An early decision by Linux in favor of open source still is shaping the way Microsoft and others do business

In 2001, then-Microsoft CEO Steve Ballmer made headlines by calling Linux, the open-source operating system, a “malignant cancer” threatening to destroy the paradigm of intellectual property. Harsh words indeed, but not surprising ones considering their source — the flamboyant Ballmer — and the company he was leading. Microsoft made its money selling software directly to customers. Linux, a Windows competitor, gave its product away for free (but charged customers for technical support). If left unchecked, Linux could indeed have upended Microsoft’s business model.

Six years later, Microsoft general counsel (and current president) Brad Smith said that Linux, which was fast gaining steam in Microsoft’s corporate wheelhouse, violated more than 200 Microsoft patents. It appeared a legal battle between Microsoft and Linux was imminent, but a fascinating thing happened instead: Microsoft let down its guard, and has begun to operate more like Linux.

OpenSourceSidebarThe medium of transmission for the open-source “cancer,” it turns out, is a fundamental element of Microsoft’s new business plan: cloud computing. Direct software sales are becoming less important as fewer consumers and businesses buy PCs to download said software on. Instead, customers are turning to the cloud, where providers’ financial viability hinges on customer volume.

But what would compel a company like Microsoft to share source code that could generate billions in licensing revenue? Shaosong Ou has studied the motivation behind open sourcing since the early days of Linux. The University of Washington professor has found that developers enjoy the altruism and sense of community felt by contributing to open-source projects, and it gives them an opportunity to accrue skills and become more marketable in the future.

But the motivation to open-source projects isn’t as charitable for companies. For enterprise customers, “it’s basic economics,” Ou said. “Developing software in the open-source way saves cost, and you don’t sacrifice the quality.”

So Satya Nadella, Microsoft’s cloud overseer-turned-CEO, got to making nice with open source and its trove of developer devotees. Since he took the company’s helm in February 2014, Microsoft has embraced open sourcing by, among other things, sharing its .NET framework and allowing Linux to operate on its Azure cloud platform. The latest wave of open sourcing has focused on artificial intelligence; Microsoft, Google, and Facebook have all shared critical components of their machine learning and AI programs, and Microsoft, Google, and Amazon all offer machine-learning services to cloud customers.

Companies’ open-sourcing of AI code highlights another benefit of the method: free labor.

“Developing a very complex product, like sophisticated AI, takes a tremendous amount of intellectual effort,” Ou said. “The bottom line here is, when you have enough contributions to a complex problem, it’d be easier and more feasible compared to a smaller community.”

So Microsoft, Google, and others aren’t just competing for developer attention by open-sourcing AI framework; they’re hoping outside developers hone early-stage products into sophisticated applications.

Nevertheless, cloud computing remains the driver of the latest open-source movement. Cloud-centered companies make money by renting computing power and storage space, and if certain services don’t work on their platforms, then they might lose customers. If Amazon and Google allow Linux systems on their cloud, then Microsoft had better do the same, otherwise cloud momentum could shift away from them.

Open sourcing cloud-enabled framework, and letting other open-source programs operate on it, helps Microsoft build early inertia for Azure. The more developers use Azure today, and the more significant companies and projects that Azure hosts, the better Microsoft is positioned in the long run. The same goes for AI projects, which churn through so much data that a cloud server is about the only hosting option.

Nadella has clearly embraced open sourcing more than his predecessor, but what remains to be seen is whether Microsoft can thrive under this business model. The company is used to product-specific sales, but the indirect-revenue model of cloud computing services is something more familiar to Google: The company created a search engine and email platform, but advertising dollars foot the bill. So Microsoft will have to understand that, from this point forward, the bulk of its cloud applications, such as certain AI elements, won’t be direct moneymakers; rather, they’ll be tools to coax companies and developers to Azure.

The cloud arms race is young but important. In its latest quarter, Microsoft’s strong Azure and Office 365 revenue growth wasn’t enough to offset flagging Windows sales. Fifteen years after Ballmer’s diagnosis, the Linux cancer is undeniably changing the way Microsoft and other tech giants do business.

This article appeared in the June 2016 issue of 425 Business.