Wednesday, February 21, 2007

An Open Letter to Joe Wilcox re Free Microsoft Software

Your "Virtual PC and the Value of Free" Microsoft Watch column didn't mention SQL Server 2005 Express Edition (SSX) SP2 and its predecessors, MSDE 1.0 and 2000. These freely-distributable databases undoubtedly are the most widely used of all "free" Microsoft application software, with the possible exception of the Jet database.*

The three free databases have limitations on the number of processors and amount of memory they can use, and MSDE versions had a query throttle. However, these restrictions don't impede their use in the majority of data-intensive Windows applications at the workgroup or divisional level. SSX SP2 runs only under Windows XP, Vista, or Server 2003. However, MSDE 1.0 also runs under Windows 95 and 98; MSDE 2000 runs under Windows 98 and XP but not Vista. SSX SP2 offers optional full-text search and Reporting Services features that weren't available in MSDE versions.

SQL Server 2005 Compact Edition (SSCE) v. 3.1 and higher is a free, lightweight relational database that can run on desktops, laptops, Tablet PCs and devices. (Previous versions were limited to Tablet PCs and devices). Free Microsoft Synchronization Services (now in the CTP stage) enable synchronizing SSCE client with SSX server databases.

Microsoft offers a free, graphical database management application for SSX and SSCE, SQL Server Management Studio Express (SSMSX) SP2, which is based on SQL Server 2005's SQL Server Management Studio.

Despite giving away SSX SP2 and its predecessors, the SQL Server segment has had the greatest revenue and profit growth of all Microsoft product lines for the past several quarters. Microsoft increased the license fee for SQL Server 2005 Standard edition by $1,000 over the SQL Server 2000 version.

Other Free Microsoft Applications

Another free Microsoft product you missed is Windows SharePoint Services (WSS) 2.0 and 3.0, which run under Windows Server 2003. WSS is a full-featured intranet-based collaboration and document-sharing application that also can be deployed on the Internet. WSS 3.0 is the foundation for the definitely not-free Microsoft Office SharePoint Server (MOSS) 2007.

SQL Server 2005 Express is the data store for Office Accounting Express (and probably for the forthcoming full version), as well as WSS 3.0. (MSDE 2000 was the data store for WSS 2.0). SSX also is the preferred data engine for Visual C# Express, Visual Basic Express, and Visual Web Developer Express.

Your article emphasizes Microsoft's free Virtual PC 2007, but Virtual Server 2005 R2 is free also.

Obviously, Microsoft's free offerings, including SSX SP2, Visual Studio Express editions, WSS 3.0, and Virtual Server 2005 R2 have a well-defined upgrade path. It's also understandable that these products run only under Windows and aren't distributed under an "open source" license.

Damnation by Faint Praise

Although your column doesn't directly castigate Microsoft for offering free products, you say:

Many factors account for Microsoft's success, but two longstanding business practices stand out: release of software that achieves a "good enough" standard and offer of lower-cost, or free software that enhances the value of its platform products like Windows.

The preceding sentence appears to me to be damnation by faint praise.

Question: How much better than "good enough" must software be to warrant a significantly higher price?

Your column quotes Paul DeGroot, an analyst with Directions on Microsoft.

"You can even see it with a product like SQL Server, by giving away OLAP," DeGroot said. "It doesn't generate direct revenue for [Microsoft], but it harms Oracle. It used to be a revenue stream for Oracle."

Question: Does harming Oracle "by giving away OLAP" violate federal or state statutes?

Bundling Discounts

You address the Office bundling discount issue with this observation:

When, in the early 1990s, WordPerfect was the dominate word processor, Microsoft responded by bundling together Word, Excel and PowerPoint as "Office." The three products together sold for about the same price as WordPerfect. The lower-cost tactic is most effective when the software is "good enough"—meaning covers the 70 to 80 percent of features most end users would use most of the time.

Microsoft has repeated this pattern over the years. I remember when in the later 1990s, computer stores sold Microsoft's FoxPro for about $100; meanwhile, competing products from companies like Borland sold for many hundreds of dollars more.

Microsoft introduced Access 1.0 in November 1992 as a standalone desktop database application priced at $99; dBASE IV 1.1 cost $795 at the time. According to the February 1994 "Desktop Batch Processing" paper by Jim Gray, formerly of Microsoft Research, Access was generating revenue of about US$300 million per year by a bit more than a year after its release. Microsoft created Office 95 Professional by adding Access to Office 95 Standard's Word, Excel, PowerPoint and Schedule+ applications, and $100 to the Estimated Retail Price.

Today, the list price of Microsoft Office Standard 2007 (full product) is $399.95 and Microsoft Office Professional 2007 (full product) is $499.95.

Microsoft Free Software's Effect on Competition

SQL Server's primary competitors are Oracle and IBM, both of which offer "Express" (i.e. "free") versions of their flagship relational database management systems (RDBMSs): Oracle Database XE and IBM DB2 9 Express C. Oracle Database XE doesn't run under Vista, but IBM DB2 9 Express C (finally) does. It's very likely (if not certain) that SSX is responsible for two more free RDBMSs entering the market.

SQL Server and SSX compete with "free and open source" databases, such as MySQL, PostgreSQL, and others. MySQL AB earns its revenue by selling MySQL Enterprise Service and Support for prices ranging from $595 to $4995 per year and running the MySQL Conference and Expo in conjunction with O'Reilly Conferences, which costs from $595 to $1,495 to attend. It's highly probable that SSX, Oracle Database XE and IBM DB2 9 Express C all contribute to lower revenues at MySQL AB, but quantifying the degree of damage to MySQL's business is difficult, if not impossible. emphasizes the "free and open source" nature of its RDBMS, but has a large number of registered commercial support providers who might suffer reduced income as a result of free commercial RDBMS competition.

The effect of SSX on MySQL AB and PostgreSQL support provider income is much less than either Oracle or IBM free RDBMSs because SSX doesn't run on any Unix flavor.

Free Visual Studio Express editions are integrated development environments (IDEs) that compete with the IBM-sponsored, Java-oriented, open-source Eclipse development platform and language IDE, free Oracle JDeveloper, and Sun Microsystem's "free standards-based tools. The only commercial competitor of note is Eclipse-based JBuilder 2007 from CodeGear (formerly Borland), which sells for $399 to $1,999; C#Builder 2006 ranges from $1,090 to $3,490. (The $399 JBuilder Developer edition corresponds approximately to VS Express versions.) The VS Express editions undoubtedly have reduced C# Builder revenue, but free or fully-licensed VS editions don't support Java.

You mention that Microsoft's Virtual PC 2007 competes with offerings from IBM, VMware and Sun, but HP also appears to be a virtualization player. VMware, which offers a free VMware Player, is a division of EMC. All of these firm are more interested in the server than the desktop virtualization market and have the wherewithal to compete successfully with Microsoft.

Update 2/26/2007: Mary Jo Foley's February 26, 2007 All About Microsoft post, "VMware attacks Microsoft virtualization strategy," included a link to a February 24, 2007 New York Times article, "A Software Maker Goes Up Against Microsoft" that describes VMware and its objects to Microsoft's licensing policies for virtualizing operating systems and virtual hard drive (VHD) images. The Times article included a chart of VMware's revenue—$709 million in 2006 and more than $1 billion (estimated) for 2007. The Times estimates VMware's virtualization application market share at 80%.

The Monday following appearance of the Times story, VMware made public a white paper, "Microsoft Virtualization Licensing and Distribution Terms," which details VMwares complaints about Microsoft's increasingly restrictive virtualization terms. Mary Jo cites in her later "Microsoft has a virtualization white paper, too" post a white paper and license calculator—"Licensing Microsoft Server Products with Microsoft Virtual Server 2006 and Other Virtual Machine technologies" (linked in the VM whitepaper) and "Windows Server Virtualization Calculator." These two articles appear to validate several VMware complaints.

Your "VMware Strikes Back" post on the same day includes links to the VMware white paper, but not to the NY Times story or Microsoft's white paper or license calculator documents.

Update 3/5/2007: ZDNet's George Ou weighs in with The facts on VMware vs. Microsoft.

Intuit has a monopolist's share of the retail (small business) accounting software market. According to NPD, Intuit controls 91.6% of the market, which is similar to Microsoft's share of the office productivity applications market. The probability of free Office Accounting Express significantly reducing Intuit's revenue from QuickBooks is close to zero. The free suite is a much more serious threat to the Office suite's contribution to Microsoft's bottom line, but so far it appears to me that isn't "good enough."

Predatory Pricing

A comment to your post by Philip Marcus, J.D., raises the issue of predatory pricing by Microsoft:

This technique of giving away software or charging les[s] than competitors is an old Microsoft trick to kill competition. Once the competitor is dead, MSFT can jack up the price for the now tethered user.

It is called "predatory pricing" and it is illegal, albeit hard to prove in court. The competitors generally do not have the money to take on MSFT in a lawsuit, and DOJ has already had their one shot at MSFT.

Added 2/26/2007: According to a November 25, 1998 Seattle Weekly article, "Be careful what you wish for: Why winning its antitrust battle might destroy Microsoft," by Mike Romano:

There is currently no statutory definition for predatory pricing. In 1993, however, the Supreme Court applied a standard test developed by professors Philip Areeda and Donald Turner in Brooke Group v. Brown & Williamson, a case involving cut-rate generic cigarettes. According to Areeda-Turner, competition in any industry will naturally drive prices toward marginal costs (i.e., the cost of material and labor in making the last widget, excluding the start-up cost of building a widget factory). Pricing below marginal cost serves no purpose except to drive out competitors, and is therefore predatory. Once competitors are driven out of business, a predatory monopolist can recoup its losses by charging supracompetitive prices, to the eventual detriment of consumers. ...

"I think Areeda-Turner is terrifically important," says New York University economics professor Lawrence J. White, who was chief economist for the Justice Department's antitrust division just before Rule took over and who remains a harsh critic of Microsoft. "But it does create a dilemma for something like software. I rarely agree with Rick, but [predatory pricing] is not a useful way of thinking about this."

This is most likely why the DOJ is not relying on predatory-pricing charges in US v. Microsoft; instead, it is trying a more nuanced case of illegal bundling—the tying of an inferior product to a monopoly product in order to drive out a competitor in the inferior product's market.

Clearly, the marginal cost of free software delivered by downloading a file over the Internet is close to nothing—just the miniscule bandwidth cost.

Unlike Mr. Marcus, I'm not an attorney but I haven't seen any evidence of "MSFT jack[ing] up the price for the now tethered user." Internet Explorer 7.0 remains a free download but continues to lose market share to equally free FireFox. As mentioned earlier, the price of Access has remained about $100 since it knocked former market leaders dBASE IV and Paradox out of the desktop database market.

Free Windows Media Player hasn't put Real Player or QuickTime out of business. I'm sure Apple has "the money to take on MSFT in a lawsuit." Apple seems to have no qualms about taking on Cisco Systems in a dispute over the iPhone trademark. Virtual machine marketers IBM, EMC, Sun and HP certainly are large enough to take on Microsoft, as demonstrated by earlier litigation with IBM and Sun.

Apple and Linux have begun to loosen Windows users' tethers, and the market share of OS X and Linux distributions is likely to continue to increase (albeit slowly) in the foreseeable future.

* Note: The Jet database infrastructure (consisting of msjet40.dll, msjetoledb40.dll, and vbajet32.dll) is included in the \Windows\System32 folder as part of the Windows XP and Vista operating systems.