Microsoft Sees Open-Source Threat Looming Ever Larger

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.

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