June 15 (Bloomberg) -- Munich may become the biggest Microsoft Corp. customer to switch to Linux personal-computer software this week, as the city decides whether to remove the Windows operating system from 14,000 municipal computers.

The city's 82-member council, after more than a year of review, will vote tomorrow on a proposal to change to Linux, according to an agenda for the meeting. It would be the biggest PC defection to Linux ever, said Brendan Barnicle, an analyst at Pacific Crest Securities in Portland, Oregon.

Microsoft Chief Executive Steve Ballmer last year offered unspecified price cuts and shifted more workers to help local governments to keep Linux from getting a foothold in PCs, where Windows has almost 95 percent of the market. The increased competition in PCs comes as shipments of Linux for servers that run corporate networks grow more than twice as fast as Windows.

``In the area of Linux on the desktop, the direction is more negative than positive for Microsoft,'' said Tony Ursillo, an analyst at Boston-based Loomis Sayles & Co., which manages $56 billion and has sold some of its Microsoft stake this year.

Linux is available free over the Internet. Companies such as International Business Machines Corp. and Novell Inc. modify it to suit clients' needs and sell the software and related services, generally at a lower price than Windows. The specific company that would sell Linux to Munich hasn't been set. If the vote passes, the city will accept bids.

``This is a case of one city in one country that is deciding, through the help of IBM, to deploy Linux for their own very specific reasons,'' said Martin Taylor, who heads Microsoft's efforts to compete with Linux. ``Most people that actually do a technology and/or cost comparison continue to choose Microsoft.''

Encouraging Competition

Windows for PCs, which accounted for 32 percent of Redmond, Washington-based Microsoft's $32.2 billion in sales last year, is the company's biggest and most-profitable business. The gross margin on Windows, or the percentage of sales left after production costs, was 81 percent. That's compared with 76 percent in Office programs, Microsoft's No. 2 profit maker.

Ballmer, 48, traveled to Munich in March 2003 and offered a discount to keep the business, according to Taylor. He wouldn't comment on the size of the discount. The city made a preliminary choice two months later to switch from Microsoft, the world's largest software maker.

Munich Mayor Christian Ude, 56, said in a May 2003 statement the city wanted to encourage more competition in the software market and make sure Munich didn't have to rely on one vendor. City spokesman Bernd Plank declined to comment on the vote.

Free Work

IBM, based in Armonk, New York, sent as many as 10 engineers at a time to work for free with Munich officials for six months to help craft plans to switch, Plank said. IBM spokesman Mike Darcy declined to comment.

Several other German cities opted to stick with Windows, Taylor said last week. Frankfurt decided last year to sign a new contract with Microsoft for PC software, without disclosing the size of the deal. Even in Munich, the department of education bought 28,000 Windows and Office licenses in February for use in schools, Microsoft said.

Microsoft lowered its price for the Munich contract to $23.7 million from $36.6 million, USA Today reported last year. The company declined to comment on the value of the contract.

Linux will account for 6 percent of desktop operating system shipments by 2007, up from 2.8 percent in 2002, according to forecasts from Framingham, Massachusetts-based researcher IDC. Windows will decline to 92 percent, IDC estimated.

Poster Child

Microsoft shares have lagged on concern that growth may slow further as Linux increases in popularity, investors such as Ursillo have said. They rose 5.9 percent last year as the Standard and Poor's 500 Index rose 26 percent. Microsoft has dropped 1.7 percent this year as the S&P gained 1.2 percent.

The stock gained 13 cents to $26.90 yesterday in Nasdaq Stock Market composite trading.

Munich's government uses Windows NT 4.0 and Microsoft's Office 97 and Office 2000 for word processing and spreadsheets, Plank said. Microsoft doesn't make an Office version for Linux, so the city would have to replace those programs as well if it changes to Linux.

Munich has become ``the poster child for the desktop Linux movement,'' Chris Stone, vice chairman of network-software maker Novell, said in a telephone interview in February.

Novell's Bruce Lowry declined to comment on the Munich vote. IBM said last year it would work with Suse Linux AG to develop a Linux plan with Munich. Novell bought Suse, and IBM has taken a $50 million stake in Novell.

More companies or governments are showing interest in adopting PC Linux. Symantec Corp. Chief Executive John Thompson said last month that the Cupertino, California-based maker of anti-virus software may switch to Linux for some or all of its PCs from Windows.

Making a Dent

Most clients using Linux on PCs now aren't switching from Windows, said Barnicle, who rates Microsoft shares ``buy.'' They are scrapping proprietary programs, IBM's OS/2 and the Unix software used for technical workstations, he said.

``The desktop threat is not ready to happen yet,'' Loomis's Ursillo said.

Popular PC applications aren't available for Linux, Ursillo said. Adobe Systems Inc. doesn't make its graphics software for Linux, and Symantec and Network Associates Inc. in Santa Clara, California, don't sell Linux versions of their anti-virus programs, he said. Symantec plans its first Linux anti-virus program this year.

Companies need to improve tools for developers to make it easier to build programs for Linux, Novell's Stone said. Some existing Linux software such as spreadsheet applications can't handle complex tasks that Windows-based programs can, he said.

``You've got to provide real value and equivalent functionality and then some to make a dent'' in Microsoft's dominance, Stone said.

To contact the reporter on this story: Dina Bass in Seattle at dbass2@bloomberg.net or Benedikt Kammel in Berlin at bkammel@bloomberg.net

Last Updated: June 14, 2004 18:08 EDT