Microsoft Opens Up to Open Source

Ray Noorda died last month. A legend in the software business, Noorda came on board with Novell (Nasdaq: NOVL  ) in 1983 and turned the company into a powerhouse in corporate networks. His arch-nemesis, of course, was Microsoft (Nasdaq: MSFT  ) , which he tried to crush with his own Office suite. But as we know, Bill Gates prevailed.

Yet in the tech world, enemies can easily become allies. That was the case last week, when Microsoft agreed to partner with Novell on its Linux software.

To understand why, consider that Linux is a robust operating system that has evolved impressively with its open-source approach. In fact, Linux has been quite beneficial for Red Hat (Nasdaq: RHAT  ) , which over the years has built a notable services business -- including installation, maintenance, training, and seamless upgrades -- around this technology.

This is a big problem for Microsoft. Any threat to its franchise -- namely, its operating system -- must be defended at all costs. And the potential nightmare for Microsoft is that Red Hat's momentum will continue and eventually turn it into . well, the next Microsoft.

It's interesting to note that yet another enemy of Microsoft, Oracle (Nasdaq: ORCL  ) , recently pummeled Red Hat. Oracle will now provide the same type of Linux support that Red Hat does, but at a 50% discount. On that news, Red Hat's stock plunged 25%. A rumor actually made the rounds that this move was a clever attempt on Oracle's part to buy Red Hat on the cheap.

Either way, with Oracle also pushing Linux, Microsoft perceived a threat. And that's why teaming up with Novell is a smart move. As a result, Microsoft has its own version of Linux, which will work seamlessly with Windows Server technologies. Microsoft, meanwhile, has also agreed not to pursue patent litigation against Novell's Linux technologies. That might mean, however, that Microsoft will prosecute its patent rights against Red Hat.

Microsoft has also accomplished a key goal of creating confusion in the marketplace. What will customers do now? Go with Oracle? Or Red Hat? Or will they do what they have always done over the years and just rely on Microsoft?

Raven Zachary, a senior open-source analyst for the 451 Group, told me, "With this announcement, Microsoft is stirring up the pot a bit without changing its position on the dominance of the Windows platform."

Basically, Red Hat is left in a tough spot. It seems inevitable that corporate customers will hold back, and if they do, sales will slow down. That means there's still lots of risk in Red Hat's stock.

Clearly, Red Hat has accomplished a lot for a company its size. But Microsoft still has many advantages -- not to mention huge amounts of cash -- and it obviously still knows how to play hardball.

Related links:

Microsoft is aMotley Fool Inside Valuepick. Try out Inside Value, the Foolish newsletter service dedicated to finding great companies trading at bargain prices, free for 30 days.

Fool contributor Tom Taulli does not own shares of companies mentioned in this article.He is currently ranked 37th out of more than 12,000 players in Motley Fool CAPS, the Fool's new stock-rating community that's open to investors just like you.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 517060, ~/Articles/ArticleHandler.aspx, 10/27/2016 8:34:46 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,169.68 -29.65 -0.16%
S&P 500 2,133.04 -6.39 -0.30%
NASD 5,215.97 -34.29 -0.65%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/27/2016 4:00 PM
MSFT $60.10 Down -0.53 -0.87%
Microsoft CAPS Rating: ****
NOVL.DL $6.10 Down +0.00 +0.00%
Novell, Inc. CAPS Rating: **
ORCL $38.22 Down -0.09 -0.23%
Oracle CAPS Rating: ****