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Microsoft CEO Steve Ballmer’s annual e-mail update to the Microsoft troops revealed much about the Redmond, Wash., giant’s views on Linux and its other operating-system competition. In turn, we asked analysts and Linux leaders what they thought of Ballmer’s latest Linux comments.

In the memo, Ballmer wrote, “We are effectively using independent studies by Forrester Research, the Yankee Group, IDC, Giga, BearingPoint and many others to change perceptions of the advantages of Windows over Linux when it comes to total cost of ownership [TCO], functionality and productivity advantages, support and security. We need to do work like this in every business to get customers to recognize our work and appreciate it fully.”

Garth Dickey, president and CEO of Progeny Linux Systems Inc., said he was surprised to see Ballmer talking so candidly about the company’s need to alter perceptions.

“Mr. Ballmer’s pep-talk memo reflects the fact that Microsoft is a smart company with a lot of strengths,” Dickey said. “I’m struck by the candor of his comment about using independent studies to change market perceptions about Windows.

“The transparency of commissioning such ‘independent studies’ for a specific purpose—that is, to find a prespecified result—serves merely to undermine the effectiveness of such efforts by raising doubts within the industry about the impartiality of such studies.”

Eric Raymond, president of the Open Source Initiative, noted that Ballmer “talks about changing perceptions—even Ballmer has to admit that they have to work hard to catch up with customer perceptions of Linux value.”

Others were sharper with Microsoft. “It is true that Microsoft is using third parties to create FUD for use via its Get the Facts program. But who would believe this stuff?” asked Bill Claybrook, president of New River Marketing Research.

“No operating system is better than another operating system in every possible way, and that is what MS is trying to convince people to believe,” he said. “TCO studies are basically worthless unless they are directed at specific organizations.”

Specifically, Claybrook said, “The problem with MS’ independent studies by Forrester, Yankee, etc. is that they are not really objective. One of the studies that is on the Get the Facts Web site done by a third party that looked at the interoperability of operating systems had Windows winning as usual, but almost 40 percent of the people interviewed were running only Windows. Now that is not objective.”

Ballmer maintained a cheery note as he compared Microsoft’s growth with others’.

“In the 12 months through Q3 of this year, we grew faster than key competitors such as IBM, AOL, Sun, Oracle and Sony,” he wrote. “We know how to compete with Linux through innovation, quality support execution and facts-based customer education. We gained server market share (as did Linux) and are poised for more progress. OSS products have yet to provide meaningful customer value on the client compared with our offerings.”

The Open Source Initiative’s Raymond said such commentary belies a bleaker picture of competition with Linux.

“Whistling in the dark, ain’t he?” Raymond said. “To maintain this line, he has to ignore unpleasant facts like Gartner’s report of 57 percent growth in Linux server shipments in 1Q 2004, on a trend line that took us to a quarter of Windows volume and should have us overtaking them early next year … or sooner.”

Raymond also mentioned “high-profile moves to open source by the governments of France and Brazil, joining Germany, Korea, South Africa and Peru. Not to mention a million Java desktops in China.”

Next Page: Naming key competitors.

Dickey said it was telling to see which companies Ballmer named as key competitors: IBM, AOL, Sun, Oracle and Sony. “It’s interesting to see this list not only to understand the breadth of Microsoft’s ambitions, but to learn who is missing from the lineup—names like HP, Google, Dell, etc., let alone Novell, Red Hat, Lindows and so on,” Dickey said. “I guess there just wasn’t room to list all of the companies that Microsoft views as targets.”

In his final mention of Linux, Ballmer observed, “With Windows Server 2003, we can compete for every commercial workload running on Linux or Unix today—even mainframes and high-performance computing—at lower cost, more efficiently and more reliably. In addition, we are unique in offering an integrated platform including our server and IW applications and partner ISV workloads and applications.”

Laura DiDio, senior analyst at the Yankee Group, said she thinks Ballmer is pragmatic in general, although also a little “rah-rah.” Still, she said, “Server 2003 has turned out to be a sleeper product for them, especially in the SMB [small to midsize business] market. While the margins are terrible—$5 to $10—resellers are making money from deploying it, servicing it and trainings staffers on it. This is buying Microsoft a lot of good will in the SMB reseller and customer space.”

DiDio said the SMB market in general is proving especially fruitful for Microsoft. “We’re not out of the economic downturn yet, but Microsoft’s promotional discounts are starting to drive it. And Linux, while it’s gaining traction in academic and government markets, isn’t really a factor in the SMB space.”

While IT departments may be ready to migrate from Windows, DiDio said, the people holding the IT buying dollars often view such a move as risky.

“IT buying power has largely been ceded to CFOs [chief financial officers], and CFOs are pragmatic and risk-aversive,” she said. “While IT departments may say that they’re sick and tired of grappling with Microsoft security issues and patch management, the CFOs see it in terms of replacing complete application environment, and Linux at this point can’t compare with Windows, Unix, Macintosh or even NetWare.”

Linux has been making gains, DiDio said, in IT departments that are technically self-sufficient, have an awful lot of help from system integration or have a very simple environment with few applications.

For example, she said, “When Novell makes the rounds of its NetWare customers and tries to get them to switch to SuSE Linux, the CFOs want ZENworks and eDirectory now, and Novell can’t give them that yet.” Microsoft, on the other hand, “particularly with Server 2003, can offer SMB customers a full package of services.”

In addition, DiDio said CFOs suffer “sticker shock” when looking at the full cost of switching a network to Linux. “They look at Linux and see that they need to add third-party programs to get the same functionality, so they turn back to Windows.”

But she said Microsoft can’t afford to be too haughty about its position. “Ballmer has reason to be cautiously optimistic,” she said, but “Microsoft can’t be cocky. They have to be careful with pricing, and they must be pristine in how they deal with people on licensing issues and stop arm-twisting tactics by their sales department.”

Nevertheless, Raymond said she believes that Linux is “past the uphill part. Linux is now at early majority stage in some important vertical markets, notably financial services and the movie biz. From here, the news for Microsoft is only going to get worse.”

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