Microsoft Sees Open-Source Threat Looming Ever Larger

By Peter Galli  |  Posted 2004-09-05 Print this article Print

The software maker is facing growing pressure from open-source software across every segment of its business—a competitive threat that could have significant consequences for its financial future going forward, Microsoft said in its latest 10-K filin

Microsoft Corp. is facing growing pressure from open-source software across every segment of its business—a competitive threat that could have significant consequences for its financial future going forward, the software maker said in its latest 10-K filing to the Securities and Exchange Commission this week. "We continue to watch the evolution of open-source software development and distribution and continue to differentiate our products from competitive products, including those based on open-source software. We believe that Microsofts share of server units grew modestly in fiscal 2004, while Linux distributions rose slightly faster on an absolute basis," the filing reads.
Increase in Linux distributions reflected some significant public announcements of support and adoption of open-source software in both the server and desktop markets in the last year, company officials said.
Among those recent wins are the Allied Irish Bank, one of Irelands largest banking and financial services groups, which said in June that it was set to transition its branch-dependent applications and migrate about 7,500 desktop users off Windows and onto Sun Microsystems Inc.s Java Desktop System over the next year or so. Microsoft, of Redmond, Wash., recently has lost other business from European customers. In June, officials of the Norwegian city of Bergen said the city plans to move 100 schools and 32,000 users away from its proprietary Unix and Microsoft Windows applications platform to Linux by the end of this year, while Munich has also committed to Linux and open-source software. Microsoft also again used its latest 10-K filing to float the possibility that it would have to lower the prices of its software products, with officials saying that "to the extent open-source software products gain increasing market acceptance, sales of our products may decline, which could result in a reduction in our revenue and operating margins." While Microsoft often mentions Linux and open-source software as a potential threat to its business, it seems to be treating the threat far more seriously and describing it as more pervasive than in previous official filings. In a lengthy section of the filing that deals with competition, Microsoft officials noted that while the software business is intensely competitive and subject to rapid technological change, evolving customer requirements and changing business models in every segment means that the company was facing significant competition across all areas of its business. "Our direct competitors include firms adopting alternative business models to the commercial software model. Firms adopting the noncommercial software model typically provide customers with open-source software at nominal cost and earn revenue on complementary services and products, without having to bear the full costs of research and development for the open-source software," said Microsoft officials in the filing. Company officials also again warned—as they had in February 2003—that "while we believe our products provide customers with significant advantages in security and productivity, and generally have a lower total cost of ownership than open-source software, the popularization of the noncommercial software model continues to pose a significant challenge to our business model, including recent efforts by proponents of open-source software to convince governments worldwide to mandate the use of open-source software in their purchase and deployment of software products," officials said. Next Page: Upgrades struggle to compete with current software versions.

Peter Galli has been a financial/technology reporter for 12 years at leading publications in South Africa, the UK and the US. He has been Investment Editor of South Africa's Business Day Newspaper, the sister publication of the Financial Times of London.

He was also Group Financial Communications Manager for First National Bank, the second largest banking group in South Africa before moving on to become Executive News Editor of Business Report, the largest daily financial newspaper in South Africa, owned by the global Independent Newspapers group.

He was responsible for a national reporting team of 20 based in four bureaus. He also edited and contributed to its weekly technology page, and launched a financial and technology radio service supplying daily news bulletins to the national broadcaster, the South African Broadcasting Corporation, which were then distributed to some 50 radio stations across the country.

He was then transferred to San Francisco as Business Report's U.S. Correspondent to cover Silicon Valley, trade and finance between the US, Europe and emerging markets like South Africa. After serving that role for more than two years, he joined eWeek as a Senior Editor, covering software platforms in August 2000.

He has comprehensively covered Microsoft and its Windows and .Net platforms, as well as the many legal challenges it has faced. He has also focused on Sun Microsystems and its Solaris operating environment, Java and Unix offerings. He covers developments in the open source community, particularly around the Linux kernel and the effects it will have on the enterprise.

He has written extensively about new products for the Linux and Unix platforms, the development of open standards and critically looked at the potential Linux has to offer an alternative operating system and platform to Windows, .Net and Unix-based solutions like Solaris.

His interviews with senior industry executives include Microsoft CEO Steve Ballmer, Linus Torvalds, the original developer of the Linux operating system, Sun CEO Scot McNealy, and Bill Zeitler, a senior vice president at IBM.

For numerous examples of his writing you can search under his name at the eWEEK Website at


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