Microsoft takes on the free world (cont.)

By Roger Parloff, Fortune senior editor

Open-source schism

Yes, free software is a more sophisticated concept than many people think, and it is subject to a legally enforceable license of its own. That license was written by free-software inventor Richard Stallman, who anticipated 20 years ago all the threats free software faces today. Foremost among those threats, Stallman understood, were patents.

A gifted developer and prickly, uncompromising individual, Stallman, 54, quit his job at the MIT Artificial Intelligence Lab in 1984 to found what he considered to be a social movement guided by ethical principles. He set forth those goals in the GNU Manifesto, where GNU (pronounced with a hard "g" and rhyming with "canoe") was an acronym for "GNU's Not Unix." (It's a "recursive" acronym, an inside joke that programmers get. Trust us.) Free software would guarantee users "freedoms" that were ordinarily forbidden by proprietary software licenses, including the ability to see the source code, alter it, copy it and redistribute it.

But while many people assume that Stallman simply ignored intellectual-property law, he actually mastered it and enlisted it in the quest to achieve his goals. He demanded that all contributors to GNU projects assign their copyrights to the Free Software Foundation, which Stallman set up and controlled. That meant that anyone who distributed free software covered by those copyrights had to abide by a license Stallman wrote, called the GNU General Public License (GPL).

The GPL has teeth: Lawyers for the Free Software Foundation have been able to force developers who incorporated free software into proprietary products to open up their source code, for instance.

By 1991, Stallman and his collaborators had conjured an entire free operating system, which is today known as Linux. Though large portions were created by Stallman's GNU developers, the kernel was the work of an independent project led by the then 20-year-old Finnish student Linus Torvalds, after whom the system is now named. (Stallman insists that "GNU/Linux" is the proper name, and he refuses to give interviews to reporters unless they promise to call it that in every reference. In part for that reason, he was not interviewed for this article.)

Businesses loved free software. But they had no use for Stallman's noble sentiments, and neither did the many developers who began to write free software specifically for businesses. They chafed at some of the requirements in Stallman's GPL, so they devised their own licenses, called open-source licenses. Those often gave them a freedom Stallman forbade: the freedom to keep secret any improvements they made in free software, turning them back into proprietary code. (Stallman has scoffed that such licenses confer the freedom to sell oneself into slavery.) Popularly, "open-source software" became an umbrella term for all FOSS, but, again, Stallman bars reporters from using it that way as a condition of being interviewed.

Thus there is a schism in the free world between the more business-oriented advocates of open-source software - who simply think that community authorship makes for better, cheaper software - and the more ideological champions of free software proper, who see themselves as advancing a social movement.

While the open-sourcers have produced lots of good applications, crucial portions of Linux remain governed by Stallman's GPL. For our purposes, the key aspect of the GPL is that it expressly forbids what Microsoft general counsel Smith wanted to do: cut patent royalty deals with distributors of Linux.

"Any free program is threatened constantly by software patents," Stallman wrote in a 1991 revision to the GPL. "We have made it clear that any patent must be licensed for everyone's free use or not licensed at all." This restriction became known as the "liberty or death" clause.

Striking a deal

Smith was not to be deterred. Since the GPL covered only distributors of Linux, nothing stopped Smith from seeking royalties directly from end users - many of which are Fortune 500 companies. He would have to proceed carefully, however, because most of those users were also major Microsoft customers.

"It was a conversation that one needed to have in a thoughtful way," says Smith, with obvious understatement. In 2004, Microsoft began having those conversations, and Smith claims they were cordial. "Companies are very sensitive to the importance of protecting intellectual property," he says, "because ultimately they know that their own businesses similarly turn on [such] protection."

Some customers actually entered into direct patent licenses with Microsoft at that point, Smith says, including some "major brand-name companies" in financial services, health care, insurance and information technology. (He says they don't want to be identified, presumably because they fear angering the FOSS community.) Others wanted Microsoft to work out the patent issues directly with the commercial distributors like Red Hat and Novell. (Red Hat has about 65 percent of the paid Linux server market, according to IDC, while Novell has 26 percent.)

Microsoft did approach distributors, bearing both a stick, the unspoken threat of a patent suit and a carrot, the prospect that once patent issues were resolved, more customers would sign up for Linux.

By spring 2006, Red Hat and Microsoft were engaged in serious patent negotiations, according to one source with direct knowledge. Red Hat deputy general counsel Mark Webbink will say only this: "I've spoken with folks from Microsoft for a number of years, and ... we've had discussions about IP and other matters of mutual concern."

In June, Novell CEO Ron Hovsepian reached out to Microsoft and was put in touch with Smith. (He'd heard that Microsoft was talking to other Linux distributors, Smith says.) Hovsepian wanted to find ways to make Linux and Microsoft server products work together better - a top priority for customers as they consolidate their computing onto fewer machines. Smith would not talk about technical collaboration, however, without a commitment to also address Microsoft's patent concerns.

Over the summer Novell and Microsoft hammered out a clever, complicated - and highly controversial - deal. They knew that if Novell paid Microsoft a royalty in exchange for Microsoft's promise not to sue Novell for patent infringement, Novell would be in violation of the GPL, Stallman's farsighted free-software license.

So they came up with a twist: Microsoft and Novell agreed not to sue each other's customers for patent infringement. That would be okay, because it's something that the GPL does not address. On those terms, Novell agreed to give Microsoft a percentage of all its Linux revenue through 2011 (or a minimum of $40 million).

The pact also included a marketing collaboration. Microsoft agreed to pay Novell $240 million for "coupons" that it could then resell to customers (theoretically for a profit), who would, in turn, trade them in for subscriptions to Novell's Linux server software. In addition, Microsoft gave Novell another $108 million as a "balancing payment" in connection with the patent part of the deal.

It might seem counterintuitive that Microsoft would end up paying millions to Novell when Microsoft is the one trying to get royalties for its patents. Microsoft's explanation is that this balancing payment was calculated as it would be in any cross-licensing deal: Novell has valuable network-computing patents that Microsoft products may infringe, and since Microsoft's products bring in so much more revenue than Novell's, Microsoft owed a balance.

But FOSS critics of the deal would later speculate that the real purpose of the payments was to induce Novell to cut a royalty deal on Linux that Novell knew was unnecessary. Says Red Hat's Webbink: "It allowed [Microsoft] to go out and trumpet that, see, we told you Linux infringed, and these guys are now admitting it."