Microsoft's annual report: Open-source mental block

In reading through Microsoft's annual report, I am struck by how far the company has come in appreciating the threat that open source brings to Redmond.

I'm also shocked by just how ill-informed the company continues to be with regard to open source as a business strategy. CEO Steve Ballmer has revealed this before in his quips, such as open source "doesn't pay the bills in this company." But here Microsoft has managed to enshrine its ignorance in a public document:

Our business model has been based upon customers paying a fee to license software that we develop and distribute. Under this license-based software model, software developers bear the costs of converting original ideas into software products through investments in research and development, offsetting these costs with the revenue received from the distribution of their products. Certain "open source" software business models challenge our license-based software model...

A number of commercial firms compete with us using an open source business model by modifying and then distributing open source software to end users at nominal cost and earning revenue on complementary services and products. These firms do not bear the full costs of research and development for the software. Some of these firms may build upon Microsoft ideas that we provide to them free or at low royalties in connection with our interoperability initiatives. To the extent open source software gains increasing market acceptance, our sales, revenue and operating margins may decline.

Yes to that last point, but no to Microsoft's earlier point about R&D costs. (And no to its throwaway line that open source is building on Microsoft's ideas. This is undoubtedly true in some areas, but it also goes the other way, which Microsoft fails to acknowledge.) Unless Microsoft is reserving that commentary exclusively for Red Hat and Novell and others like them that build on a community-developed platform like Linux, Microsoft's comments couldn't stray any further from the mark.

For most open-source companies, we spend significantly more of our money on research and development than Microsoft and its proprietary ilk. That's one of the primary selling points for open source: we spend less on sales and marketing and more on developing our products.

Microsoft's response to competition from open source?

Although we believe the breadth of our businesses and product portfolio is a competitive advantage, our competitors that are focused on narrower product lines may be more effective in devoting technical, marketing, and financial resources to compete with us.

In addition, barriers to entry in our businesses generally are low and products, once developed, can be distributed broadly and quickly at relatively low cost. Open source software vendors are devoting considerable efforts to developing software that mimics the features and functionality of our products, in some cases on the basis of technical specifications for Microsoft technologies that we make available. In response to competition, we are developing versions of our products with basic functionality that are sold at lower prices than the standard versions.

What Microsoft fails to mention is its own reliance on mimicking the features and functionality of others' products (Apple, WordPerfect, Sony PlayStation, etc.). This is how the world works, Microsoft. It's how we progress as an industry instead of being forced to reinvent the wheel over and over. Microsoft has benefited from this as much as any other company, if not much more so.

Microsoft is a strong company. It makes good products. It doesn't need to resort to half-truths to compete. As it notes, the breadth of its product line is its single-biggest differentiator right now, but it's also a potential Achilles' heel. Even so, as long as Microsoft continues to push forward rather than making a fetish of hoarding old markets, it will be fine.

But if it continues to sacrifice the Web to protect its desktop hegemony (while it fends off attacks from Apple and Google) and if it throws out the open standards and open source that drive successful Web companies, it will rightly dwindle in importance and eventually die, however long that might take.