<THE CASH-KING PORTFOLIO>
The Death of Windows
Rob thinks it's coming
by Rob Landley (email@example.com)
Austin, TX (Nov. 19, 1998) -- In India, Gandhi led his people on a march to the sea to make their own salt, thus avoiding oppressive government taxes on the stuff. When the normal capitalist mechanisms of competitive production broke down, and the consumers were not being served in something they could not do without, they banded together to produce enough to supply their own needs. Today, this phenomena is beginning to happen in the software industry, with the Open Source movement and Linux. And yes, it's already being analyzed as a social movement.
Open Source is where well-documented source code is distributed along with the product, for free, and anyone with the slightest technical skill can modify it themselves and even e-mail their modifications back to the site they downloaded the source from for inclusion in the next release of the product (after review by the product's maintainers). Anyone can create an open-source software product, using the free public license or other similar licenses such as the Artistic or Mozilla licenses. And anyone who has a copy of the product has the same rights to the product as anyone else. You can buy a copy of Red Hat Linux and use it to go into business competing with Red Hat, and it's perfectly legal.
Open Source products like Linux make no sense seen completely from a producer's perspective. Selling an otherwise free product to compete against an entrenched monopoly has been called "the business model from hell." But from a consumer perspective it's wonderful. And not only is this model working, leaked internal Microsoft documents show that it has Microsoft (Nasdaq: MSFT) very worried.
The so-called "Halloween Documents" were leaked this past Halloween weekend to Open Source advocate Eric Raymond, whose influential conference paper on the Open Source development model, "The Cathedral and the Bazaar," was cited by Netscape executives as the reason they decided to release the source code to their browser. He annotated the first paper (a related document leaked a few days later) and put them up on his web site, and the story was picked up by dozens of news organizations including The New York Times, The Wall Street Journal, and CNN. You can read that extraordinary report here -- I suspect every Microsoft investor will be interested in that.
The Halloween Documents are a pair of internal Microsoft research reports -- one on Open Source in general and one on Linux in particular. I highly recommend reading them as they give valuable insights into Microsoft's corporate mindset. Microsoft has publicly acknowledged the authenticity of the Halloween documents, both to every news organization that asked and on its website. The company defends them as just "one engineer's opinion," albeit commissioned by Microsoft, prepared on company time, reviewed and revised by dozens of other Microsoft engineers and executives, and submitted to Microsoft Vice President Paul Maritz before being leaked.
In the leaked documents, Microsoft more or less concedes the superiority of the Open Source development model. It acknowledges that it produces more stable and efficient code, and does so more rapidly than traditional software development. Like the scientific community, the widespread peer review and parallel development efforts of Open Source work quite well. Quoting from the document, "The ability of the OSS process to collect and harness the collective IQ of individuals across the Internet is simply amazing."
What's happening here is that people who want to use software, who aren't satisfied with (or can't afford) Microsoft's offerings, are writing their own. This is not driven by producers, it's driven by consumers. Since the consumers want to USE the software rather than profit from it, it is in their interests to share the fruits of their labor as widely as possible. Companies like Red Hat are not driving the open source movement, merely figuring out how to profit from something that already exists by providing a service (I.E. professional packaging and technical support). The products themselves (the Linux OS, the Apache Web server, the GIMP graphics editing package, The GNU software development tools, and hundreds of others) remain free.
Microsoft has good reason to worry. Linux hasn't just been expanding explosively at the grass-roots level (doubling in size every year), it has started to gain widespread (if sometimes tentative) industry support. Intel has thrown its weight behind Linux, making an equity investment in leading Linux distributor Red Hat and appealing to the Open Source community to provide device drivers under its new cross-platform "unified device driver model" (UDI). It has also promised to help in any way it can in the task of enhancing Linux to take full advantage of the new 64-bit architecture of Merced.
Netscape (Nasdaq: NSCP) has made a similar equity investment in Red Hat and has designated Linux as a "Tier 1 platform," meaning new versions of Netscape will be released for Linux at the same time as Windows. Oracle (Nasdaq: ORCL), the second largest software company, is behind Linux with a vengeance, and has decided to port its products to Linux, possibly even providing support for Linux itself. In response, all of the other major database vendors have announced ports of their software to Linux. IBM is giving away a free (entry level) Linux version of its DB2 server in addition to shipping and supporting the open source Apache Web server earlier this year. Corel has announced that not only will it port its office suite to Linux, it will make it a free download for personal use. Hewlett Packard is now shipping an entire servers line with Linux preinstalled. The list goes on and on...
A year ago, consumers considered handing Microsoft's monopoly over to Sun (Nasdaq: SUNW) by supporting Java. Today, Java is seen as a useful tool but not a solution to "The W2K problem" (Windows 2000). Microsoft wasn't any more benevolent than IBM, and IBM wasn't any more benevolent than Apple. Support for open source is a direct result of the chain of monopolies the industry has suffered under since its inception, and there's not a whole lot Microsoft can do about it.
Tomorrow, we'll finish up with Microsoft's legal problems. On a side note, this article on America Online's (Nasdaq: AOL) browser contract with Microsoft showed up in the news mere minutes after yesterday's column went from editing to production. It would have been perfect to include, so take a look now.
Again, I don't suspect my fellow Cash-King managers agree with all that I'm offering this week, nor all of the readers of these reports. And I don't want to hold this column hostage! But I do think these are sources of real concern for Microsoft investors.
For more on Microsoft today, check out this morning's Breakfast with the Fool, which takes a look at Mr. Softy's rocky relationship with RealNetworks (Nasdaq: RNWK). The Fool's Breakfast News is up every morning by 9:00 am EST. Enjoy!
- Rob Landley (Oak)
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Stock Change Bid AXP - 5/8 101.50 CHV - 5/16 80.25 CSCO + 7/16 73.31 KO + 7/16 71.38 GPS --- 68.00 EK + 1/8 76.19 XON - 11/16 70.00 GM - 1/2 72.38 INTC +3 112.88 MSFT +2 111.75 PFE - 13/16 110.56 SGP + 5/16 104.00 TROW + 1/8 34.25
Day Month Year History C-K +0.39% 7.20% 19.16% 19.16% S&P: +0.71% 4.91% 14.57% 14.57% NASDAQ: +1.17% 8.37% 15.20% 15.20% Cash-King Stocks Rec'd # Security In At Now Change 2/3/98 24 Microsoft 78.27 111.75 42.78% 2/3/98 22 Pfizer 82.30 110.56 34.34% 2/13/98 22 Intel 84.67 112.88 33.31% 5/1/98 37 Gap Inc. 51.09 68.00 33.10% 6/23/98 34 Cisco Syst 58.41 73.31 25.51% 8/21/98 22 Schering-P 95.99 104.00 8.35% 2/27/98 27 Coca-Cola 69.11 71.38 3.28% 2/6/98 56 T. Rowe Pr 33.67 34.25 1.71% 5/26/98 18 AmExpress 104.07 101.50 -2.47% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Eastman Ko 63.15 76.19 20.65% 3/12/98 20 Exxon 64.34 70.00 8.81% 3/12/98 17 General Mo 72.41 72.38 -0.04% 3/12/98 15 Chevron 83.34 80.25 -3.71% Cash-King Stocks Rec'd # Security In At Value Change 2/3/98 24 Microsoft 1878.45 2682.00 $803.55 5/1/98 37 Gap Inc. 1890.33 2516.00 $625.67 2/3/98 22 Pfizer 1810.58 2432.38 $621.80 2/13/98 22 Intel 1862.83 2483.25 $620.42 6/23/98 34 Cisco Syst 1985.95 2492.63 $506.68 8/21/98 22 Schering-P 2111.7 2288.00 $176.30 2/27/98 27 Coca-Cola 1865.89 1927.13 $61.23 2/6/98 56 T. Rowe Pr 1885.70 1918.00 $32.30 5/26/98 18 AmExpress 1873.20 1827.00 -$46.20 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Eastman Ko 1262.95 1523.75 $260.80 3/12/98 20 Exxon 1286.70 1400.00 $113.30 3/12/98 17 General Mo 1230.89 1230.38 -$0.52 3/12/98 15 Chevron 1250.14 1203.75 -$46.39 CASH $120.62 TOTAL $26044.87 *Please note: On 8/4/98 $2,000 cash was added to the
portfolio. $2,000 will be added every six months.
*The year for the S&P and Nasdaq is as of 02/03/98