Yesterday, Microsoft announced DreamSpark – an ironic name, since it actually lays bare Microsoft's worst nightmare: that more and more of tomorrow's programmers are growing up using free software for their studies, which means that as they move out into the world, there will be less and less demand for Microsoft's tools, and even fewer programs written for its platforms.

Its answer? This:

Microsoft Corp. Chairman Bill Gates today will unveil a software giveaway that will ultimately provide millions of college and high school students around the world with access to the latest Microsoft developer and designer tools at no charge to unlock their creative potential and set them on the path to academic and career success.

The Microsoft DreamSpark student program (http://channel8.msdn.com) makes available, at no charge, a broad range of development and design software for download. The program is now available to more than 35 million college students in Belgium, China, Finland, France, Germany, Spain, Sweden, Switzerland, the U.K. and the U.S. Broad global coverage, as well as an expansion of the program to high school students around the world, potentially reaching up to 1 billion students worldwide, will continue throughout the next year. Gates will share details with students and faculty at Stanford University as part of a U.S. and Canada college tour that kicks off today.

“We want to do everything we can to equip a new generation of technology leaders with the knowledge and tools they need to harness the magic of software to improve lives, solve problems and catalyze economic growth,” Gates said. “Microsoft DreamSpark provides professional-level tools that we hope will inspire students to explore the power of software and encourage them to forge the next wave of software-driven breakthroughs.”

With the DreamSpark programme the company says in the plainest possible terms that its business model has failed. Despite its repeated assertions that its products are worth paying for because they are better than open source alternatives, its giveaway proves the contrary: it has admitted that it can no longer compete with free, and that it must now match open source's zero price.

I'd already pointed out this approach in a previous post here on Linux Journal, noting how increasingly it is being forced to give away its products in developing countries in order to fend off the growing attraction of free software in those markets. That strategy was sustainable while it continued to sell its products for good margins in its main markets. But two factors are changing the situation dramatically.

The first is the current move to give away copies of its development tools, on what it clearly hopes will be a massive scale. This is bound to impact its bottom line, even if only a relatively small proportion of students and educational establishments now no longer need to pay for such software.

The other factor is the current attempt to buy Yahoo. Microsoft has admitted that if its offer is accepted, it will need – for the first time in its history – to take on debt to pay for it, and on a massive scale:

Microsoft would have to borrow money for the first time to fund its takeover of Yahoo, the technology giant admitted today.

Chris Liddell, the Microsoft chief financial officer, told analysts and investors in New York that the company would pay for the bulk of the deal half in cash and half in stock.

The rest of the $44.6bn (£22.3bn) deal would be financed with an undisclosed amount of credit.

What that means is that it must squeeze as much money as it can from its operations to fund that debt and still pay dividends to shareholders, who will be looking for some payback from the Yahoo takeover. Giving away software is the last thing it would want to do in these circumstances, and the DreamSpark announcement shows just how worried it is about the future.

Truly, then, this is an unprecedented “giveway” - of Microsoft's worsening plight.

Glyn Moody writes about open source at opendotdotdot.