Pecked by Penguins

Four years ago, Microsoft Corp could barely be bothered with Linux. At a
trade show in 1998, then-President Steven A. Ballmer referred to Linux, the
upstart computer operating system that rhymes with cynics, as "lie-nucks."
When asked if he was sure of the pronunciation, Ballmer quipped: "There is
no financial incentive to answering that question." Translation: Linux is
just a pipsqueak that isn’t worth our time.

These days, there’s no Microsoft employee who doesn’t know how to
pronounce Linux. Microsoft has made a sport of vanquishing competitors–from
Novell and Borland to Lotus and Netscape Communications. But Linux is looking
more and more like a sliver of Kryptonite that’s working its way under
Microsoft’s cape. It has Microsoft flummoxed precisely because it’s not like
any of the company’s previous foes. "We’re used to competing with
products and companies," says James E.

Allchin, the group vice-president who runs Microsoft’s Windows business.
"It’s different than anything else we’ve dealt with before."

Linux isn’t a company, and it’s more than just a traditional software
product. It’s a social phenomenon. The so-called open-source software is
created collectively by thousands of volunteer programmers, many of whom have
day jobs with corporations that are Microsoft’s customers. Since Linux is
available free of charge, it undercuts Microsoft’s traditional price
advantage. And the Windows monopoly actually fuels Linux. Customers leery of
being locked into proprietary Windows flock to the upstart operating system.

The stakes are sky-high. While Linux hasn’t made much headway against
Windows in desktop PCs, it’s rapidly gaining ground in server computers. That
threatens to stifle Microsoft’s expansion in an important market where its
revenues grew just 5%, to $4.4 billion, last year, compared with 15.5% growth in
its desktop software business.

To date, Microsoft has stumbed in its efforts to put down the Linux
challenge. First, in 1999, the company created a Web site under the heading
"Linux Myths" that questioned Linux’ performance and reliability. It
was ineffective. Then in June, 2001, in an interview with the Chicago Sun-Times,
Ballmer labeled the software a "cancer" because open-source rules
impinge on intellectual-property rights. In the past year, the software giant
has been lobbying governments to expand their purchases of Microsoft software–only
to see dozens of countries consider legislation that would encourage the use of
open-source software such as Linux. "The strategy
has failed, and Microsoft should abandon it immediately," says Forrester
Research Inc. analyst Ted Schadler.

Microsoft’s response to Linux has even given rise to internal critics.
David Stutz, a former Microsoft group program manager who retired on Feb. 7,
took the company to task in an essay on his Web site. He wrote that the threat
Microsoft faces from open source is nothing less than the "erosion of the
economic value of software." His admonition: "Microsoft needs to
resist the urge to get defensive and instead innovate." The company
responds that it is innovating.

At the same time, Microsoft is working on a new war plan. Last year, it
tapped Peter Houston, senior director of server strategy, to study the Linux
threat and help formulate a combat strategy. Houston plans to focus the debate
on "business value," where the company believes it has an advantage.
While Linux itself is free, Microsoft argues that it costs far more to maintain
Linux than Windows on computers. To prove the point, Microsoft commissioned a
study by market researcher IDC that was released in December. The study
concluded that because Microsoft had created more software tools for managing
and updating Windows, the operating system would be 11% to 22% cheaper to run
than Linux over a five-year period in four out of five different common
computing tasks, such as sending files to printers and running security
applications. Windows was more expensive when it came to serving up Web pages.

Yet even this tactic seems to be backfiring. One of the study’s authors
accuses Microsoft of stacking the deck. IDC analyst Dan Kusnetzky says the
company selected scenarios that would inevitably be more costly using Linux.
Also, he believes Windows should be cheaper to operate, since it has been around
longer, giving Microsoft more time to develop software to manage the operating
system.

But its assertions about Linux’ hidden costs don’t always pan out in the
real world. "Our experience is different," says Jeffrey R. Davis, the
global technical lead at Amerada Hess Exploration & Production, who manages
400 Linux servers by himself.

"It takes fewer people to manage the Linux machines than Windows
machines." Microsoft’s latest gambit is to play nice with Linux. It’s
glomming on to the open-source community’s philosophy of sharing and letting
customers take peeks at its top-secret Windows source code. At the LinuxWorld
conference in New York in late January, Microsoft manned a little booth tucked
away at the back of the hall. There, a handful of employees wore black t-shirts
with the words "Let’s Talk" printed on them.

It turns out learning how to pronounce Linux was the easy part. The company’s
still learning how to deal with it.

By Jay Greene in Seattle in BusinessWeek. Copyright 2003 by The McGraw-Hill Companies, Inc