On the third anniversary of the 2006 Microsoft-Novell pact, Novell is touting 475 customers who have bought SUSE Linux Enterprise certificates from Microsoft under the settlement. Under the controversial agreement, Novell agreed to give Microsoft either a percentage of all its Linux revenue through 2011 or a minimum of $40 million. Microsoft, in turn, bought $240 million in SUSE certificates that it could then resell to customers with mixed environments who wanted to buy new Windows servers and purchase Linux machines. In addition, Microsoft gave Novell another $108 million as a “balancing payment” in connection with the patent part of the deal.

This joint marketing initiative worked so well in the first two years that Microsoft committed to buying up to an additional $100 million in SUSE certificates in the summer of 2008. To date, Microsoft has only actually purchased an additional $25 million. In fact, SUSE certificate sales boomed so much in 2007 that they were cited as a major factor in SUSE’s three-point market share gain that year vs. Red Hat.

A look at the numbers after three years
While interoperability was the stated goal of the partnership, financial factors were the key motivator for both companies.

“While technical interoperability was the announced basis for the Microsoft relationship, Novell did the deal because it needed to jump start its Linux subscription sales,” said Bill Claybrook, founder of New River Marketing Research, a firm specializing in Linux. “In November 2006, Novell was on the tail end of four or five consecutive quarters of flat SUSE Linux Enterprise Server subscription sales. At the same time, Red Hat was reporting year over year increases in revenue and subscription sales of 30% – 40%, and Red Hat was already way ahead of Novell in subscriptions sold and in revenue from subscriptions.”

Fast forward to early 2009, Novell said last February that Microsoft sold $195 million in SUSE certificates through Oct. 31, 2008 at the two-year mark of the five-year agreement. At the three year mark, Microsoft has sold $226 million. Anyone looking at the numbers would reasonably conclude that the enthusiasm for the product has waned. Perhaps it’s the economy’s generally abysmal state in 2009 that accounts for the slow sales, but maybe it’s something else?

With these numbers in mind, it’s not surprising that there has been no further Novell announcement about additional Microsoft purchases of SUSE certificates from last summer’s “up to $100 million” commitment. Nor has there been any additional IDC study of SUSE inroads on Red Hat’s market share.

In addition, Claybrook says a bigger problem on the financial front has to do with what has happened with the purchased Novell certificates. While most have been sold, “… many of the firms that purchased the certificates have not implemented them, meaning that Novell is not collecting renewal subscription revenue.”

The Linux community’s reaction
Initially, reactions to the deal were overwhelmingly negative from the open source community, with very few people showing any optimism about how the partnership with Microsoft could help Linux.

Claybrook said that Novell’s business decision ignored this attitude in favor of the perceived financial incentives.

“Novell felt that the value of Linux interoperability with Windows was more important than what the open source community had to say or felt,” said Claybrook. “The two companies used comments extracted from customers about how important Linux/Windows interoperability was to their businesses as the primary reason that the deal was done. Several of the well-known, open source Linux developers within Novell took serious exception to the Novell-Microsoft deal and some quit the company.”

Stephen Holmes, former Novell Data Center employee and Linux specialist shared his experience and perspective. Holmes was at Novell in 2006, and remembers what it was like when the open source company announced the agreement with Microsoft.

“Those of us looking at it from a purely business perspective had a sense that it was better to play in the sandpit with the bully, to at least get to play with some of the toys (e.g., customers and revenue), rather than look at them playing alone with all of the toys themselves,” shared Holmes.

But not everyone was as pragmatic.

“Those who came from SUSE were incensed that we could dare to jeopardize the integrity and stability (social stability) of Linux and open source with such a deal,” said Holmes. “This played out with an unprecedented level of ire directed at us around that time — anger that persists to this day.”

And truly, it does. One of the most prominent reminders is the ongoing corporate watchdog site, Boycott Novell, which was founded following the pact.

Greater interoperability for end users, and contributions from Microsoft
But after three years, the results of the agreement are panning out. The numbers above indicate that financially, it may not have been the boon Novell was looking for. But technologically, end-users are benefiting from the agreement.

Steve Brasen, principal analyst at EMA shared a positive perspective on the affect on Microsoft’s involvement in open source that the agreement has contributed to.

“Naturally, Windows and Linux will continue to compete as OS platforms (and they should!), but this partnership has already provided concrete results in standardizing management services to aid in the creation of centralized solutions for supporting heterogeneous environments,” said Brasen. “What’s more, there is the potential for this relationship to provide even greater value for Novell customers in the future. For example, by expanding on Hyper-V’s support for SUSE Linux or by enhancing ZENworks with integrated management tools for Microsoft products.”

Holmes credited the partnership with the spurring further kernel interoperability efforts.

“Contributions to the Linux kernel and key projects such as clustering, storage and management have seen massive increase in contributions,” said Holmes. “Simply stated, customers don’t have single platform systems and they demand that companies such as Novell and Microsoft work together on many levels (OS, virtualization, management, security) and in this regard, although the outputs have been small they have mattered — particularly in virtualization interoperability.”

Beyond improved interoperability, Microsoft has become more friendly to and even contributed to open source projects.

“Microsoft is both using and contributing to the OpenPegasus Project’s Common Information Model Object Manager (CIMOM) and contributing to the open source community interoperable providers that collect management data so it is available for management services,” said Brasen. “I would suggest we should applaud both Novell and Microsoft for establishing this relationship and encourage them to continue with their collaboration efforts.”

More on the Novell and Microsoft pact:
Novell extends interoperability with Microsoft
Microsoft takes on the free world
Novell SUSE 11 to boost virtualization and improve interoperability

Linux has been gaining ground in the enterprise, as was seen with Red Hat’s impressive results from 2008. We said back in January that open source would do well in a down economy, and now there’s data to back up the prediction.

In the IDC survey, the leading reason given for migrating to Linux was an interest in lowering ongoing support costs. More than 40% of survey participants said they plan to deploy additional workloads on Linux over the next 12-24 months and 49% indicated Linux will be their primary server platform within five years. (Is anyone else surprised by that number?) Among those hesitant to adopt Linux, lack of application support and poor interoperability with Windows and other environments was cited as the primary concern, indicating the key areas that need more work. Companies have made great strides where interoperability is concerned, but clearly more work needs to be done before Linux can gain more ground. We have covered Red Hat’s recent interoperability agreement with Microsoft, Canonical’s effort’s toward certification on HP servers, and reviewed the leadership of Novell in interoperability efforts. But, clearly the market needs more assurance that Linux will meet their critical business needs.

Key to the recent interoperability efforts has been virtualization. This is a good move according to the survey results as nearly half of respondents stated that moving to virtualization is accelerating their adoption of Linux. A notably high, 88% of those surveyed plan to evaluate, deploy or increase their use of virtualization software within Linux operating systems over the next 12-24 months. An increase in virtualization uptake was seen in our 2008 Purchasing Intentions survey, which revealed that virtualization interest was influencing server purchases.

In our recent newsletter, we asked readers to tell us what’s missing from all of these agreements. We encourage you to share your thoughts here. What would you like to see in terms of specific application support or capabilities? What’s missing from the interoperability landscape?

Prior to the webcast this morning, a couple of bloggers had pointed out why this news was a little different than your run-of-the mill partnership. Their emphasis was strongly focused on the lack of patent agreements with the deal — a new turn of events for Microsoft and Red Hat after a few years of battling publicly over the topic.

On his CNET Blog, Asay shared his surprise and adulation of the maturing of both Microsoft and Red Hat to the needs of the market.

Today, Red Hat and Microsoft have together demonstrated that interoperability can exist independent of back-room dealings over patents. Microsoft has increasingly been forced to open its stance on patents by the European Commission, anyway, proving Red Hat’s resolute stance against patents was the right one. But today’s announcement suggests that Microsoft is maturing in its views as to how to interact with open-source vendors.

Asay pointed out that when Novell signed its agreement with Microsoft (in 2006), the announcement was met with criticism of the company from the open source community.

Asay’s Twitter post was a little more to the point (only 140 characters, afterall):

I guess this means, dear Novell, that in fact patent covenants need NOT be included in interop deals, including those with Microsoft

Matthew Aslett of the 451 Group posted a blog 15 minutes prior to the call, echoing Asay’s concerns.

In the webcast, Mike Evans, vice president of corporate development at Red Hat, and Mike Neil, general manager of virtualization strategy at Microsoft, tried to emphasize the customer-focused nature of the arrangement. Evans displayed statistics and sections of a recent IDC report on virtualization that proclaims we are only seeing the beginning of virtualization efforts in enterprise IT, and that more will begin to use the technology in 2009. These statistics match up with a recent survey conducted by SearchDataCenter.com that revealed that virtualization is on the rise in IT departments. In the call, a slide with a quote from Gary Chen, research manager of enterprise virtualization software at IDC, was displayed:

“IDC research shows that Windows and Red Hat Enterprise Linux are two of the main operating environments deployed by enterprises, accounting for 80% of the x86 operating systems running on hypervisors. It is great to see two of the big platform vendors put aside their competitive differences and put the customer first.”

Certainly, the effort is focused on the customer, but today, much of the focus seems to be skewed to the patent and financial language in the agreement. This seems fair, as the struggle between the two companies on the issue of patents has been publicly hashed out for almost three years. Microsoft had held fast to its claim that it couldn’t do interoperability without a patent pledge, but it looks as if Red Hat has won on its argument that a patent deal isn’t necessary to an interoperability agreement.

What do you think? Is this just another agreement? Or does this signify another change in Microsoft’s attitude toward open source collaboration? Or, have both companies just seen the writing on the wall and jumped just in time to take advantage of the virtualization market?

But things start to get interesting at point number six in his list, and I honestly would have missed this if I hadn’t seen the comments of The VAR Guy, who stated “Red Hat is destroying the old myth that there’s no money in open source.”

The VAR Guy’s declaration was based on Whitehurst’s statement with this information about the success of the company:

Weathering the economic storm. Red Hat has continued to execute well in what is a pretty competitive economic climate. In fiscal year 2008, Red Hat became the first open source vendor to cross the $500 million mark in revenues and we’ve also maintained 27 consecutive quarters of sequential growth in total revenue.

Impressive. Or is it? The VAR Guy points out that Microsoft earned 120 times as much during the same year.

Red Hat may be leading in the Linux distribution race thus far, but Novell is charging ahead, on the cusp of releasing SUSE 11, with greater virtualization and interoperability promised. With Novell’s partnership with Microsoft, the company is making gains in the market.

As businesses try to bounce back from the downturn in the economy, open source may be an even more attractive alternative. What do you think? Is Red Hat’s $500 million a true achievement, or is it just an attempt to give credence to open source? Share your thoughts.