Subject: Challenges to the Company's Business Model
From: Keith Bostic <bostic@sleepycat.com>
Date: Wed, 5 Feb 2003 21:08:38 -0500 (EST)


http://www.microsoft.com/msft/download/MSFTQ03-2_10-Q.doc

Challenges to the Company's Business Model

Since its inception, the Companys business model has been based
upon customers agreeing to pay a fee to license software developed
and distributed by Microsoft. Under this commercial software
development (CSD) model, software developers bear the costs of
converting original ideas into software products through
investments in research and development, offsetting these costs
with the revenues received from the distribution of their products.
The Company believes that the CSD model has had substantial
benefits for users of software, allowing them to rely on the
expertise of the Company and other software developers that have
powerful incentives to develop innovative software that is useful,
reliable and compatible with other software and hardware. In recent
years, there has been a growing challenge to the CSD model, often
referred to as the Open Source movement. Under the Open Source
model, software is produced by global communities of programmers,
and the resulting software and the intellectual property contained
therein is licensed to end users at little or no cost. Nonetheless,
the popularization of the Open Source movement continues to pose a
significant challenge to the Companys business model, including
recent efforts by proponents of the Open Source model to convince
governments worldwide to mandate the use of Open Source software in
their purchase and deployment of software products. To the extent
the Open Source model gains increasing market acceptance, sales of
the Companys products may decline, the Company may have to reduce
the prices it charges for its products, and revenues and operating
margins may consequently decline.