Linux took on Microsoft, and won big in Munich

Subject: ICTD News for 16 July 2003
Date: Wed, 16 Jul 2003 11:05:02 -0400
From: ICTD Newsmaster <ictdnews@undp.org>

---- Linux took on Microsoft, and won big in Munich

The result in Munich shows that the world's largest software
company is again under attack from a powerful outside force.
But this time the encroacher isn't government antitrust
lawyers or a rival tech giant. Instead, Microsoft is
defending itself against the open-source-code movement. In
the past two years, dozens of government agencies and
schools across Asia, Europe, Australia and the Americas,
along with financial institutions and moviemakers, have
helped establish open-source software on beefy computer
servers that display Web pages and crunch numbers.

http://www.usatoday.com/usatonline/20030714/5320229s.htm

Linux took on Microsoft, and won big in Munich Victory could
be a huge step in climb by up-and-comer

By Byron Acohido USA TODAY

On the brink of losing a pivotal account to an ascending
rival, Microsoft last March dispatched CEO Steve Ballmer to
the rescue.

The German city of Munich was balking at a $36.6 million
proposal from Microsoft to upgrade 14,000 desktop PCs to the
latest versions of Windows and Office. Instead, Munich --
Germany's third-largest city and a technology hub for
Central Europe -- was leaning toward a switch to Linux, the
upstart computer operating system whose open-source code is
continually improved by volunteer programmers worldwide.

A Linux victory in Munich would be a stunning blow. So
Ballmer visited Mayor Christian Ude to assure him Microsoft
would do what it takes to keep the city's business.
Documents obtained by USA TODAY show Microsoft subsequently
lowered its pricing to $31.9 million and then to $23.7
million -- an overall 35% price cut. The discounts were for
naught.

On May 28, the city council approved a more expensive
proposal -- $35.7 million -- from German Linux distributor
SuSE and IBM, a big Linux backer.

The vote wasn't just another win for Linux, as it continues
to gobble chunks of the computer server software market -- a
market Microsoft does not dominate. Munich is about to
become the largest tech user to deploy Linux for everyday
use on desktop PCs, the wellspring of Microsoft's profits.

USA TODAY obtained government and corporate documents that
provide a rare insider's look at Microsoft's efforts to keep
from losing a key customer. Among other things, it:

* Agreed to let Munich go as long as six years, instead of
the more normal three or four, without another expensive
upgrade, a concession that runs against its bread-and-butter
software upgrade strategy.

* Offered to let the city buy only Microsoft Word for some
PCs and strip off other applications. Such unbundling cuts
against Microsoft's practice of selling PCs loaded with
software.

* Offered millions of dollars worth of training and support
services free.

The result in Munich shows that the world's largest software
company is again under attack from a powerful outside force.
But this time the encroacher isn't government antitrust
lawyers or a rival tech giant.

Instead, Microsoft is defending itself against the
open-source-code movement. In the past two years, dozens of
government agencies and schools across Asia, Europe,
Australia and the Americas, along with financial
institutions and moviemakers, have helped establish
open-source software on beefy computer servers that display
Web pages and crunch numbers. Now they have begun embracing
open-source software running on ordinary desktop computers.

''What's striking about the Munich deal is the use of Linux
on the desktop,'' says Paul DeGroot, tech industry analyst
at research firm Directions on Microsoft. ''It's a threat to
Microsoft's real source of strength, the desktop, where it
has no competition and is used to winning all sorts of
battles.''

Should its desktop software sales stagnate or, worse,
decline, Microsoft's profit could plummet, and it could find
itself with a diminished ability to bankroll promising, but
costly, new ventures, such as tablet PCs, smart phones and
online video games.

Anchored by the Linux operating system, open-source software
is the antithesis of Microsoft's proprietary codes. It
includes a growing number of freely distributed
applications, such as OpenOffice, a Microsoft Office clone,
and Mozilla, a Web browser that can perform basic workplace
tasks. Created and honed by volunteer programmers worldwide,
open-source alternatives are generally cheaper to acquire
and easier to customize, and cost nothing to upgrade.

Though Microsoft underbid IBM and SuSE by $11.9 million in
Munich, city officials were concerned about the
unpredictable long-run cost of Microsoft upgrades, says
Munich council member Christine Strobl, who championed the
switch to Linux. And the more Microsoft discounted, the more
it underscored the notion that as a sole supplier, Microsoft
could -- and has been -- naming its own price, she says.

''Microsoft's philosophy is to change our software every
five years,'' Strobl says. ''With open-source, it is
possible for us to make our own decision as to when to
change our software.''

Munich must still prove that Linux is ready for prime time
on the desktop. Research firm Gartner cautions it won't be
until 2005 before it is known how well it works in Munich.

Whether other big tech buyers follow Munich's lead remains
to be seen. Analysts say Microsoft has the will and
resources to vigorously defend its turf. Windows and Office
run on more than 90% of the world's desktop computers and
command gross profit margins of up to 80%. The company has
$46 billion in cash and will spend $5.2 billion this year,
up 20% from last year, on research to improve its offerings.

''Product-wise and installed-base-wise, they're very well
positioned,'' says Gartner analyst Mike Silver.

Microsoft issues call to arms

Open-source advocates counter that Munich proves tech buyers
are beginning to demand price cuts from Microsoft while
giving Linux a serious look.

''What the Berlin Wall was to politics, Munich is to
technology,'' says SuSE CEO Richard Seibt. ''I believe we
are now witnessing that dramatic break to freedom of
choice.''

Ballmer declined interview requests. A week after Microsoft
lost in Munich, however, he issued a call to arms. In a June
4 companywide memo, Ballmer cast open-source software as
having ''no center of gravity'' and suggested IBM adds ''an
illusion of support and accountability'' to Linux. But he
also warns that Linux ''requires our concentrated focus and
attention.''

In a recent interview, Microsoft Chairman Bill Gates said
Linux is just the latest in a long line of competitors,
adding that the company has no plans to allow its products
to run on Linux.

Munich ''reinforces for us that we operate in a very
competitive marketplace,'' says Maggie Wilderotter,
Microsoft senior vice president of business strategy.

What happened in Munich also shows how profoundly tech
buyers' mindsets have changed. Five years ago, as Linux was
just starting to appear on the tech landscape, companies
routinely snapped up expensive technology with minimal due
diligence. Today, they have become assiduously frugal. And
Microsoft, analysts say, has forced the issue by eliminating
discounts for upgrades, cutting off support for older
versions of its products still in wide use, and steering
customers to a controversial 2-year-old software licensing
plan under which corporate and government customers pay
upfront for software and upgrades.

''Microsoft's biggest enemy is themselves,'' says Gartner's
Silver. ''They do things that make people very upset and
engenders a lot of resentment.''

Comparing Microsoft, Linux

The opening salvo for the battle of Munich was fired from
Microsoft's Redmond, Wash., headquarters. Last October, the
company announced it would no longer support Windows NT
server software, which is used by businesses to network
groups of desktop PCs.

That meant Munich needed to do something about its Windows
NT-based network of desktop PCs running Office 95 and 98.
Microsoft wanted to upgrade the city to its newest products:
Windows XP and Office XP. But the city balked, and hired
technology strategist Unilog Integrata, to review its
options.

In comparing Microsoft with Linux, Unilog outlined the
trade-offs: Microsoft generally requires a customer to buy
one copy of its Windows operating system for each worker,
along with a ''full stack'' of basic programs, such as a
word processor, spreadsheet calculator, e-mail, calendar and
Web browser. Each worker's Windows PC then serves as a
gateway to other programs. Munich, for instance, uses 175
Windows applications for such tasks as managing police
records, issuing permits and collecting taxes.

While Linux is easier to customize than Windows -- so each
PC doesn't have to have a full software stack -- and
upgrades are free, it does not work well with Windows
programs. Another layer of connection software is required,
adding complexity.

Unilog judged Microsoft's proposal -- to swap out all
existing versions of Microsoft Windows and Office for the
newest versions -- as cheaper and technically superior. But
the offer from IBM-SuSE better met ''strategic'' criteria
set forth by the Munich council, says Harry Maack, Unilog
project manager.

For instance, the council wanted the city's computers to be
very flexible and provide a return on investment over a long
period of time. Unilog first recommended that the city
select a $39.5 million Linux package from IBM-SuSE over a
$36.6 million standard upgrade package from Microsoft.

''On price and technical criteria the advantage was
Microsoft's, but the gap was not that big,'' Maack says.
''On strategic issues, it was clearly open-source, and the
gap was very great.''

With battle lines drawn, Microsoft turned to a freshly hired
recruit, Jurgen Gallman, steeped in Linux. Until last
November, Gallman had been IBM's top Linux executive in
Germany. IBM has pumped more than $1 billion into marketing
Linux, including opening more than a dozen Linux training
centers in cities such as New York, London and Beijing.

With Unilog, the consultant, recommending IBM-SuSE, Gallman
stepped up lobbying for Microsoft. He arranged technical
briefings with city tech staffers to elaborate on the
advantages of Microsoft's bid. At a workshop, Microsoft
''gave detailed answers on all the issues and concerns in
the (Unilog) study in exactly the same order'' as listed in
the study, Maack says. ''They must have had a hard copy.''

Gallman denies that Microsoft obtained a copy. He says it
could provide thorough answers based on its expertise.
According to city fairness rules, neither side should have
had a copy of the report.

Despite Gallman's efforts, it became clear by late March
that a majority of the 80-member city council would follow
Unilog's recommendation and select IBM-SuSE, says Ernst
Wolowicz, Mayor Ude's chief of staff. Near the close of
business on March 25, Gallman arrived at city hall,
escorting Ballmer to a meeting with the mayor.

Some drinks and some persuasion

According to Wolowicz, who attended the meeting, Ballmer
told Ude he came from a skiing trip to pay his respects.
Microsoft now says Ballmer was on a scheduled business trip
in Germany.

Drinks were served. Ballmer advised Ude not to be too hasty
in his support for Linux, and tipped the mayor off to a deal
in the works with Germany's federal Ministry of Interior
that would provide a 15% price discount for all public
sector customers in Germany, including Munich.

The 45-minute meeting transpired with little fanfare. But a
week later, someone leaked an account of Ballmer's visit to
the German press, and suddenly Munich's impending decision,
handled as routine city business to this point, became a
cause célèbre.

German media depicted Ballmer dashing from the Swiss ski
slopes to steer Ude into rethinking his decision. Some
stories credited Ude for cagily maneuvering the American
tycoon into making concessions.

Not long after that, the International Herald Tribune ran a
story based on a leaked e-mail by Orlando Ayala, a top
Microsoft executive for foreign sales. In the memo, Ayala
declares, ''Under NO circumstances lose against Linux.'' He
authorizes $118 million in ''consulting service discounts''
for different regions, including $5.4 million to win
business in Germany, according to excerpts published by The
Register, an online publication that covers the tech
industry.

''It was clear they were prepared to do whatever they needed
to do not to lose, and that they wanted the customer to feel
that way,'' says Jim Stallings, IBM's vice president in
charge of Linux.

When recently asked about that e-mail and whether Microsoft
was improperly undercutting competitors in Europe, Gates
said, ''We will never have a price lower than Linux, in
terms of just what you charge for the software,'' adding
that Microsoft's value is in the overall benefit of systems
including hardware and services.

In Munich, meanwhile, government documents obtained by USA
TODAY show Gallman prepared a 350-page offer slicing $4.7
million off the price mentioned in Unilog's report.
Microsoft's bid was now $31.9 million.

Microsoft made the cuts by agreeing to provide free or
sharply discounted training for city workers, and by
sponsoring school programs, such as allowing teachers to use
Microsoft software purchased for the workplace at home for
no extra charge, the documents show.

In a noteworthy concession, it also agreed to support
Windows XP for six years -- a year beyond the five-year base
contract, and said the city could skip the next Office
upgrade, too. That meant Munich could use Windows XP and
Office XP until 2010, and would not have to upgrade in 2009.
That would save the city, by Microsoft's estimate, $1.8
million.

This ran counter to a controversial licensing policy
Microsoft's introduced in 2001, which makes Windows and
Office more expensive for customers who do not upgrade every
three to four years.

The offer from the Linux camp improved, as well. SuSE CEO
Seibt -- also an IBM alum who hired Gallman at Big Blue in
1996 -- shaved the Linux bid by $3.8 million to $35.7
million.

Though IBM-SuSE's bid was still $3.8 million higher than
Microsoft's, Unilog on April 28 called the offers a tossup.
On May 21, council members met separately by party to
discuss the upcoming vote. It became clear that two of three
political parties, representing a clear majority, favored
the open-source offer.

Microsoft makes one last offer

On May 27, the day before the council was scheduled to
formally make its choice, Microsoft's Gallman faxed Ude a
letter accusing the Linux camp of cheating, according to a
copy of the letter obtained by USA TODAY. ''That our
competitors SuSE and IBM were given a one-sided opportunity
to improve their April 28th offer, based on detailed
knowledge of Microsoft Germany's offer, is not in accordance
with our legal understanding of the ground rules of fair
process,'' Gallman wrote.

David Burger, the SuSE vice president in charge of the Linux
bid, says he never saw Microsoft's bid, nor did he offer the
city any sweeteners after the Linux camp's one-time cut.
''That ploy is a little poor coming from a company like
Microsoft,'' Burger says. ''I find it ironic that Microsoft
could actually be trying to be seen as if it were being
dealt with unfairly.''

Gallman extended one final ''improved offer,'' slicing
another $8.2 million off Microsoft's standing bid, according
to Ude's letter.

Among other sweeteners, this time Microsoft reduced its
license fees for Windows XP by $912,600 and lowered its
charges for helping the city make the upgrade by another
$3.6 million, according to a separate letter Microsoft faxed
to Wolowicz.

Microsoft also took the unusual step of offering to let
Munich buy Microsoft Word -- normally bundled with Excel
spreadsheet, PowerPoint slide presentation, Access data base
and Outlook communications software to make up Microsoft
Office -- a la carte.

In explaining that concession in its letter, Microsoft
indicated it possessed data showing that many workers don't
need a full stack of basic programs. ''This applies in
particular to our proposal to put only Word on 4,000
workstations because the other Office products are not used
on approximately 30% of workstations, based on our
experience,'' says the letter from Microsoft. The projected
savings: $778,050.

Gallman, in an interview, said the last-minute offer stemmed
from Microsoft's wish to communicate ''a better
understanding of Microsoft's licensing model.''

''It was not a discount,'' he says.

Gallman's appeal fell mostly on deaf ears. Councilwoman
Strobl, for one, was skeptical. ''Our consultant had no time
to double-check the offer, whether it was really cost
effective, or whether there were hidden costs,'' she says.
''We did not take it seriously.''

Other council members shared her doubt.

''Microsoft came too late,'' says Wolowicz, Ude's chief of
staff. ''The perception of the majority of the city council
was now (Microsoft) wants to put pressure on the decision.
Psychologically it was not good.''

On May 28, the council voted 50 to 30 to switch to Linux.

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