Microsoft to Promote Linux: The Details

Legally, what Novell and Microsoft accomplished on Thursday -- assuming they really did so, because their documents could come under review -- is achieve what many legal scholars have thought impossible, due to the oil-and-water differences between open source and proprietary software. The two companies' goal was to encourage customers to channel a virtualization path that leads through both Novell and Microsoft, with the enticement of escaping the threat of intellectual property litigation. But while Microsoft can indisputably speak for Windows, Novell cannot speak for Linux.

"To do that," Smith continued, "one of the things we fashioned was an approach that will ensure...that every customer who purchases a subscription, for example, for SUSE Enterprise Linux will get not only service and support from Novell, but will get as part of that, in effect, a patent covenant from Microsoft."

The covenant is a very slick, and from the new partners' perspective, hopefully legally defensible approach to Novell's representation problem. Steve Ballmer first alluded to the technical term for it, and later explained it in more depth:

"In a sense, I think of Novell as a proxy for the customers. Novell works with the open source community, so we needed to have a way to work with Novell that was respectful of the community. But nobody represents the community. On the other hand, our customers were saying, we want somebody to represent us in the use that we will make Linux. And customers weren't picky, they said, 'Find somebody who's in this game who really wants to get after it.'"

Red Hat was one consideration, which Ballmer kind of, sort of, virtually admitted, without naming the company specifically. But it was Novell that approached Microsoft with the idea of a partnership back in March of this year. "When I reached out to Steve [Ballmer] and Microsoft," said Novell CEO Ron Hovsepian, "it was a conversation about how we work together with our customers."

"We had discussions with lots of folks in the industry," added Ballmer. "You can probably guess a list of names...but it was really when Ron called and initiated a contact, because he's thinking about where he wanted to take Novell, that we were able to put together something that addressed the business issues, the patent issues, and the technology issues all at once."

It is this part of the agreement which may leave both Windows and Linux proponents absolutely breathless: It has to do with how the two parties will exchange monies, and for what purpose. "There's, of course, a little bit of economics involved, as there always are," Brad Smith began, knowing full well the size of the can of worms he's getting paid the big bucks to open.

"We dealt with the need for an up-front balancing payment that runs from Microsoft to Novell," Smith continued, "reflecting among other things the large relevant volume of the products that we have shipped. And you'll see, as well an economic commitment from Novell to Microsoft, that involves a running royalty, a percentage of revenue, on open-source software shipped under the agreement. So we've been able to sort out the economics, and in some ways, perhaps one of the most important things is, because we've been able to sort out the economics, Novell's customers don't have to."

In other words, Novell, acting as a proxy on behalf of its customers who might otherwise be subject to lawsuits, is paying Microsoft royalties for sales of SUSE Linux. Rather than haggle out the details of who owns what and who doesn't, the two companies have apparently decided that Microsoft indeed owns something, and has estimated the relative value of that something.

How much are we talking about? We don't know the percentages, though since Novell is a public company, we may be able to do the math ourselves in about a year's time. In the meantime, looking at Novell's last quarterly report, filed last August, the company reaped about $40 million of net revenue in its last fiscal quarter from the licensing of software.

That's not very much, which goes to show you that licensing isn't where the money is. However, the company earned about $238.3 million during the quarter from the service and maintenance of that same software. After expenses, gross profit came up to $173.9 million.

By contrast, Microsoft reported operating income for its last quarter at $4.4 billion. But owning a chunk of the Linux business is at least as valuable to Microsoft as the creation of a new and successful software product line. And since the lion's share of Linux revenue comes from the maintenance of software, not its sale, it only makes sense that if Microsoft is to earn a chunk of that, it participates in the actual job of maintenance.

Which is how Microsoft has become, to the likely amazement of many, a support provider for SUSE Enterprise Linux. Windows veterans may be wondering, why would anyone want Microsoft to provide technical and customer support for Linux (a certain oft-told helicopter joke comes to mind)? But for enterprise customers working on the virtualization problem, the prospect of dealing with two support sources may be just enough to keep the whole idea back-burnered. So while Novell will obviously be customers' primary support source, Microsoft is stepping up to add Linux support where it's needed.

Next: Microsoft will be paid royalties for future SUSE Linux innovations