Linux Nips at Microsoft's Heels

Microsoft would surely like to see its overseas revenues expand, but governments, universities and companies in countries like China and India simply can't afford Microsoft's prices, analysts say. How important are those markets? "They're not at all important in the next quarter," Lundstrom said. But "20 years from now, the global center of the software industry will be Asia."

Another sign that the Linux wave is building is the increased backing it has attracted from behemoth IBM(IBM Quote), which recently unveiled an all-star marketing campaign -- featuring Muhammad Ali and Kurt Vonnegut, among others -- to spread the word about Linux. IBM also invested $50 million in Novell(NOVL Quote) when Novell bought No. 2 Linux vendor SUSE Linux.

IDC's Kusnetzky likens IBM's Linux backing to a surfer preparing to catch a killer wave: "If you [see] the good wave coming, the really good surfboard rider will really start pushing and start digging into the water so that when the wave hits he's able to ride it."

Arousing the Giant

As in the Internet browser wars, Microsoft was initially caught off guard by the Linux threat but is now keenly focused on responding.

"We've tried to be very clear that Linux is a competitor and a challenge to Microsoft," CFO John Connors said at a conference in late February. "We've also been very clear that the open source and free software model is a threat to all commercial software vendors. ... It's a threat to everybody."

In a telephone conference with analysts last week, Martin Taylor, Microsoft's general manager of platform strategy, addressed the issue of pricing overseas. "We do know that we need to work with these governments so that we do have software and the right offerings priced in a way that's relevant to them and their consumers and their constituencies," he said.