Undoing the dupe: A way out of your Big Software contracts

By Roger Burkhardt, CEO, Ingres

(Last month Burkhardt wrote about how Big Software companies lock customers into restrictive software licensing agreements and continue to raise prices, even during tough economic times. Here Burkhardt offers some tips for effectively renegotiating contracts with your current Big Software suppliers.)

Burkhardt tells how to untangle your company from Big Software. Photo: Ingres

For decades now many of us in corporations have been paying loads of money to work with Big Software companies like Oracle (ORCL), Microsoft (MSFT), IBM (IBM) and SAP (SAP). Our information technology employees are familiar with these software vendors and their technologies (and their proprietary licensing models) and may even identify their careers with them. So, while we may suspect we are being overcharged, and could spend millions less running our IT departments, we have remained comfortably, and expensively, locked-in.

But we want to be back in charge. And we deserve to be; we’re the customers that line the pockets of all Big Software companies. Without us, who would buy all that software?

But we question whether it is even possible to break away from this perverse reality where software leviathans dictate both economic terms and the technology road maps that are critical to our business.

Is there a way to move towards an alternative model, where IT costs are variable and aligned with actual business needs? Yes, but we just don't like change. And perhaps we lack 100 percent confidence in the ability of new, alternatives to perform the mission-critical processes that must run our companies 24×7, reliably and securely.

I understand these requirements well. In my former role, I was responsible for the New York Stock Exchange’s technology, and the continuous availability of our trading systems was paramount. My team showed me a better way to deliver that reliability by using innovative Open Source software and open standards. This gave me the tools to combat the hardball negotiating tactics of Big Software and to substantially drive down costs.

Over the last decade, alternative IT models have matured across a broad range of software technologies and a growing number of customer success stories demonstrate that it is eminently feasible for well-lead IT organizations to move to this better model. And in doing so, gain substantial cost savings and rapid innovation benefits of a New Economics of IT.

You don't need to continue signing over your business' bottom line to Big Software companies that keep you locked-in to contracts with no end to escalating costs.

A way out

If you’re ready to embrace change and begin looking at more cost efficient and innovative ways to run your IT infrastructure, here are five tips to help you extract yourself from expensive Big Software contracts that are holding your company hostage:

1. Introduce real competition to the software license cartel. We know that introducing real competition for any product or service is the key to avoiding expensive and inflexible contracts.  The key in software is to introduce competition from companies with a disruptive and competitive business model. Consolidation in the proprietary software industry has created an oligopoly of proprietary players which demonstrate their power by raising prices in the middle of a recession. In fact, the software leviathans such as IBM, Microsoft and Oracle compete with each other about as vigorously as OPEC members and we need new business models to provide real competition.

The proven alternatives are Open Source software from companies such as Ingres and Red Hat (RHT) and Software-as-a-Service (SaaS) offerings from players like Salesforce.com (CRM). Both models provide low and variable costs and create real competition to the proprietary software model. By adopting these models for at least 10-15% of your software you can negotiate better prices on the other 85%.

2. Understand and adopt the new software business models.. Open Source software has no license fee and support is provided under an annual software subscription that is substantially less than the annual maintenance fee charged in the proprietary model. The subscription includes product usage rights, support services, access to new features and goes up or down year to year depending on your actual business usage. This subscription model is used by both Open Source and SaaS providers and aligns costs directly with the value the software provides in actual use. Another benefit: the end of Big Software shelfware. Consider donating your remaining unused software to not-for-profit organizations that could surely use it.

3. Strategically avoid technology lock-in. For competition to work, you need to be able to switch vendors over time and this requires an IT strategy that mandates open standards and so won’t lock your company into a particular vendor. This is true of proprietary software and Open Source and SaaS alike. Remember, having a low cost and variable cost model isn’t sufficient in itself; over time you may still want to switch technologies to support new business strategies. The good news is that mature open standards are available for the full range of software technologies and they bridge both proprietary and Open Source worlds. For example, half of all programmers use the open Java language and Ingres customers are running critical financial systems written in Java that process billions of dollars a day on a completely open source infrastructure.

4. Demonstrate an open competitive environment. In order to drive down your software costs, you need to adopt mature alternatives for a significant portion of your software and use this leverage to negotiate better terms overall. Proven alternatives to Big Software are available at virtually all levels of IT – from the operating system up to the application layers. You won’t eliminate proprietary software overnight – you are often dealing with multi-year contracts after all – but by eliminating 10% to 15 %, you will save up to 95 % in those areas and will be empowered to negotiate substantial cost reductions for the remaining 85% of your environment.

5. Re-read your software contracts and plan your escape from Big Software. Check the fine-print of your Big Software contracts to make sure there is a cap on the maintenance costs after the license deal ends. If not, ask for one well in advance of the renewal date and if you don’t get it (surprise!), re-double your efforts to build your negotiating leverage by bringing in open subscription-based software technologies for 10-15% of your portfolio.

Software subscription models make it easy to prove the value of software before you make significant investments. They reduce the total cost of ownership by eliminating expensive license fees and a whole range of subsequent “gotchas”. It’s simply a better, smarter way to buy, one that finally puts the customer back in charge.

No duping involved.

Burkhardt is president and CEO of Ingres. He previously spent six years as CTO and executive vice president of the New York Stock Exchange, where he and his team transformed  the NYSE to a fully electronic model.

How enterprise software giants separate you from more of your company’s money

By Roger Burkhardt, CEO, Ingres

Burkhardt reveals Big Software's secrets. Photo: Ingres

Here’s how the software business really works: A software company charges your firm an enormous upfront licensing fee and locks you into escalating costs for decades to come, often using a set of hardball tactics.

But with the growing popularity of pay-as-you-go and subscription-based software and services, the old way is being exposed for the unfair financial model that it actually is. And the new open, more flexible models are starting to make the old ones look downright deceitful, especially when you show them against the backdrop of a deep recession.

Many companies have been forced to downsize to make it through these tough economic times. And as information technology and C-level executives examine the financial books together, many are discovering the unfortunate news that their Big Software contracts are harming their business’ bottom line and cannot be downsized – at least now without a fundamental change of approach.

Perhaps it’s not always intentional, but if you’re an IT decision maker with several of these licensed-based software contracts on the books, it’s very likely you’re getting duped.

How the duping works

Big Software Goliaths like Oracle (ORCL), Microsoft (MSFT), Sybase (SY) and SAP (SAP) use multi-year enterprise license agreements that lock you into annual fees that go up, but can almost never be reduced. They encourage you to make large upfront purchases of software licenses by providing significant volume discounts. Volume discounts are common in the software industry and help you achieve a lower price-point on your software licenses and annual support fees. However, encouraging you to purchase larger quantities than you need often leads to “shelfware”, i.e., owning a whole lot of software you don’t use.

What if you want to downsize? Because annual support fees are tied to the net license price, the discount is tied to the original volume of license purchased. Therefore, the Big Software companies argue that you lose the discount originally granted on the contract. Their typical tactic is to re-price right back to list price, not a reduced discount, and with typical discounts in the 25 to 85 percent range it is financially infeasible to downsize. It’s this kind of aggressive tactic that ensures that Big Software’s revenue streams never go down, and in fact continue to go up as annual escalators are applied.

Duped and trapped

If you don’t need to downsize your usage but want to just hold steady and pay maintenance you’ll be caught in the renewal trap. When your multi-year contract comes up for renewal, you’ll find that your contract has no cap on subsequent increases to the annual support contract. The high-paid sales person will then warn that your original discount will evaporate if you don’t buy more licenses. It will be cheaper to buy more “shelfware” than to pay list price for your maintenance.

In addition, if you ever want to reinstate support on the unused portion of your licenses, you would be required to pay all the back-support fees for the period you cancelled. It would be like getting a large service bill for services never rendered from your former auto mechanic – the guy whom you haven’t taken your car to in two years because you found a better shop. No wonder Oracle’s margins on maintenance are over 90 percent!

More deeply duped

The enormous consolidation of the software market has created a few behemoths that have enormous pricing power over their customers because of their large market shares and a strategy of vertical integration, which raises customer-switching costs. If you try and get out of being locked-in, you’re likely to pay a big price.

Big Software players have demonstrated their power by raising prices during the worst economic period since the Great Depression – not exactly a tactic that supports the customers through tough times. In the last year and half, for example, Oracle has seen fit to raise overall software and maintenance fees by 15-18% and to raise prices on acquired technologies by 45%. Many companies locked in to an Oracle contract, for instance, have signed a contract where they agree to pay these unexpected price hikes, often without reading the fine print and realizing the true cost of what they have signed up for.

Many price increases are hidden behind additional fees that penalize customers for taking advantage of industry advances such as modern multi-core chips which reduce hardware costs or even just external access to your own data over the Internet. Yes indeed, even in the 21^st century Internet access is often excluded from Big Software’s standard licensing terms.

Meanwhile, contract consolidation and the co-termination of contracts further reduce options, as more software is covered under a single contract. You may ask for a consolidation, but more likely than not, the vendor will argue that the entirety of the new contract is open for re-pricing, if you attempt to modify one component of that contract. This is happening with increased regularity for product lines that have been acquired, as vendors consolidate the newly acquired product lines in single corporate purchasing agreements and use their increased leverage to extract more revenue and lock the customers in even more firmly in the future.

To learn more about how to get out of Big Software contracts and/or negotiate current ones to your advantage, stay tuned for my next article.

Burkhardt is president and CEO of Ingres. He previously spent six years as CTO and executive vice president of the New York Stock Exchange, where he and his team  transformed  the NYSE to a fully electronic model.

Ellison asks if Microsoft matters. Photo: Oracle

Oracle's Ellison gives the tech world a topic. Discuss among yourselves.

Does Microsoft matter? That's the question the noted Microsoft (MSFT) hater and Oracle (ORCL) CEO Larry Ellison found himself answering at a Silicon Valley event Monday night. The short answer, as Jon Fortt reported here, was yes.

The longer version of his answer on the one hand shows Ellison as the old zen master that he is, making a backhanded and self-serving swipe sound like an innocuous observation. At the same time Ellison raises a fascinating point that's worth exploring further.

First consider his comments in their entirety when asked about the relevance thing by former Sun (JAVA) president and Motorola (MOT) CEO Ed Zander.

They make a lot of money. I think they're clearly relevant. I divide the computer industry into two groups. And I know for a long time I was constantly picking a fight with Microsoft. Now Oracle's constantly picking a fight with IBM (IBM). Because you've got to pick your enemies very carefully, because you're destined to become most like those enemies you select.

Microsoft, culturally now, is a very consumer-centric company. They've got the Xbox. They've got Zune. … I think they are obsessed with Apple (AAPL). They're obsessed with Google (GOOG). … Under the new administration at Microsoft, I see all of their energies going into being successful in the consumer space.

Larry's rap v. Oracle's 10-K

The funny thing about Ellison's clever positioning is that Oracle considers Microsoft a major competitor in nearly every important market in which it competes. A quick look at Oracle's last 10-K, the regulatory filing where companies are required to list their significant competition (as opposed to musing about who they like to think they go up against), reveals how Oracle lines up against Microsoft.

"In the sale of database software," Oracle discloses, " our competitors include IBM, Microsoft, Sybase (SY)"  and others. (Presumably these are listed in order of market share because the order changes. Note that Microsoft is the No. 2 foe in Oracle's most important market.) "Our middleware competitors include IBM, Microsoft, SAP (SAP),"  and so on. "Our applications compete against offerings from . . .  SAP AG, IBM (through Maximo, MRO Software, Ascential Software, Cognos), Microsoft (through Dynamics GP, Dynamics NAV, Dynamics AX, Dynamics CRM, Dynamics Snap, Dynamics SL)," and others.

This shpiel continues as Oracle lists the enemy in content management and collaboration products (where Microsoft is listed first), development tools, operating systems (an understatement regarding Microsoft), and virtualization products. Microsoft appears in each grouping.

Enterprise software still rules

Suffice it to say that Oracle competes against Microsoft and it's awfully clever of Ellison to highlight Microsoft's grudges against two consumer-oriented companies with whom Oracle doesn't currently compete. (In fact, neither Apple nor Google appear anywhere in Oracle's filing.)

This still leaves the larger questions of Microsoft's relevance and to what extent it is culturally a consumer company. If you want to pick on Microsoft, Zune (its floundering iPod wannabe), its online business, and Xbox are good places to start. Only the latter has had a modicum of success, and even then not a profitable success.

But has Microsoft forsaken the "enterprise" for the home? Microsoft's two divisions that focus almost entirely on business customers — one called the"Microsoft Business Divison," also known as the Office franchise, and the other called "server and tools" — accounted for 57% of the company's revenues last year and 85% of its operating profits. Yes, Microsoft most certainly is a business-focused company.

Still, Ellison has a point. His old (and current) foe spends oodles on its flailing consumer businesses, and CEO Steve Ballmer certainly seems to devote a tremendous amount of energy to them. He's famous for saying Microsoft never quits and that these newer businesses will crush the ball eventually.

They'd better. In a recent article I referred to Microsoft as a monopolist. I consulted a handful of experts on the term who assured me that hobbled or not a company operating under agreements with antitrust regulators can still be called a monopolist. Those monopolies are in its business segments, though, and they're under attack. At least today it seems laughable that Microsoft would ever become dominant on products like music devices, cell phones or search engines. Is Microsoft relevant? Absolutely. But for how long?

Strong first quarter earnings underscore the prowess of Oracle's Ellison.

Ellison is as engaged as he needs to be. Photo: Oracle

I spent most of the summer reporting and writing a feature story about Safra Catz, the enigmatic co-president of Oracle (ORCL).  I talked to oodles of people about Catz's ambitions, her value to the company, the likelihood of her becoming CEO, and her relationship with Charles Phillips, Oracle's other co-president.

All this is in the article, published in the current issue of Fortune. The conclusion is that Catz is a complicated, competent, intelligent pile-driver of an executive who makes Oracle hum.

Left explicitly unsaid in the quest to find out as much as possible about Safra Catz is just how successful her boss, Larry Ellison, has been as CEO of Oracle. This was my single greatest takeaway from my reporting.

There was a period, years ago, when Ellison became disengaged from actively running the company. Because his extracurricular activities get so much attention — the America's Cup battles, the yachts, the homes, the marriages, and so on — the world that watches Oracle from afar doesn't quite get that Ellison's era of disengagement ended a long time ago.

The Steve Jobs of enterprise software?

Like his buddy, Apple (AAPL) CEO Steve Jobs, there certainly are things Ellison doesn't want to do. He's just not that into finance. (He's into money, of course, and is as tight-fisted with Oracle's cash as he free-spending with his own.)

He's a known enemy of operational details. The comparisons with Jobs and Apple (AAPL) go further, in fact. In Catz, Ellison had the confidence, maturity and discipline to hire a get-it-done No. 2, just as Jobs has done with Tim Cook, whom I've also spent some time on.

Both founders are technically proficient industry visionaries who've been through disastrous downs and stratospheric ups. (Oracle hit the skids in the early 90s, when Jobs was exiled from Apple.)

The point about Ellison is that he has done just what a CEO should do. He knows so much about his product that the technical people respect him and don't try to B.S. him.

A clear vision, plus trusted lieutenants

He trusts his operational lieutenants enough to do their jobs. He sets overall direction for the company. Critically, he changed his mind at a moment when doing so made all the difference. For years Oracle, like Apple to this day, didn't do much in the way of acquisitions. Ellison's epiphany that organic (that is, in-house) growth wasn't going to be good enough is the reason that Oracle has trounced SAP (SAP), Microsoft (MSFT) and anyone else in its way over the past half decade.

(Late Wednesday Oracle announced fiscal first quarter earnings of $1.12 billion, or 22 cents a share, 4.4% from $1.08 billion a year earlier. Margins climbed to almost 35%, from 28.5% – all during a quarter in which revenues fell slightly.)

It's worth noting that hiring ex-banker Catz and ex-analyst Phillips, both strategically minded and acquisition-friendly executives, coincided with Ellison's change of heart. The point is the same, though. If the people he hired helped him see the light, bully for him. Ellison gets to take credit.

Much is also made of Ellison's long absences from the office and his distractedness. The business world and investors should greet such talk with two words: Who cares? Ellison's cell phone keeps him as close to Oracle as he needs to be. When important things are happening Ellison is a constant presence at Oracle.

At a youthful 65 he quite likely will be running his show for years to come. Eventually people may even stop wondering how much credit for it all he deserves because the answer will be apparent: A whole lot.

On NBC's Press: Here (airing 8/23), Fortune's Jon Fortt, TechCrunch's Sarah Lacy and host Scott McGrew chat with SAP executive board member John Schwarz. For all four video segments online now, check out video on the Press: Here website. (SAP) (IBM) (ORCL) (CRM) (MSFT)

Roundtable brings together top tech executives

Before there is Brainstorm Tech (the conference) there is Infotech Forty (the forum).

Fortune senior writer Jon Fortt and I are co-chairing an intimate event for a group of high-ranking technology executives whose jobs are becoming increasingly strategic in their corporations. No longer are these chief information officers and chief technology officers the folks who make company computers and software run; they play key roles in making sure their enterprises meet financial and other goals.

Attendees include Cisco CTO Padmasree Warrior, SAP tech chief Vishal Sikka, and Albert Cheng, executive vice president, digital media for Disney's ABC group.

The conversation is sure to be lively as these senior tech execs debate and discuss issues such as cloud computing and the role of social networks in the corporation. (For a sneak preview of the issues around cloud computing that will shape the conversation, check out Fortune's recent profile of software-as-a-service pioneer Salesforce.com, Fortt's story on how truck maker Kenworth gets access to supercomputers via the 'Net, and this piece on why client/server software isn't going away anytime soon.)

IBM Software chief Steve Mills says that while Big Blue is doing more with application software, he'll be careful not to rough up his allies. Image: IBM

In a software industry defined by big egos and ruthless tactics, IBM built its empire on smart alliances. Rather than try to write every application customers needed to put their businesses on the web, Big Blue marshaled an army of allies and sold their programs in packages on top of its own. The result: A lot of successful companies – folks like PeopleSoft, Siebel Systems and Lawson – made their fortunes with IBM's help. And along the way, IBM built its own $20 billion enterprise software business into the industry leader.

Now the times seem to be forcing IBM (IBM) to tweak its friendly approach. Although the company promised to avoid offering its own programs to compete with its partners (and executives say that policy stands), some industry insiders note that the giant has begun flouting its no-compete policy as growth in its software business slows and it seeks new avenues for sales. Just look at some of the companies IBM has gobbled up recently: Cognos for business intelligence, FileNet for content management, MRO Software for asset management, to name a few. Do those qualify as applications? You bet.

Not that the changes put IBM in imminent danger. IBM's software business still supplies nearly a fifth of the company's revenues and 40 percent of the profit, helping to make the company a favorite technology stock on Wall Street this year. The stock is up about 15 percent in 2008, and analysts expect steady results when the company reports earnings on Thursday.

And while he allows that his strategy has evolved enough to raise eyebrows, software czar Steve Mills insists IBM's allies have nothing to worry about. Mills is the mastermind behind the company's big-tent software strategy, and he knows he still needs that ecosystem.

"The basic premise of keeping partners happy remains in place," says Mills, senior vice president and group executive of IBM Software, in a chat with Fortune. "There are a few rub points – but by the way, some of them have a few rub points with us as well."

In other words, Mills would like to assure everyone that he isn't morphing into Oracle's (ORCL) Larry Ellison or Microsoft's (MSFT) Steve Ballmer, two software executives more likely to steamroll smaller competitors. Instead, IBM is mostly sticking to its playbook of offering a foundation of databases and middleware, while recruiting smaller companies around the world to build on top of it. Does that mean IBM won't build more applications businesses? Well, Mills won't count that out entirely. But overall, he'd like everyone to know that where its partners are concerned, he's still a lover, not a fighter.

Given the challenges ahead for IBM, that's probably a good idea. The technology world is in the throes of a shift from selling installed software – Oracle databases, IBM middleware, Microsoft Exchange e-mail and the like – to selling access to online services. So far, the hot online service leaders like Amazon.com (AMZN), Google (GOOG) and Facebook tend not to rely on that traditional software to deliver their products; so it's not clear that this shift to "cloud computing" will be kind to IBM.

"From a cloud computing perspective, frankly IBM's performance up to this point has been disappointing," says James Governor, an analyst at RedMonk. He and others note that the major Web 2.0 service providers are mostly cobbling together their own software infrastructure to handle a flood of Internet traffic, rather than rely on off-the-shelf database and middleware offerings from IBM. For a company that's used to being a go-to supplier for that stuff, the trend should be a little scary. Says Governor: "There's plenty of headroom at IBM, but it is at a crossroads." And while IBM firms up its software-as-a-service strategy, it would be wise to keep its partners from defecting.

IBM has to keep its ecosystem allies happy, even as it pursues growth and adapts for the future. That way, it can keep offering a broad portfolio of software products to its customers, and hopefully buy more time to figure out that cloud computing thing. Jonathan Eunice, analyst at Illuminata, puts it in plainspoken terms: "You want to keep your current cash cow as healthy as possible for as long as possible."

Early in the life of Hewlett-Packard, an adviser warned co-founder Dave Packard that more companies die from indigestion than starvation. The message: Be careful how you handle acquisitions.

With CEO Mark Hurd's announcement Tuesday that Hewlett-Packard (HPQ) will purchase services giant EDS (EDS) for $13.9 billion (including EDS's cash and debt), Hurd is making a bold statement that his team is operationally strong enough to handle the heartburn.

There are plenty of investors who aren't convinced. As of Wednesday morning HP stock had lost about 8 percent of its value since word of the deal leaked out, bringing it under $46. That means shares are down almost 15 percent since their October high. Meanwhile IBM (IBM) shares are up 10 percent since October.

EDS will be a new operational division of HP based in Plano, Texas, with EDS chief executive Ronald Rittenmeyer reporting directly to Hurd. Hours after the deal was announced Tuesday, Fortune spoke to Hurd and Rittenmeyer about how they will approach customers, grow HP's software business, and control costs. Below is an edited transcript of our chat.

A big issue on Wall Street's mind is going to be costs, and the fact that EDS at close to 140,000 employees has nearly as many people as HP. What assurances can you give about how you can cut costs out of the equation here?

Hurd: We gave financial guidance today about this deal being non-GAAP accretive in '09 and GAAP accretive in 2010. Certainly that has implications on cost. I would tell you that we think we know a lot about cost structures and how to align overhead cost structures, and I can assure you, Jon, we'll deliver on that.

In the past under HP's structure, salespeople from the Technology Solutions Group had taken the lead selling to big companies, bringing in the Personal Systems Group and Imaging and Printing Group behind them. With EDS in the picture, how do you plan to make sure the sales approach doesn't get too complicated?

Hurd: I think we always work to simplify our approach. Part of the blessing of HP is the scale and the capability that we bring to customers and the market, and part of the issue we have to work through is making sure our scale doesn't turn into bureaucracy and complexity. So we're constantly trying to make the company simpler and easier to do business with.

But I would look at the engagement with EDS no differently than how we work our services business today. Today, our TSG sales force goes to market and when it sees a services opportunity, it brings in HP's services business. It'll be no different with EDS. We'll need to educate them about the breadth of the capability of EDS, so that when they see an opportunity that makes sense, they become a demand-creation organization. So I don't see it creating any net new complexity. And Jon, as you know, we'll always be on guard trying to make sure that if it does, we eradicate it as quickly as possible.

EDS had been working to de-emphasize lower-margin services work like mainframe management and call centers, and instead chase higher-margin jobs like custom software development. How does getting bought by HP help EDS in that transformation?

Rittenmeyer: From an applications development standpoint, we have done an awful lot to continue to grow that. We have signed a very extensive alliance with SAP (SAP), and we've done some stuff with Microsoft (MSFT) recently. So we are going to continue to grow that business. It's got upside.

Remember, our application maintenance business is about $4 billion – $5 billion. It's one of the largest out there. And it gives us great leverage for application development, because we're already out there.

We run their systems. We probably have some of the best people in terms of knowledge of legacy modernization in the marketplace. So I think what this does is it provides us with a much broader technology base, and a much deeper technology base than we have. And the access to that will only make these offerings a heck of a lot more capable and a lot more effective when we go to market. So I think it absolutely marries the right connection of the two. Because HP, from an applications standpoint, that's not their biggest field. And it is one of ours.

Hurd: Jon, one point that you might be interested in is that the largest application development app on the market is Mercury [which HP purchased in 2006]. So the fact that we can bring the Mercury software assets to the services capabilities of EDS is, we think, strategic in this deal. Secondly, the biggest customer of Opsware [which HP acquired in 2007] was EDS, and if you look at data center automation and server management, we think we can bring a software portfolio that's pretty attractive to the automation processes, and create a real win for customers.

If you thought open-source software was a threat to big-company profits, think again.

Oracle CEO Larry Ellison. Image: Oracle

Just a few years ago, the open-source software movement was a pariah among big software firms. Shai Agassi, then an executive at SAP (SAP), likened it to socialism. Microsoft CEO Steve Ballmer called it a cancer. The attitude among many in the establishment seemed to be that the “free code” revolution led by software such as Linux would discourage invention and erode profits.

That nightmare scenario hasn’t happened. Instead, the open-source movement has helped lower the cost of computing, and fueled a lot of moneymaking innovation, and not just among scrappy startups. For just one example, consider Oracle (ORCL), which is likely to highlight open-source trends as one of the growth drivers in its business when the company reports quarterly earnings today.

How? Last quarter, the business software giant pointed out that its database market share actually tends to improve when customers move to Linux, which has been a fast-growing server operating system for much of the decade. And Oracle is poised to capitalize on open-source trends in other ways. For instance, the company distributes Linux for free, and makes money by offering support.

So far so good: earlier this year CEO Larry Ellison reported that Oracle is in the early stages of selling high-margin Linux support contracts, some for as much as $500,000 a pop. Ellison claims the open-source strategy is also helping to lure database business away from competitors. “We're just taking share right away from IBM on mainframes and we're taking share away from Microsoft using Linux,” he told analysts in September.

The Linux love-fest doesn’t stop with Oracle. Google (GOOG), which already uses Linux-based servers to power its search platform, also wants to tap its open-source infrastructure to deliver more and more software over the Internet. (Google’s Android cell phone platform will also be based on Linux.) VMWare (VMW) has long been a Linux-friendly shop. Co-founder Mendel Rosenblum has praised it as a natural fit for the company's virtualization software, which is all the rage these days as companies seek to cut data center costs by using the software that lets one computer do the work of many.

Beneath the surface, the companies are making similar bets on the profit power behind open source. All are wagering that if the cost of a computing platform drops far enough that everyone can afford it, there will be opportunities to make money by helping customers to use fascinating software and services on top of it. In Oracle’s case, it’s profiting from software and support; in Google’s case, from advertising, and in VMWare’s case, from helping people run more programs without buying more equipment.

It still remains to be seen whether the open-source approach has a shot at eventually becoming the most popular force in computing. Some powerful companies still don’t think so. Microsoft (MSFT), which believes it can do better than the open-source community, continues to do well in the server business — there are even signs in the most recent IDC server report numbers that Windows server growth is outpacing Linux. And Apple’s (AAPL) iPhone certainly doesn’t use an open-source operating system –- Steve Jobs likes to point out that it runs the same software as full-fledged Mac computers.

Nevertheless, it clear these days that open-source software is far from the profit killer some feared. Just ask Larry Ellison.

Oracle CEO Larry Ellison has put the pressure on BEA management. Photo: Oracle

BEA Systems rebuffed Oracle CEO Larry Ellison's $6.66 billion hostile takeover bid by letting it expire on Sunday, but this game is far from over. BEA's management now faces more pressure, not less, to sell the business software company.

That's because the San Jose-based company has the tough task of convincing anxious shareholders that it really is worth $1.5 billion more than Ellison's Oracle (ORCL) was willing to pay. It doesn't help that BEA's stock is now trading below the $17 per share that Oracle offered, and far below the $21 per share management insists it should fetch.

BEA (BEAS) executives might not have much time to prove the company's value. Activist investor Carl Icahn, who had already bought a 13 percent stake in BEA to push for a sale, is threatening to lead a shareholder revolt against BEA's management unless they auction the company off to the highest bidder – which, so far, had been Ellison. In a letter sent Friday, Icahn was particularly critical of the rough way BEA handled Ellison's advances.

"I view your public declaration of a $21 per share 'take it or leave it' price as a management entrenchment tactic, not a negotiating technique," he wrote.

New design in HP’s business displays (Photos 1-5)

One can't help feeling that BEA's board might be outmatched. After all, Oracle CEO Ellison has a reputation for eating smaller software outfits for breakfast; the software giant has swallowed more than 30 companies in the past three years. Most famously, Oracle digested PeopleSoft in a $10 billion hostile transaction that ranks as the second-largest merger in software industry history.

Back when Oracle stalked PeopleSoft, the target company used tactics that BEA executives clearly have studied. At the time, Oracle first made a low offer that PeopleSoft management dismissed as an attempt to distract the company and its customers – but Oracle eventually ended up paying 61 percent more than its initial bid.

BEA management seems to have been betting on a similar outcome when Oracle came calling. Days after Oracle's bid, which was 25 percent higher than the company's trading price at the time, BEA insisted that Oracle could afford to pay more.

Seagate’s slick new storage for Mac and PC (Photos 1/9)

But analysts don't think BEA is likely to command a premium from Oracle — partly because Oracle had already offered a healthy premium, and because Icahn has been pushing BEA to sell. In that kind of environment, Oracle has most of the leverage.

Now Ellison and his team can sit back and watch BEA shareholders squirm. BEA management has already declared that they won't embrace any offer of less than $8.2 billion for the company, which would make it the third-largest software acquisition in history. But no one other than Oracle seems willing to pay even $6.66 billion, even though analysts see companies like IBM (IBM), Hewlett-Packard (HPQ) and SAP (SAP) as reasonable suitors. Oracle has said that if investors don't like the way BEA management is behaving, they can feel free to stage a mutiny. Meanwhile, Oracle will take its $8 billion cash hoard and shop elsewhere.

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That puts the burden on BEA management to either find another buyer, or boost the company's stock price some other way. If BEA can't do either, and the stock price drifts downward, don't be surprised if Oracle makes another bid – but for less than the first one.