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October 26, 2002 / gus3

My response to Craig Mundie’s remarks to the Stern School of Business

(Another old article. Craig Mundie introduced Shared Source, a Microsoft collaboration program designed to weaken Open Source projects through cross-contamination.)

There was no way I was going to let these comments go without a response. My own text is interspersed in the speech, and looks like this.

It has long been said that change is the only constant in the technology industry. In the past 20 years the velocity of that change has accelerated at a seemingly exponential rate, serving constantly as an engine of growth for the global economy.

Yet during the last year, the U.S. economy has hit what could be regarded as its most substantial speed bump of the past two decades. (Wrong. Remember the big drop of 1987? It was smaller in actual numbers, but it was a larger percentage on the day’s opening price.) Illustrated most starkly by the declining valuation of the NASDAQ, we’ve witnessed a notable decline in consumer confidence that has people wondering whether we?re at a brief respite or whether we’ve reached the end of an economic era.

At Microsoft we believe that the personal information technology revolution that began in the early 1980s is far from over. It probably has at least two more decades to go. But it’s also important that we learn from the lessons of the past year and apply them in order to make the most of the potential that lies ahead.

One lesson is that we should keep things in context. (Hear here. He doesn’t do a very good job, as I’ll show below.) Every big phase of economic expansion has its share of downturns, and new technological advances frequently bring with them a share of over-exuberance. The recent and substantial technology investment downturn mirrors similar episodes that affected railroads, steel, automobiles and radio. In this context, it’s not surprising that, as early as 1995, Bill Gates wrote in his book The Road Ahead about what he called the “Internet gold rush” and predicted both enormous long-term advances and substantial short-term setbacks, saying “Gold rushes tend to encourage impetuous investments. A few will pay off, but when the frenzy is behind us, we will look back incredulously at the wreckage of failed ventures and wonder, ‘Who funded these companies? What was going on in their minds? Was that just mania at work?'” (This wasn’t in the first edition of the book. Besides, Bill Gates didn’t write it; he had a ghost writer.)

But there is a broader lesson as well–companies and investors need to focus on business models that can be sustainable over the long term in the real world economy. A common trait of many of the companies that failed is that they gave away for free or at a loss the very thing they produced that was of greatest value–in the hope that somehow they’d make money selling something else. The Internet, for example, was full of sites producing content for free, in the hope that somehow they’d generate revenue from sources that never materialized, whether it was advertising, subscriptions, or a wing and a prayer. As we’ve learned–or really re-learned–one can’t build a business or our economic future on that type of flimsy foundation. (Gee, that sounds familiar. Remember Internet Explorer 3/4/5? Talk about flimsy. If you want your computer to be secure, you shouldn’t be using IE. It is the ultimate “wing and a prayer” in web browsers. It was designed to lock people into using proprietary HTML extensions from Microsoft, and make Windows a requirement for surfing the Web.)

Contrast this recent experience with the two decades of economic success that preceded it. The global economy grew in an unprecedented way in no small measure because of a generation of new companies, of which Microsoft was fortunate to be one. Many or even most of these companies invested heavily in research and development and sold their principal products at prices that covered their costs and generated profits that they reinvested in further research and development. (This is no guarantee of success, any more than the method in the prior paragraph is a guarantee of failure. What percentage of companies failed, doing business “correctly”?)

This research and development model, in turn, was almost always based on the importance of intellectual property rights. (Legal debate continues on whether there is such a thing.) Whether copyrights, patents or trade secrets, it was this foundation in law that made it possible for companies to raise capital, take risks, focus on the long term, and create sustainable business models.

Despite the demonstrable success of the computing industry and the IP-based economy (I know that this is the focus of his speech, but how much of the overall economy is he talking about?), and the clear failure of newer firms that gave away products for free, it’s notable that in the past year (a matter of months after MS acknowledged it) there has been a broader discussion about whether the ingredients that delivered longstanding economic success can continue to do so. In part this discussion has focused on whether the personal computer will continue to provide a sustainable technological foundation for economic growth. And in part this has focused on whether IP protection as we have known it–whether for music, software, or other products–should continue to be a fundamental engine of economic growth.

The questions to be raised are twofold:

  1. Can the personal information technology continue to drive broad economic growth? The answer is “yes.” (NO.) The computing industry needs to move to a model of multiple computing devices that more effectively empower people to unleash the computing power of the Internet and move their ideas and their content with them from machine to machine.(Personal IT does not drive economic growth; corporate IT drives it. If anything, personal IT slows down economic growth by making the toy at home the tool at work.)
  2. Should an information-based economy protect the intellectual property assets that are driving its growth? The answer is “yes.” (NO.) We should examine the progress of the Internet to understand the landscape of the software industry today and how intellectual property fits into that landscape.(An information-based society is not based on the creation of lasting value. Information can only be examined and analyzed. An economy based on information might as well be based on “2+2=4”.)

In thinking about the technology foundation we need, it’s important to recognize that the popular use of the Internet is still less than 10 years old, and is already moving into its third significant phase.(The currently popular use [Web surfing] is less than 10 years old, but it was e-mail that established it as a viable technology.)

Phase 1: In the early ’90s it was all about static information. The nascent World Wide Web was catapulted to the world stage as millions of individuals and businesses began to tap the potential of the medium. (Wrong. Dynamic CGI content was available and common in the early ’90s.)

Phase 2: The late ’90s saw the birth of the online transaction and the promise (promises, promises) of Internet-based business models. Both were about connectivity, but now the static distribution of information was replaced by business-to-customer or business-to-business transactions. (Totally false. If all information were dynamic, no proxy cache would be useful.) For the general public, came to personify the Internet transaction. (And for Web programmers, and its CEO, Jeff Bezos, personified the corporate swindler. The US Patent and Trademark Office really dropped the ball when it granted the “one-click” patent to Revenue models based on advertising sales vs. product sales came into vogue and Yahoo became the poster child for this model. The interesting part of this model is the shift of focus away from the technology IP to content IP (what do these terms mean? Without a definition, this statement is void of meaning) as the revenue engine for a company.

Phase 3 is what is being worked on now. It’s all about connecting the currently separate complex systems of information and transactions and bringing that power to the individual in a readily accessible format on a variety of devices. (Never mind the security concerns!)

These new technologies will be able to identify the relationships between disparate information sources and transactional environments. The individual may then cull relevant data and execute the necessary transactions to complete a task or make strategic decisions. An example of this would be to have a single process for identifying physicians covered by your healthcare plan, comparing physical locations of clinics to mass transit schedules and routes, scheduling the appointment and taking care of the co-pay all at once. Most importantly, this can be done any time, any place and on any device. (And anyone with a packet sniffer can see the names of your doctor and your HMO.)

There are challenges to the success of Phase 3 becoming a reality.

  • Business models:
    The increasing numbers of failures in the .com space (because they couldn’t hold their own against Microsoft) show a flaw in many of the existing Internet business models.

    1. Advertising as the primary revenue stream
    2. Operating under the assumption that market share equals revenue
    3. Free now, pay later (again, just like IE 3/4/5 and the new “features” you had to get in order to run them)
  • Development models: A heavy investment in research and development is going to be required in order for businesses and individuals to see the benefits of phase 3. (And to hide the risks from the end user.)
  • People: The technology industry has to prove its commitment to privacy and security (!) in order to encourage user acceptance of the technologies. Furthermore, the next phase needs to be presented in a simple and compelling fashion so that individuals and businesses may make use of them easily. (How ironic. A Microsofty talking about security, when their Web server has always been one of the riskier servers to use. The NT security model is still weak. Windows 9x/ME have NO security.)

The paradigm shift that is at the core of phase three is the focus of the Microsoft .NET strategy. .NET is a set of Web services that are user-centric rather than device-centric. This is a shift in focus from individual Web sites or devices to new constellations of computers, devices, and services (and system crackers) that work together to deliver broader, richer solutions. People will have control over how, when and what information is delivered to them. Computers, devices and services will be able to collaborate directly with each other, and businesses will be able to offer their products and services in a way that lets customers embed them in their usage of the Web at their discretion.

It is important to note that Phase 3 will not come about due to any one company’s, or even a single group of companies’, efforts. Innovation investment and a significant community of software developers will need to share the excitement for bringing about the next generation of the Web. The resulting intellectual property will be the foundation of the business model providing the continuing opportunity for R&D investment. (He just finished harping about IP, and now he wants the “community” to join in? How disingenuous.)

The business model I am speaking of for Phase 3 is the Commercial Software Model. The taxonomy of this model is built around 5 key elements:

(What he mentions here are opposing goals in the Microsoft view. Items marked with an asterisk [*] conflict with those marked with a plus [+].)

  1. Community: a strong support community (*) of developers
  2. Standards: promote collaboration (*) and interoperability (*) while supporting innovation (+) and healthy competition(+)
  3. Business Model: promotes the growth of a profitable business
  4. Investment: level of research and development investment drives resources for future innovation(+)
  5. Licensing Model: provides product and source access (*) without jeopardizing the intellectual property rights of those who create or use the software (+)

(Notice this very last point. He wants to protect the IP rights of the create and use, but he wants to eradicate the right of First Purchase, which says that once I buy a published work, I own that copy. No corporation can dictate to me how often I use it, if I can make a backup copy or transfer it to another medium, or who I can sell it to. The only thing I can’t do is sell copies while keeping the original.)

Microsoft has fostered the world’s largest community of software developers for well over a decade. (Lie #42: That’s only true in the USA. When you take into account the rest of the world, Unix stands out. And how has Microsoft fostered it for over ten years, if the Internet hit it big only in the middle ’90s?) Today, our developer network (MSDN) works with a community of 5 million developers. The element of the commercial software model for Phase 3 that we need to improve is that of our licensing model. Microsoft is expanding its licensing model to include our “Shared Source Philosophy.”

Shared Source is a balanced approach that allows us to share source code with customers and partners while maintaining the intellectual property (wE 0wN j00!) needed to support a strong software business. Shared Source represents a framework of business value, technical innovation and licensing terms. It covers a spectrum of accessibility that is manifest in the variety of source licensing programs offered by Microsoft.

The principles of the Shared Source Philosophy are:

  • Helping customers and partners to be successful through source access programs (while preserving the Pointy-Haired Boss’s ignorance)
  • Building the development community and offering them the tools to produce great software (in exchange for compromising your ability to work on your projects)
  • Improving the feedback process in order to create better products for Microsoft’s customers and partners
  • Maintaining the integrity of our customers’ environments (LIE #71: Windows is a system integrity disaster. Who knows what kind of stuff is in those “security updates”?)
  • Increasing educational access in order to get the technology into the hands of universities worldwide, and to seed the future of a strong technology industry (to get them while they’re young)
  • Protecting software intellectual property based on the firm belief that software offers value as the basis of a successful business (to protect Microsoft’s IP)

Some examples of Shared Source already being implemented at Microsoft:

  • Research Source Licensing: For nearly a decade Microsoft Research has licensed Windows source code to more than 100 academic institutions in 23 countries. (And now, those students and professors cannot work on Open Source projects, because of “contamination”.)
  • Enterprise Source Licensing Program: Source code for Windows 2000 and subsequent releases of Windows is available for licensing at no charge to over 1,000 enterprise customers in the United States. Today we are announcing a pilot program expanding the ESLP to 12 additional countries. (This compromises the professional programmer’s ability to work on Open Source projects as well.)
  • ISV Source Licensing: we are developing a program for licensing Windows source code to top tier ISVs for development and support purposes. (This goes after the independent consultants.)
  • OEM Source Licensing: Windows source code has been licensed for years to leading OEMs to assist in the development and support of their consumer and server products. (This is for the Mom and Pop computer stores.)
  • Windows CE source code access: We are licensing Windows CE source code through Platform Builder 3.0 (generally available to all developers). Microsoft will be broadening and adding to the community support mechanisms through the Platform Builder Program. In the second half of this year we will offer academic site licenses for CE source code. (Given WinCE’s dismal market performance, this isn’t a surprise.)
  • Additionally, we have announced an expanded level of CE source access to, (i) our leading silicon vendor partners via the Windows Embedded Strategic Silicon Alliance program, and (ii) our leading system integrator partners via the Innovation Alliance Program. (They’re even going after the hardware manufacturers!)
  • Sample code: Over the years Microsoft has made millions of lines of source code freely available to developers through resources such as SDKs, DDKs, and MSDN. (How hypocritical. Just a few weeks ago, Jim Allchin railed on “freely available” source code, and claimed that it would destroy our nation.)
  • We have announced that the specifications for the .NET Framework have been submitted to the ECMA standards body, enabling others to implement and evolve this technology in a platform-independent manner so that it is can be rapidly and widely adopted on an industry-wide basis. (A Microsofty talking about “standards”? They’ve never believed in standards, unless they’re the ones to create them. Examples: MSIE‘s broken Keep-Alive implementation; their proprietary extensions to the Kerberos protocol.)

We emphatically remain committed to a model that protects the(ir) intellectual property rights in software and ensures the continued vitality of an independent software sector that generates revenue and will sustain ongoing research and development.

The commercial software model is just one model being utilized in the software industry today. It is important to take into account the Open Source Software movement as an example of an alternative model.

The phrase “open source software,” or OSS, is often used as an umbrella term for a collection of product development, distribution and licensing practices, many of which have existed individually since the early days of computing. (No, it wasn’t. Computing was a cathedral, and only the “ordained” could get access.) There are actually a number of different approaches within this community, but the common traits are providing people with access to source code and allowing others to modify and redistribute that code.

As a result of Microsoft’s statement of position today, many people will attempt to say that Shared Source is Microsoft’s failed attempt at being an Open Source Company. This could not be a more incorrect statement. Shared Source is not Open Source. (GOOD!) We recognize that OSS has some benefits, such as the fostering of community, improved feedback and augmented debugging. (Which they desperately need. This is an implicit admission that their Beta program is a failure, and their QA department is hamstrung.) We are always looking for ways to improve our products and make our customers more successful (and squash the competition), and to that end we have incorporated these positive OSS elements in Shared Source. But there are significant drawbacks to OSS as well.

The OSS development model leads to a strong possibility of unhealthy (says who?) “forking” of a code base (if the possibility is that strong, then why hasn’t Linux forked?), resulting in the development of multiple incompatible versions (Windows 3.1/3.11/95/98/ME/NT 3.5/NT4/2000/CE… ’nuff said?) of programs, weakened interoperability, product instability (NT4 Service Packs, anyone?), and hindering businesses’ ability to strategically plan for the future. Furthermore, it has inherent (IP) security risks and can force intellectual property into the public domain. (OK, so maybe he doesn’t mean “IP security” here. But if that’s the case, then he means “system security”. And Microsoft is saying, “Trust us”.)

Some of the most successful OSS technology is licensed under the GNU General Public License or GPL. The GPL mandates that any software that incorporates source code already licensed under the GPL will itself become subject to the GPL. (Which the Lesser GPL [LGPL] doesn’t do. But he ignores that here, because he knows it will invalidate his whole argument.) When the resulting software product is distributed, its creator must make the entire source code base freely available to everyone, at no additional charge. (Wrong. Source must be available in the same medium as the executable program. This guarantees that the program and its source code can be distributed together.) This viral aspect of the GPL poses a threat to the intellectual property of any organization making use of it. It also fundamentally undermines the independent commercial software sector because it effectively makes it impossible to distribute software on a basis where recipients pay for the product rather than just the cost of distribution. (BIG LIE #1729: Consumers don’t pay for Windows. They pay for the “right” to use it. Microsoft can revoke that right, on their discretion [whim].)

In this sense, open source software based on the GPL mirrors the .com business models that proved the least successful during the past year. They ask software developers to give away for free the very thing they create that is of greatest value in the hope that somehow they’ll make money selling something else. (Notice that he asks his audience to take this statement on faith. He offers no objective evidence to support it.) In effect, it puts at risk the continued vitality of the independent software sector. The business model for OSS may well be attractive for software as an adjunct to hardware–the model of the ’60s and ’70s (a slam on the “communist hippies”)–or for service businesses that do not generate the revenue needed for major investments in technology. But as history has shown, while this type of model may have a place, it isn’t successful in building a mass market and making powerful, easy-to-use software broadly accessible to consumers. (So why does the *BSD/Linux/Apache installation base grow by leaps and bounds?)

In contrast, two decades of experience (never mind the three decades of Unix experience, and the N decades of IBM experience) have shown that an economic model that protects intellectual property and a business model that recoups research and development costs have shown repeatedly that they can create impressive economic benefits and distribute them very broadly. (OSS-based projects have nearly zero initial R&D costs. No payments for non-disclosure agreements. No big figures for the initial code base. Etc.)

Finally, the fact that we believe strongly in the value of IP protection doesn’t mean that we discount the importance of contributing to and supporting the public domain of knowledge as well. (So why did it take an Anonymous Coward to show the world, through Slashdot, how they tried to bastardize the Kerberos protocol? And why did Microsoft then try to shut Slashdot down?) We believe that interaction between the public domain and the IP-based sector needs to be based on mutual responsibility and respect.

There is an important and longstanding tradition for the public domain of knowledge, or “intellectual commons.” This is reflected in many ways, including federal support for basic research, the limitations on IP rights reflected in the law (but not the limitations imposed by the Constitution) and, more recently, the broad practice of contributing technology to public standards groups for the continued development of the Internet. We support this (No you don’t. You were dragged kicking and screaming into the Internet age. We’d still be running NetBIOS if you had had your way.) and want to continue to be a constructive and responsible (Hardly. Their stubbornness allowed the ILOVEYOU email virus to flourish, even after the Melissa fiasco. All because Microsoft refused to change one default installation setting in their Office line.) participant in this community, including making contributions to public standards. There is an equally important tradition of commercial companies having the opportunity to benefit from and apply this public knowledge, including by developing commercial products that are protected by IP rights. (But let a company develop a truly innovative product that they refuse to sell to Microsoft, and they’ll be locked out and shut down.) There are many examples of this, including the many products that grew from research in the space program and the advances in speech recognition technology that followed work done at pre-eminent institutions such as Carnegie Mellon.

The GPL asserts that any product derived from source code licensed under it becomes subject to the GPL itself. (Again, he’s ignoring the LGPL.) When the resulting software product is distributed, the creator must make all of the source code available, at no additional charge. This effectively makes it impossible for commercial software companies to include source code that is licensed under the GPL into their products, since by doing so, they are constrained to give away the fruits of their labor. As we think about technology, IP rights, and the public sector of knowledge, we need an intellectual model that encourages interaction (under Microsoft’s auspices), not a model that drives them apart. (He tries to paint these two as opposites ends of a continuum, which they are not.) We believe that a shared source model, coupled with continuing contributions to public standards, provides a path that is preferable to the open source approach founded on the GPL.

Collectively (Note the word use here: Jim Allchin accused the OSS/GPL crowd of being anti-American commie pinkos who came from collective farms, and now Craig Mundie is encouraging us to go in that direction. How sweetly ironic!) we need to seize the opportunity to make the most of the next two decades of potential economic growth. This requires the proper combination of continuity and change. It means keeping the model of personal information technology (This is not what will drive the next generation of IT.) but adapting it to the needs of the next generation of technology, as we are doing with .NET. It means promoting a sharing of knowledge, through source code and broader interaction, while respecting the importance of intellectual property rights. If we combine these approaches in the right doses, there is cause for great optimism about the economic road ahead.

(This is so rich. I know that a lot of the points I make in here are specific to IT, but if any of those students at the Stern School of Business are learning anything, they’ll look at Microsoft’s business practices, and then see what a bunch of bulls— this speech was.)

For other responses, check out:

UPDATE 15-May-2001: Hopefully, the Last Response by Bruce Perens, signed by all the major players

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