Whose Finances Are On The Line?

Sunday, 2007-January-21 at 13:46 4 comments

Financial Risks Of ODF & OOXML

Brian Jones has made the point repeatedly (see for example, here and here) that IBM has made a big bet on having only one standard for XML-based office application file formats.  In saying this, he makes it sound as if IBM could not recover if things don't go their way.  But recent reports (e.g., here and here) on Microsoft's financial statements show that Microsoft has quite a bit riding on avoiding interoperable file formats.

Now, it is clear that IBM has bet on ISO 26300 (OASIS OpenDocument Format).  It is also clear that Microsoft has bet on the MSFT-ECMA Office Open XML format (variously referred to as OpenXML, OOXML, MOOXML, EOOXML, MSXML, or MOOX).  Both IBM and Microsoft are huge companies with billions of dollars in resources.  No halfway sensible person would think that either one would have problems supporting both formats, other than the hidden patent & copyright landmines that Microsoft has attached to MOOXML.  So what do the two companies have to lose?

IBM's Risks

Rob Weir has made an excellent series of presentations which show the following things:

  • Microsoft's patent promise is filled with holes.  Anyone that implements any application that reads and writes these new file formats without getting explicit permission from Microsoft is placing himself in danger.  In addition, there are actually two different promises involved, neither of which allows anything that is not spelled out in the specification to be protected.
  • The MSFT-ECMA Office Open XML format specification contains numerous "compatibility" quirks, most of which are best summed up as "do this the way that this ancient version used to do it" without specifying how those versions did it.
  • The EULAs on those ancient versions prohibit reverse-engineering, so that any potential competitor that implements those parts of the specification risks copyright-infringement actions.
  • That there are many proprietary elements added instead of re-using existing standards, such as VML in the place of SVG.

It is likely that IBM could cross-license any needed patents, so that it could update its Workplace and Lotus SmartSuite offerings.  This would reduce, but not eliminate legal threats from Microsoft if they were to implement OOXML compatibility in their products.  They might even be able to license some of the same code that Microsoft used in prior versions of Microsoft Office, in order to pick up the "legacy" features.

Thus, for IBM, the worst they can expect is a continuation of the present, where Microsoft leads the market and everyone else offers some level of "compatibility" with them.  They would lose a few months altering their products to add that functionality, and they would temporarily lose a little bit of momentum in the market, unless they sold the products with "a free upgrade is coming in three months" kind of deal.

Does anyone think IBM does not have the resources to turn around and support MOOXML?  According to their latest 10-Q, they had $4,406,000,000 in software revenue, with $647,000,000 in costs.  They grossed almost 3 billion dollars on software alone that quarter.

So, in summary, I have to believe that IBM is uniquely positioned to maintain its position however the ISO votes.  This does not mean that IBM is not in favor of sensible standards such as ODF.  In fact, they have found that the more software that gets sold, the more services customers buy.

Microsoft's Risks

Microsoft is also a huge company, with billions of dollars in hand.  Now that Vista is finished, they could take those thousand of programmers, show them the internals of their office applications, and have ISO 26300 capability built into their software (via an urgent update, like the one that changed some fonts in Office 2003) within a month or two.  The problem is, Microsoft has near-monopoly position in office applications mainly because people are trapped by their file formats.  If almost anyone of the street can write a file-compatible office suite, why would most people and companies pay the Microsoft premium?

So then, it is really not an issue of Microsoft cannot support ODF natively in their office products, is it?  Well, then, why don't they support it?

As already mentioned, Windows Client, Windows Server, and Office (MBD) are the only profitable segments of the company, as their most recent 10-Q shows.  Without their exclusive access to the specifications for the file formats that most office application users save their work in, suddenly, other things, such as SharePoint will not be reasons to choose Microsoft Office.  Nor would network effects apply any longer, as anyone could send a document from any vendor's office application and the recipient could open it with any vendor's office application, instead of having to purchase a specific product in order to open the document.  Microsoft would have to compete for most buyers on the basis of functionality and price, like all the other vendors.

This process would necessarily mean that for some buyers, Microsoft's office suite would be too expensive, too big, too slow, or too whatever.  These buyers would choose an alternative office applications suite.  Some other buyers would stick with the vendor that they already know, generally Microsoft.  A third group, which would probably be the largest of the three, would choose based on their own needs and how well each vendor can meet those needs within a given price level.  One thing that is certain is that Microsoft would lose market share, the same way that AT&T lost market share after the phone monopoly was broken up.

As I stated in previous articles, Windows Client's dominance partly depends on the dominance of Office/MBD.  This means that losing dominance in office suites would reduce the demand for Windows on the desktop.  Network effects would come in, as software and peripheral vendors would notice that people and companies are buying more Macintosh, Linux, BSD, and other operating systems—it would be sheer suicide for them to ignore it—and begin making their products more compatible with those other operating systems.  This would reduce the demand for Windows on the desktop even more, and so on.  So we can see that losing this struggle could have a drastic effect on the company's bottom line.

To some degree, Windows Server's sales are dependent on the dominance of Windows Client on the desktop.  No one seriously believes the "Get The Facts FUD" campaign's tales of lower cost and higher reliability, at least not anyone tech-savvy or anyone who actually works with servers.  This means that losing dominance on the desktop is likely to threaten Microsoft's efforts in the server room as well.  And we know that losing all three of their monopolies would mean that XBox, Zune, Origami, MSN/Live, and their other money-losing businesses would be shut down or sold off cheap.

If Microsoft loses this one, it is like the playground bully once all the kids in the neighborhood decide to gang up and pound on him at once.  He learns to get along with almost everyone, because he knows he can no longer pick one or two at a time.  Hey, Microsoft, how about it?  Are you ready for this?


This one is so obviously critical to Microsoft's whole dominance that they have to force everyone to use their locked-in proprietary formats or go down in flames.  You will continue to see Microsoft claim that they are seeking interoperability and compatibility.  If that were at all true, they could do one or both of two things: (1) add full support for ODF (ISO 26300) via a "critical update" for their office suite versions 2000 and later, or (2) issue a patent and copyright and reverse-engineering pledge that says "we grant everyone in the world a perpetual right to use anything they have to use in order to implement OOXML in any application that they want, on any operating system".  This would stop the most of the opposition to OOXML becoming an ISO standard almost immediately (there are good technical reasons to oppose it, but with the licensing/patent/copyright/reverse-engineering issues solved, people would gladly work with Microsoft to fix the other issues).  When you hear the histrionics about choice, diversity, and whose finances are at risk, remember that no one has as much to lose as Microsoft.  Let them scream.  They will adjust to the new ways, just as the phone and long-distance companies did.

Entry filed under: ODF, Software. Tags: .

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  • 1. G Fernandes  |  Monday, 2007-January-22 at 07:25

    You’ve hit the nail on the head. However, this is the precise reason why MS will use all their lobbying might to subvert the ISO process.

    Since ISO – like any standards body – can be influenced by lobbying, it is highly likely that the MS format gets ISO approval. Mainly because all potential objectors will choose (rather, be persuaded by MS) not to object.

    Of course, in the long run, it will mean consumers suffer due to the lack of a level playing field.

    But nothing will change unless there is a grass-roots rejection of this monopoly in favor of a level playing field guaranteeing end-user choice and eliminating vendor lock-in.

    GNU/Linux is fast gaining momentum. This will mean a reverse conversion – from server, to corporate desktop, to enthusiasts home desktop, to many end-user desktops. That is what is happening.

    One hopes that this movement can sustain itself beyond legal hurdles that will invariably be cast its way through the might of MS lobbying.

  • 2. Gary Edwards  |  Friday, 2007-January-26 at 16:44

    Hi W^,

    Thank you for this analysis. Nothing like following the money to get to the bottom line. Great work.

    This proof of concept download might be helpful to you in the future; The ACME 376 Compatibility Kit:

    We appreciate you kind comments about Da Vinci,

  • [...] Certainly, you could choose to sit idly on the sidelines while others decide your future. However, our audience, or at least our target audience, has a high percentage of both business owners and technical people who are able to recognize the potential benefit to us all and who recognize that Microsoft is threatened by this because it would reduce the profitability of one of their cash cows. [...]

  • 4. AB-1668 Is Good For California « Opportunity Knocks  |  Wednesday, 2007-April-11 at 10:32

    [...] Whose Finances Are On The Line? [...]

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