OSS undermines Windows strategy
For a company such as Microsoft whose most familiar competitive tactic has been to undercut rivals on price, "free" open source software such as the Linux operating system has represented a new and unusual threat.
This has brought about a rapid rethink of the company's early, unsuccessful efforts to marginalise the open source approach to software development. It has also forced Microsoft to dig in for what will be its most important long-term competitive battle, according to Steve Ballmer, chief executive officer.
For now, the software giant has largely succeeded in limiting the direct damage from open source, says Charlie Di Bona, software analyst at Sanford C. Bernstein. "The numbers seem to suggest they're doing quite well," he says.
The conflict between the two approaches to software has been most direct in the market for servers, the computers that support the networks of machines on which modern companies run.
Servers that run a version of Microsoft's Windows operating system accounted for almost a third of the market at the end of last year, while machines running the newer Linux operating system represented 9 per cent, according to IDC, a technology research firm.
Linux may be growing much faster - at a rate of 35 per cent a year, compared with 15 per cent for Windows - but both are eating into the market for more expensive servers based on the Unix operating system, and this remains one of Microsoft's most robust businesses.
Meanwhile, Windows' grip on the personal computer remains solid, despite the sale of more machines running on Linux, particularly in parts of Asia. Virtually all of the Linux-based PCs also run Windows, much of it pirated, complains Jim Allchin, head of the Windows businesses at Microsoft. Persuading users to pay for Windows, rather than getting them to use it in the first place, has become Microsoft's biggest problem.
While the short-term results look good, the long-term threat has forced Microsoft to rethink its early, ineffective campaign against open source software.