Pecked by Penguins

So far, Microsoft's attempts to counter the Linux threat have come up short

Four years ago, Microsoft Corp. (MSFT ) 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 (NOVL ) and Borland (BORL ) to Lotus and Netscape Communications (AOL ). 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 [of bad-mouthing Linux] 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. "Microsoft has had a lot more time to work on this. I wonder why the win wasn't bigger," Kusnetzky says. Microsoft insists that it didn't rig the contest and chose the most popular uses for the software.

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 (AHC ), who manages 400 Linux servers by himself. "It takes fewer people to manage the Linux machines than Windows machines." Microsoft acknowledges that some companies find that running Linux is cheaper than Windows.

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

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