Governments vote against Microsoft

Government customers contribute just a fraction of Microsoft's revenue but cause disproportionate headaches for the company through defections to Linux and open source. Will the urge spread to business customers?

David Becker Staff Writer, CNET News.com
David Becker
covers games and gadgets.
David Becker
2 min read
Microsoft has had its share of bad courtroom experiences, but lately the software giant has been taking some of its hardest knocks in city council and legislative chambers.


What's new:
High-profile deals to migrate to Linux and official backing for open-source software point to a greater willingness for governments to challenge Microsoft.

Bottom line:
The fear for Microsoft is that business customers--the company's bread and butter--might soon follow suit.

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While government customers account for less than 10 percent of Microsoft's revenue, according to analyst estimates, they've caused a disproportionate share of headaches for the company over the past year. Ambitious projects to migrate government computers to Linux and other competing software, official decrees favoring open-source products and hard-nosed licensing negotiations have put government customers well ahead of private business when it comes to testing Microsoft's mettle.

Some of Microsoft's most publicized business defeats recently have come from government plans to migrate official computers to open-source software. The German city of Munich became one of the most high-profile Microsoft defectors last year, voting to move 14,000 city-owned PCs to open-source software. The Texas city of Austin embarked on a similar Linux project late last year. A number of British government agencies are looking at open-source, as are official agencies in Korea, "="" data-asset-type="article" data-uuid="52910227-fedc-11e4-bddd-d4ae52e62bcc" data-slug="germany-funded-linux-software-arriving" data-link-text="Germany">. And the Commonwealth of Massachusetts last year adopted an IT purchasing policy that favors open-source software, but it later modified the policy to emphasize "best value" products.

While some of announcements seem little more than negotiating tactics, the sheer volume of deals point to a greater willingness among governments to move out of Microsoft's fold. And it isn't just Linux on servers that's garnering interest: The open-source operating system finally seems to be making headway on the desktop.

"These kind of deals are symptomatic that Linux is really gaining credibility on the desktop," said Stephen O'Grady, an analyst for research firm Red Monk. "What we're seeing from government...is that certain constituencies are ready for that migration."

Follow my leader?
The fear for Microsoft is that business customers--the company's bread and butter--might soon follow suit. "Governments just get it faster in some areas, and I think open source is one of them," added Sam Hiser, the marketing guru for open-source software group OpenOffice.org. "Enterprises are very clubby; they need a sense of confidence that individually, they're not the odd one out. Governments will act more quickly--especially if there's a case for cost-cutting and doing the right thing with taxpayers' dollars."

Maggie Wilderotter, senior vice president of business strategy for Microsoft, argued the situation is one of perception more than reality. Governments aren't making radical IT moves with any more frequency than businesses, she said. They're just getting more attention when they do.

"I really believe it's more about publicity than government moving faster than anyone else," Wilderotter said. "In a lot of cases, government involvement is just more high-profile. These are more transparent contracts because of the bidding requirements. If a business decides on a new software package, it's not a press-release thing."

"There are also a lot of wins Microsoft has made with governments in the last year," she added, "but we don't spend a lot of time hyping those in the press."

Stuart Cohen, chief executive of Open Source Development Labs, said government motives for moving to open-source software vary. It is different around the world," he said. "I think in the U.S., they are very focused on the total cost of ownership and flexibility. I think in Europe, they seem more focused on the open-source concept of where Linux comes from. In Japan, I think they are focused more on the import-export ratios, and they would like to see more exporting of software versus importing of software. And I think in China they are interested in using what they build, and they are building Linux-based applications today."

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Cost is often the first factor to motivate governments into considering open-source software. "These guys are really strapped for cash; many of them are in a state of near financial crisis," said Mike Cherry, an analyst for research firm Directions on Microsoft. "They are really looking at any way to save money. If they have a Linux advocate in the IT organization who says, 'I can save you money,' that's going to get some attention."

The overall cost of buying and running Windows as opposed to Linux and open-source software has become one of the most contentious areas of the debate between open-source software advocates and proprietary software backers. Microsoft claims that while open-source products are cheap or free to acquire, increased administration and support costs make them more expensive in the long run. Several third-party studies, including an influential report by research firm IDC, have supported Microsoft's claims. But others argue that cost advantages from switching to Linux continue to accrue well after the initial installation.

Orlando Ayala, the Microsoft executive who heads the company's effort to sell the company's products to small and medium businesses as well as its channel sales program, sent an e-mail this week that highlighted two new studies that tout Microsoft's success against Linux.

One Microsoft-commissioned study, conducted among 1,700 channel partners worldwide, found that Linux deployments are flat since the last study with those firms considering Linux for future projects having declined slightly.

The other study, commisioned by Microsoft Germany and conducted by the University of Munster, studied the economic impact of Microsoft's sales on its partners. The study said that Microsoft partnerships in that country account for roughly $14 billion worth of sales annually. The study also found that for every dollar of Microsoft sales, $7.50 worth of sales are generated for Microsoft partners.

A Microsoft representative declined to comment on Ayala's e-mail.

Local interests
Overseas governments also are concerned about where their money goes. Open-source projects, especially those requiring extensive localization and integration of existing products, promise to employ local developers.

"When you talk about governments outside the U.S., they don't necessarily want to send all that money outside the country," said Mike Silver, an analyst for research firm Gartner. "The business case is a whole lot different when you start figuring in local economic concerns. They want a level playing field around software development, so they can create local jobs building infrastructure."

Government agencies also have different mandates to businesses regarding public records and open access to information. Open-source software and open standards are often seen as promising freer access to data than proprietary alternatives.

"I think public scrutiny is certainly something that is more challenging to government," said Jurgen Geck, chief technology officer for Linux seller SuSE. "They're more aware of these things because they're focused externally...When you look at police forces and other sensitive areas, it's an advantage that we can provide 100-percent transparency."

"Governments are quicker to see the benefit of open file formats," added Hiser. "The big concern for them is having guaranteed access to public documents. It's a factor that very persuasive to lawmakers."

In response, Microsoft has stepped-up efforts to share the underlying source code of its products with select customers. Its Shared Source Initiative will likely be extended to Office and other Microsoft products this year, as will a companion program called the "Government Security Program" that makes source code available to 59 governments and agencies around the world, the company told CNET News.com. The company has also initiated a program that provides access to the underlying Extensible Markup Language (XML) file formats for its Office 2003 products.

Microsoft's Wilderotter said that many of the factors that prompt governments to look at open-source software turn out to go in Microsoft's favor once a government does an impartial investigation. She pointed to the London Borough of Newham, which engaged in a high-profile project a few years ago to promote open-source development. The local government body, in London in Great Britain, engaged an outside consultant to help direct long-range IT planning, and the decision went to Microsoft.

"They looked at TCO (total cost of ownership), security and other issues, and based on a number of those factors, they chose Microsoft," she said. "It was very surprising to a lot of people they chose Microsoft, given the stance they'd taken before, but the facts were there."

Wilderotter said one of the biggest challenges for Microsoft is to deflate some of the myths surrounding open-source software, including the notion it will automatically be cheaper than proprietary alternatives.

"Cost is important, and if we get to engage in dialogue with government, what they find in many cases is that Microsoft can provide a very cost-effective alternative," she said.

But government decisions aren't always solely based on statistical analysis, Cherry said. "We all know how energetic and active the open-source community is," he said. "They cannot influence a corporation to purchase Linux, but they can work in a grass-roots activist way to get government attention. Governments are simply more sensitive to that kind of pressure."

But is it contagious?
A few high-profile government switches to Linux won't have a significant direct effect on Microsoft's revenue, Gartner's Silver said. But they could harm the company by providing a model for other customers--government and private--looking at open-source projects.

"High-profile wins, no matter who makes the switch for Linux, are good for Linux," he said. "Everyone's looking at who's done it, who's been successful at doing a big desktop migration. Some of the more significant examples are likely to come from government."

Some question how genuine government support for open-source software is, however. Few high-profile Linux migration projects have actually been implemented, and in several cases such projects have been dropped in the middle of negotiations with Microsoft.

Israel's Finance Ministry recently threatened to move thousands of PCs to open-source software, until Microsoft agreed to its demand to purchase individual applications from the Microsoft Office package.

Microsoft made one of its most dramatic concessions last summer in Thailand, where the software giant agreed to offer a combination of Windows XP and Office for about $40--hundreds of dollars below standard pricing. The package is offered through a Thai government program to put low-cost PCs in the homes of citizens, a program that originally had focused exclusively on Linux and open-source software.

"I think it's fair to say that some of this is just talk designed to drive better bargains out of proprietary developers, not just Microsoft," said Michael Wendy, a spokesman for the Computing Technology Industry Association (CompTIA), a trade group partially supported my Microsoft.

Threats to experiment with open-source software have become an increasingly common tactic for businesses negotiating with Microsoft, and government customers can use such tactics to even greater advantage, given the public nature of their negotiations, according to Silver.

"The Israel situation is a good example where people used the threat of open source to negotiate with Microsoft," he said. "Microsoft doesn't want it to look like anyone who makes that threat can get a big discount. But if I'm a government, the more noise I make, the more likely it is Microsoft is going to cut a deal."

New attitudes
Cherry said the Thailand deal in particular could come back to bite Microsoft, as it sets a precedent for the company to grant extremely favorable terms to some customers.

"If the Thai and Israel examples turn out to be the first in a long line of governments demanding special deals, then it'll have an impact" on Microsoft's revenue, he said. "The bigger issue would be if corporate customers start making similar demands. It's very natural human behavior to say, 'I want what that guy has.'"

"I think requests for these kinds of deals are just going to happen with increasing frequency, especially with governments that are strapped for cash," Cherry added. "The consequence would be the erosion of their ability to set prices."

Wilderotter said the Thailand deal is an important example of new attitudes at Microsoft toward working with government customers, particularly in developing countries. Instead of sticking with one-size-fits-all software packages, she said, the company came up with special stripped-down versions of Windows XP and Office that will still fit the needs of most Thai consumers.

"What we used Thailand as a pilot to look at is, 'Can we separate product sets to meet the needs of citizens in a developing environment?'" she said. "'How can we put good-better-best product sets into the market based on local needs?' We got very good feedback to see how we would change our product offers in those situations, and we came up with a package that met those needs."

Wilderotter said the experience helped Microsoft to develop a new way of treating government customers. "In the past, we always sort of looked at government as just another commercial customer, and they're not," she said. "Microsoft's recognition of that has resulted in a number of long-term programs that we've put in place. For a lot of these developing nations, there's huge opportunity for our company in the long run, and figuring out how to work in those environments is important."

"I think we have a lot better engagement approach now," Wilderotter said. "Governments are feeling a lot better about us being flexible, transparent and responsive to their needs."

CNET News.com's Stephen Shankland contributed to this report.