By Sam Jaffe If the words didn't send a chill down the spine of every Microsoft (MSFT) shareholder, they should have. At a January investment conference, Microsoft CEO Steve Ballmer declared: "Linux is our enemy No. 1." A few weeks later, James Allchin, who oversaw the rollout of Microsoft's Windows 2000 software, went so far as to call Linux "a threat to the American way."
When the Colossus of Redmond's top execs say stuff like that, you know it has a problem. And what makes the comments even more interesting is that Microsoft had gone out of its ways to ignore Linux, ever since the open-source software first popped into the consciousness of Corporate America two years ago.
That's because Linux has stymied the rollout of Windows 2000. Otherwise known as W2K, this year-old operating system was designed to serve as Microsoft's entree into the server world, which is the fastest-growing portion of computer sales.
SHUT OUT. Microsoft already had Windows NT, a server operating system launched in 1993 that had been a success in low-end servers overseeing tiny networks. But the bulk of the server market today is in high-end machines that oversee enormous networks of hundreds of computers, as well as professional Web servers that host Internet sites. Because of NT's inability to handle such large amounts of data traffic, it was virtually shut out of that arena. Even Microsoft has hosted many of its own Web sites on competitors' operating systems.
Hence the birth of Windows 2000. No one expects it to compete with extremely high-end operating systems like Sun's (SUNW) Solaris or IBM's (IBM) AIX. But it was supposed to roll like a juggernaut through the low-end and mid-range server market, much as Windows 95 quickly established sovereignty over the desktop five years ago.
It hasn't happened. While W2K has grown at a comfortable clip (it reached 1 million installations in its first year on the market), few of those buyers have implemented its Active Directory, which is a crucial part of the operating system for Microsoft. It is meant to oversee logins and keep tabs on multiple networks, just like Novell's (NOVL) original directory software, called NetWare.
STILL STALLING. According to a recent study by computer consultancy Enterprise Management Associates, only 26% of large corporate info-tech departments have made the switch to Windows 2000. An additional 55% planned to do so in the next six months. But if it's taking existing NT users that long to adopt the new operating system, then something must be stalling them.
That would be Linux. Starting out as a pet project of a Finnish graduate student, Linux has developed into one of the world's most popular operating systems. By the end of 2000, it was powering 30% of the Web server market, about equal to Microsoft's slice of that pie, according to consultancy NetCraft, which tracks server operating systems.
In addition, Linux has become increasingly popular as an operating system for mobile networked devices like cell phones, Web tablets, and handheld computers, another area that Microsoft has been unsuccessfully (so far) trying to enter. Thanks to its open-source nature, which allows programmers to see and change the actual source code of the program, Linux has become very popular among computer professionals and programmers.
"BETTER MOUSETRAP." That's where Microsoft would like to see Linux stay. But it's starting to catch on in the enterprise arena. Large corporations are warming to Linux as a method of overseeing networks that do things other than just serving up Web pages. "The open-source development model is a better mousetrap to address enterprises' IT needs," says Duetsche Banc Alex. Brown analyst Phil Rueppel. "And Linux is the proof-point for the open source model."
The Linux alternative just got a whole lot better with the new 2.4 version of the operating system's "kernel," or core. It's a far more robust version of the program that makes it the equal in many ways to other Unix operating systems. And though Linux is already known for its stability, the new version makes it even more stable.
Perhaps most important, Linux 2.4 is tailor-made for the next generation Intel chip, called the IA-64 or Itanium, which should be appearing later this year or in early 2002. Computers based on the IA-64 chip will be vastly more powerful, thanks to a more efficient method of using memory. "Probably the next big upgrade cycle will be centered around the Itanium," says VA Linux (LNUX) CEO Larry Augustin, whose company provides Linux hardware and services to large enterprises. "When computers start rolling off production lines, Linux will be on equal footing with everyone else, including Microsoft, in terms of taking advantage of the new hardware."
UNPAID ARMY. Will Linux slay the giant? No. Windows 2000 will allow Microsoft to remain competitive in the server market while also still virtually owning the desktop, which is where Gates & Co. stands its best chance at fending off Linux. "Since Microsoft still gets nearly 70% of its revenue from the desktop, controlling desktop applications is key," says Merrill Lynch analyst Steven Milunovich. "Microsoft Office provides a user lock-in and keeps the desktop proprietary."
Nevertheless, Microsoft has plenty to lose as it does battle with the "invisible swordsmen" of Linux, its army of unpaid software developers. While in the short-term, Microsoft's franchise is safe from the hordes of would-be giant killers, there's no denying that they'll be attacking from all sides. No wonder Ballmer is so worried. Jaffe writes about the markets for BusinessWeek Online