Microsoft and Netflix Plot Open Source Comebacks

Dana is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

During the 2000s, open source evolved as a version of the movie Star Wars. There was the rebel alliance, the open source guys, and there was the Empire that had to be taken down, usually represented by Microsoft (NASDAQ: MSFT).

The empire was taken down, although not by open source. Apple took down the empire. But now Microsoft is plotting a comeback, with open source as a key driver of that comeback.

They are not alone. A few years ago Netflix (NASDAQ: NFLX) was on top of the world. Then, as it sought to evolve from a DVD delivery service to a streaming video company, stock touts soured on the story, driving it down. But Netflix's comeback, too, is driven by open source.

Microsoft Accepts Open Source

Microsoft still isn't the best friend of open source, as witnessed by its ongoing efforts to discredit open source office suites, but it has made its peace with the Git system, which runs under the General Public License, or GPL, for new development, and Simon Phipps, a longtime open source proponent, says it's made its peace with the movement.

In addition to supporting Git, Microsoft has made terms for Windows Phone developers that are far more friendly to open source, and hired a prominent Apache community member to its open technologies development staff.

Clearly Microsoft is going at this in a strategic way, opening its doors to open source where it's weak, or seen as weak, while still competing fiercely against open source when revenues are on the table. This is, in fact, the new paradigm across the corporate landscape. Open source is now a frenemy of corporate development, useful in many ways, and as the open source community wakes up to this reality, animus may dissipate.

Given the size of the company – Microsoft had revenues of $73 billion last year – this is not yet obvious from a profit standpoint. But it could help keep profit and operating margins near their present level of 33%, meaning it's the top line that will be most subject to question.

Netflix Plots Open Source Comeback

Netflix has built its new delivery infrastructure on Amazon Web Services, which is not open source, but the tools it's using to access that infrastructure are being given to the open source community. 

As with Microsoft, Netflix's open source openness is being seen most clearly at Github, where it has placed management tools with names like Chaos Monkey, which can close unused virtual machine instances. The company drew a large crowd to its recent open source open house to hear about a host of new monkey-flavored tools, most of which are designed to improve the flexibility of Amazon's environment.

The business aim here is to make Netflix's own operations more resilient, more able to withstand random failures like the one that took it down last Christmas Eve.  All this benefits more than just Netflix, which is a feature of open source. In this case, (NASDAQ: AMZN) is also a big winner, as it has a corporate advocate within the open source community while it retains its Application Program Interface, or API, as proprietary.

Netflix's turnaround is now popular with investors, who have been piling in since mid-January, nearly doubling the stock price to its present level of $177. This gives it a market cap of nearly $10 billion, and an Amazon-like PE of 612. While the two companies are considered the fiercest of enemies, open source and Netflix's reliance on Amazon infrastructure have turned them into something more like frenemies, and it's hard to see any major player other than Amazon who might want to buy it.

The Foolish Play

Microsoft is a very stable stock, and at its present price of about $28 it sports a yield of 3.3% as well as the possibility of minor price appreciation, as the benefits of its open source revolution become more apparent. Netflix is far more volatile, and it would be wrong to assume you must buy it on the up. Someone or something will knock it down in the next three months – wait for your opportunity.  

As for open source? It's not just for developers in their underwear any more. Any company making heavy use of software that does not have a strategy that embraces open source is foolish in all the wrong ways. 

DanaFBlankenhorn owns shares of Microsoft. The Motley Fool recommends Netflix. The Motley Fool owns shares of Microsoft and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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