Suddenly, Competition Is in

In recent weeks, readers of the papers' business sections have been keeping tabs on a fierce battle between the Finance Ministry and Microsoft.

In recent weeks, readers of the papers' business sections have been keeping tabs on a fierce battle between the Finance Ministry and Microsoft. The Finance Ministry announced that it will start distributing packages of open-code office software ("Open Office") to all citizens free. In parallel, the ministry declared that it will stop purchasing Microsoft programs. Instead, it will switch to Windows' venerable competitor and install Linux programs.

In response, Microsoft hinted that the decision was motivated by a desire to grab headlines: Finance Ministry officials were applauded in Israel and around the world for their courage.

The real reason for the dispute was virtually ignored. In early 2001, the Finance Ministry signed a three-year deal with Microsoft under which the state of Israel received extremely favorable terms. The state received a package of programs that included an operating system, office programs, an electronic mail server and a number of additional programs, at the astounding price of $177 per package (including VAT). Were the state to have purchased each of these programs separately, it would have paid a much higher fee.

Microsoft was also pleased. Its new contracts are built so that organizational clients rent programs rather than purchasing them. During the rental period, Microsoft upgrades the programs for no charge. Microsoft was convinced that it had killed two birds with one stone: First, the Finance Ministry would have to continually renew its rental agreement so as to retain the computer programs. Second, Microsoft believed that it had out-muscled competitors, because under this agreement, it offered individual programs at rock-bottom prices that could not be matched by any rival.

Three years later, the Finance Ministry has changed the rules of the game. It capitalized on a clause in its contract with Microsoft that gives it the right to convert the temporary rental agreement into a permanent arrangement by purchasing the programs it possesses. Finance Ministry officials explained that this approach is more cost-effective and logical: "We don't think that we will need new programs until 2007," they said. "At that time, either there will be new solutions based on open code, or Microsoft will come to us on its knees, and offer a better deal."

But the connection between open-code software and the dispute with Microsoft is tenuous. The treasury began investing in open code more than a year and a half ago, when its relations with Microsoft were still smooth. Now, entangled in a dispute with the giant, the Finance Ministry is enjoying kicking Microsoft where it hurts, even though it really has no real intention of replacing Windows with Linux, or Office with Open Office.

Microsoft officials are also acting as though the focal point of the dispute is the Finance Ministry's "intention" to choose open-code software, even though they know that the ministry's threat is nothing more than a bluff and a public relations stunt. Microsoft prefers to engage in a virtual argument because it wants to deflect the public's attention away from the truly important issue: The Finance Ministry has decided that Microsoft's business model simply does not pay.

Microsoft's success depends upon this model. It is based on an understanding that there is no way to persuade clients to toss away programs they have purchased every 18 months or so just so that they can purchase improved software. Microsoft therefore offers organizations a deal that frees them from this obligation: Don't buy the programs, it tells clients, rent them. Such an arrangement, however, puts the client onto a slippery slope.

If other governments also decide that the business model offered by Microsoft is a bad deal, the company will sustain a tough blow. That is the reason why international media outlets are lavishing such extensive coverage on this battle.

Microsoft officials point out that 60 organizations in Israel have renewed their contracts with the company, but the Finance Ministry prefers to prattle about open code so as to win media publicity. What the ministry is not mentioning, however, is that it has enjoyed ridiculously favorable terms for the past three years. Instead of issuing tenders and inviting companies to compete for software supply contracts, the state received computer programs in a prearranged deal, without a tender and without competition. But now, the Finance Ministry is suddenly boasting about its commitment to competition.