The open-source operating system trailed only the economic environment in the biggest risks outlined by CFO John Connors.
Microsoft is taking the Linux threat seriously. So seriously, in fact, that open-source software comes in at the No. 2 spot on the company's top five list of risks.
In a teleconference to go over the Redmond, Wash.-based developer's fourth quarter and fiscal 2003 results on Thursday, CFO John Connors detailed the five biggest risks to his company's business.
"The general economic environment is risk and driver No. 1," he said. "Linux and non-commercial software is risk No. 2."
The rest of the top five, Connors said, are growing the installed base in today's tight-spending climate, litigation, and executing plans on multiple fronts.
"I'm a bit surprised that Linux comes in at number two on their list," said Michael Cherry, an analyst with Directions on Microsoft, an independent research firm that tracks Microsoft's products and strategies. "I might have flipped Nos. 2 and 3. But when you think about it, Linux falls in the same category as the attempt to grow the installed base," he said, going on to lump the two into what he calls "just good enough."
"People are using Linux for the same reason that others are still using Windows 2000 or Office 97," Cherry said. "It's good enough to do they job they're deploying it for."
Microsoft has been making noise this year about how serious it takes the threat from open-source software. Microsoft chairman Bill Gates said in February that he took Linux and its threat to his company seriously, saying the operating system is "out there and very pervasive." And in June, CEO Steve Ballmer identified open-source products a major competitive threat in an E-mail sent to all Microsoft employees.
More recently, the company has been stepping up its efforts to convince potential European clients that they should steer away from Linux and towards its products. But even though Ballmer intervened in the attempt to win over the city of Munich, Linux won out.
"When you see these big losses escalating as high as Ballmer," Cherry said, "you know that Linux has caught their attention."
But rather than rely on the most obvious evidence that Microsoft sees Linux as a major threat, Cherry suggests looking to something that has gotten little attention: the changes Microsoft has made for its Windows CE operating system.
"That's the one move I'd point to as a response to Linux," he said.
This spring, Microsoft dropped the price of Windows CE and completely opened its embedded operating system to developers, allowing them for the first time to not only view and modify CE, but also sell products that incorporated the customized code.
"I see Windows CE as evidence that Microsoft is trying some experiments to find a way to respond to Linux, and find what responses work best," Cherry said.
As other proof, Cherry pointed to Microsoft's so-called shared source program, which recently celebrated its second-year anniversary, that not only lets governments get a peek at its Windows operating systems, but also opens the door to some of its largest customers.
Although shared source and open source are quite different, Cherry said--Microsoft doesn't let anyone but itself re-compile the code to Windows, for one--the end result may be essentially the same as open-source and Linux.
"What people tend to forget is that there are gatekeepers in the open-source community, too," he said. "It's not a free-for-all. On every one of the open-source projects, there are two or three people who are the gatekeepers. And you have to make a pretty good case, accurate and technically astute, to get them to allow changes. That's how it should be."
If Microsoft's worried about Linux, it can take some solace in recent numbers from NetCraft, a server monitoring firm in Bath, England.
According to NetCraft's June analysis of the software running Web servers, Microsoft's newest operating system, Windows Server 2003, made significant inroads into the Linux market--and 5% of its growth has come at the expense of Linux, with more than 8,000 systems having migrated from that open-source operating system to Windows Server 2003.
"Microsoft will take some considerable encouragement at the number of sites that have switched from Linux," NetCraft said in the report.
But the server arena isn't really the one to watch how Microsoft reacts to Linux, said Cherry.
"People are underestimating Linux on the desktop," he said. "They think it's all about the servers, and how Microsoft responds there. They're going to be surprised at how quickly [Linux's threat] will be an issue on the desktop. Linux will get to be 'just good enough' for the desktop faster than people think."
Maybe that will make Microsoft bump Linux to the top of its risk list.
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