hoping to terrify any of its customers thinking of adopting Linux to come back to the Windows fold.) It has also agreed to collaborate with Novell on interoperability between SLES and Windows, especially with regard to virtualization, server management and document formats for the benefit of its customers.

To understand what is more likely to be the real motivation for the deals, it’s important to bear in mind that many organizations adopting Linux in their data centers have an existing Windows infrastructure. They are defecting, in part, to Linux. This is bound to be a concern for the company.

Then remember that the company isn’t subsidizing SLES to all and sundry — only to customers (including potential ones.) If Microsoft can’t stop them from moving some of their workloads to Linux, it can at least try to control them by herding them to a Linux from a company it has a strong relationship with. Since the two companies have agreed to collaborate on interoperability, and since Microsoft is paying Novell a quarter of what it’s receiving for its Linux business, it’s not a huge step to imagine Microsoft is calling the collaboration tune and Novell doing the dancing.

But Microsoft will also get something else of value from the deal: a better idea of what its customers are up to when it comes to Linux. After all, it must dearly like to have a clear understanding of the areas in which its customers are abandoning Windows for Linux, why they are doing so, how much it costs and the difficulties they face. It’s a case of heeding the advice of Chinese military strategist Sun-tzu: “Keep your friends close and your enemies closer.”

As far as the typical enterprise is concerned, the deal offers a number of potential benefits. Cheap support for SLES courtesy of Microsoft is not to be sniffed at, nor is the possibility of better interoperability. Chances are sooner or later any advances will also flow through to other Linux distributions.

The deal has a darker side to it as well. Subsidies have a habit of distorting the market, and in this case it’s Red Hat and other competitors to SLES that have to struggle against the advantage Microsoft’s greenbacks give Novell. If Microsoft tries to use the knowledge it gains from customers to stifle the growth of Linux in the longer term then that’s altogether more sinister.

Albeit not exactly surprising.

Paul Rubens is an IT consultant and journalist based in Marlow on
Thames, England. He has been programming, tinkering and generally
sitting in front of computer screens since his first encounter with a
DEC PDP-11 in 1979.

This article was first published on ServerWatch.com.