February 6th, 2007

Can the FSF derail the Microsoft-Novell Suse pact?

Posted by Larry Dignan @ 5:33 am

Categories: General, IT Management, Legal, Linux, Microsoft, Novell, Software Infrastructure

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The crosscurrents are still swirling around Microsoft's deal with Novell to resell Suse Linux. And the Free Software Foundation may have found an avenue to hit Novell in the pocket.

Late Friday, Reuters reported that the Free Software Foundation has begun reviewing Novell's right to sell new versions of Linux operating system. The FSF controls key parts of Linux. The review and a decision should be made within the next two weeks or so.

According to Reuters:

If the foundation decides to take action, the ban would apply to new versions of Linux covered under a licensing agreement due to take effect in March.

While it's not clear what will happen from the FSF review–or whether it even matters financially to Novell–there certainly is enough FUD to make a mixed source customer think twice about Microsoft's Suse certificates, which basically mean that the software giant resells Novell's flavor of Linux.

Factoring out the emotion of the Microsoft-Novell deal–there are plenty of critics who hate the deal–the hubbub over the partnership may have financial implications.

Meanwhile, Wall Street is already trying to handicap what the FSF move means.

SunTrust Robinson Humphrey analyst Terry Tillman notes that the FSF flap could cause enough uncertainty to derail customer interest in the Novell-Microsoft pact. Tillman writes:

"Our sense is that the FSF might say that Novell's agreement basically gives its Linux customers an advantage in the area of patent protection that is not afforded to the broader Linux community.  After its analysis, which is expected to take 10-15 days, the FSF could use legal action to try and prevent Novell from continuing to re-distribute Linux software."

However, there are no clear answers to this one as Tillman notes that "Novell likely drew up an ambiguous enough contract with Microsoft that makes a smoking gun difficult to uncover."

The worst case scenario for Novell? The FSF prohibits Novell's usage of its intellectual property. If that happened, Novell would have make the costly move to rework its enterprise Linux products.

JP Morgan analyst Aaron Schwartz concludes that the FSF positioning isn't likely to derail Novell's distribution rights. Says Schwartz:

"The specifics of the agreement, specifically the patent covenant, will continue to be scrutinized and there will likely always be a population of the open source community that disagrees with the deal. The open source community has pressured the FSF to use GPL 3 to prevent similar deals from occurring-and this pressure has been consistent since the announcement of the agreement in November. However, to conclude from the Reuters article that the FSF will take action against Novell we believe is incorrect."

While the Microsoft-Novell pact could spark FSF-inspired court drama, the bottom line is that this unpopular partnership is gaining some momentum. And if you believe that mixed source environments are the future in enterprise software the fact the early success of the Microsoft-Novell arrangement shouldn't be that surprising.

Says Schwartz:

"We continue to believe the reception of the transaction is much more optimistic in the eyes of the customer. Novell saw 35K license activations through MSFT through the end of January, ahead of the company's 20K target. While the financial impact of the deal will be immaterial in FY07, we believe a derivative impact has been a more open minded view from the customer towards both Suse and heritage Novell products."

And Schwartz isn't alone. Citigroup analyst Brent Thill raised his projections for Novell based on the early returns from the Microsoft pact. Novell projected Microsoft-subsidized Suse Linux subscriptions would result in revenue of $4 million to $7 million. But based on the 35,000 Suse subscriptions already activated Thill projects revenue in the $30 million ballpark. For fiscal 2008, Novell should garner $56 million in revenue from the Microsoft-funded Suse subscriptions. That's up from Thill's initial projection of $25 million.

Bottom line: Pretty soon the Microsoft-Novell pact will be institutionalized. The FSF flap may be the last chance to throw a monkey wrench into the partnership.