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.

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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.


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