The latest headline-making scandal related to Microsoft (Nasdaq:MSFT) is the leak of part of its Windows 2000 and Windows NT source code onto the Internet. The investigation into the leak is at its height, and the damage to Microsoft is as yet unclear. The world's media suggests that the source of the leak was one of the hundreds of Microsoft partners, Mainsoft, based in San Jose, California, and Lod, Israel. Microsoft will not confirm the reports, saying the matter is "under investigation. Mainsoft declines to comment.
The issue of the leaked source code touches on one of the subjects over which Microsoft is regularly condemned: its code is closed, whereas Linux's is open. Microsoft keeps its source code top secret and charges for software. Linux's source code is public, as are its accompanying products, even though research indicates that installing open code software is more expensive than using Microsoft's closed code products.
Earlier this week, Microsoft Israel managing director Arie Scope said Microsoft shared its source code with hundreds of partners worldwide. The partners are government agencies and partner companies that develop products and versions based on Microsoft source codes. "There are five to ten enterprises in Israel that have part of our code. Each of them can be the source of a leak. I hope that the leak wasn’t malicious, because our partners say they protect this code as if it were their own. Our partnership contracts are based on commercial considerations. They are strict and allow Microsoft to sue the source of a leak. The investigation is at its height, and I assume that the company will soon disclose the source of the leak."
"Globes": Maybe it's time to realize that it's impossible to keep your code secret any longer?
Scope: "Absolutely not. If Microsoft wants to stay in the software business, it cannot allow itself to concede its copyrights. Releasing the source code means giving up the revenue from it and quitting the market."
Microsoft takes into account the cost to its image from its stubbornness. Scope accepts being called a monopoly, but wishes the company's detractors would stop calling it "ruthless", which he claims "ruins his day." He says, "I can live with being called a monopoly, but not ruthless. After all, we're not like Israel Electric Corporation. My customers have no eternal obligation to me. There is no guarantee that a buyer in 2000 will make another purchase in 2004. Unless we improve our products, we don’t stand a chance. We must prove that our products are good and meet customer demands so that they'll come back to us."
Open code isn’t a gift from the gods
Scope is a little worked up. In the end, and with all due respect to Linux operating systems, there is still no suitable alternative to Microsoft's operating system. Nonetheless, Microsoft launched an ad campaign to provide comparative data about performance and costs for Windows and Linux. The first ads have already appeared in Israel. The cost of the campaign in Israel is $150,000.
"Products that don’t need support are not easy to grasp, because customers look at the buying price, but not at the owner's cost for working on and maintaining the software. Linux's software is presented as if it is given for free, whereas our software carries a cost. That's why we launched the ad campaign to educate people that it's not only the cost of software that is high, so is the cost of installing and maintaining it. It's important to realize that Linux is neither free nor cheap. Their attack on us was the motivation behind our educational effort."
Explain.
"Software with millions of users cannot be open. In the 1970s, it was normal to release the code, because only a limited number of users worked with the software. Microsoft also released its codes for free. Linux honed in on us; not our competitors Oracle (Nasdaq:ORCL), Sun Microsystems (Nasdaq:SUNW), or IBM (NYSE:IBM), which found a way to get at Microsoft without playing a direct role."
Is Microsoft suffering from paranoia?
"Certainly we're paranoid, because we want to protect ourselves. All the corporations I named encourage the use of open operating systems in areas outside their businesses. Why don’t they encourage the use of open code for IBM servers, or distribute IBM's WebSphere for free? None of them sells open code systems. Open code is not a gift from the gods. Someone finances it. Linux mainly takes bites out of UNIX servers, not Microsoft products."
But it is a fact that you can't keep the code forever locked in a safe.
"If open code wins, it will be the end of profits from software. If there are profits, they'll come from the accompanying services. That will be the end of the global high-tech industry. No one will be able to register patents, because everything will belong to everyone. It won't be worthwhile for anyone to learn computer science to provide software services. Computer science students dream of inventing software that will change the world, and making a huge profit.
"Open code is a nice ideal, like socialist ideals, but it hasn’t worked in practice. What have worked are the inventions that have made money and weren’t distributed for free. I don’t claim that there isn’t a market for Linux, we favor competition, because a company without competitors calcifies."
You're known as a killer of competitors.
" We'll continue liquidating our competitors, but we pleased to have them."
Ballmer is coming to Israel
Although it guards its code, Microsoft took the world by surprise two months ago when it announced a program of sharing its code with the public, especially academic institutions nears it fortress, proving that the company headquarters in Redmond, Washington, realized that it was not possible to man the walls forever.
Scope says that Microsoft has no animus toward the developer community. "To the contrary. We support some communities. Had Linux left us alone, we could have collaborated. They marked us as an enemy to create headlines."
One of the issues coming out of the open code affair is the conflict between Microsoft and Israel's Ministry of Finance. The Accountant General decided not to renew the ministry's contract with Microsoft, and distribute free open code among government ministries and agencies. The conflict died with a whimper. The government changed its rental contract with Microsoft to a purchase contract.
Scope says the media were mostly responsible for the affair. "Until three years ago, the government sporadically bought from us. We signed the first contract in 2001. The government accounts for 3-4% of our business. We were astonished by the headlines that claimed we'd lose millions, because the contract was a small one. We have excellent relations with the government. The media reports didn’t reflect reality, mainly because the dispute was about operating systems, while we mostly sell server products to the government."
What was the noise all about?
"That's hard to answer. The government bought updated products, rather than renting them any longer. Once the noise dies down, every government PC will have our software package. We preferred a long-term rental contract, but that's the way it is, and we have no complaints."
Why do people love to hate you?
"I think it's because of our size. We conduct surveys among users, and for many years the company's has been the most admired after General Electric (NYSE:GE). Our managers appear on lists of the world's best managers. Every child knows who Bill Gates is. In Israel, we measure customer satisfaction. Our bonus is based on these surveys: sales growth multiplied by the customer satisfaction percentage. There were years in which the surveys cost me my bonus."
Microsoft CEO Steve Ballmer is due to visit Israel in May for a day. Scope says Ballmer is not coming to talk with the Accountant General. "Ballmer was due to visit Israel two years ago, but cancelled after terrorist attacks. He is making a ten-hour visit, and there are no plans for a slew of meetings. Ballmer doesn’t close contacts; that's not his job. It's normal for the boss to periodically visit the branches. He's coming to meet Microsoft Israel employees and get a sense of what's happening on the ground."
The 13th branch in the world
Scope founded Microsoft Israel in 1989, and has run it ever since. Microsoft Israel was Microsoft's 13th branch outside the US. The Israeli development center, which has operated as an independent unit since 2003, is one of Microsoft's four R&D centers outside the US, the others being in the UK, China, and India.
Microsoft Israel has $120 million in annual sales. 40% of sales are of servers and software, 29% applications, such as Office and Project, and 25% are of operating systems. The profitable company has 430 employees, including 150 sales and customer support staff.
Surrounding these 430 employees are 10,000 employees at partner companies that carry out installations, training, and adaptations. Scope says, "I estimate that the systems generate $1 billion a year, amounting to a third of Israel's IT industry."
Published by Globes [online] - www.globes.co.il - on February 17, 2004