Microsoft has confirmed it sees the open source software movement as a threat to its commercial business model, in a quarterly report filed with the U.S. Securities and Exchange Commission (SEC).
The statement, which first appeared in Microsoft's annual report on its 2002 fiscal-year operations, amplifies comments by Microsoft Chief Financial Officer, John Connors, recently about the threat of Linux to Microsoft's server business.
"The popularisation of the open source movement continues to pose a significant challenge to the company's business model," Microsoft wrote in its recent filing. "(This is) including recent efforts by proponents of the Open Source model to convince governments worldwide to mandate the use of Open Source software in their purchase and deployment of software products."
Microsoft said it might have to reduce the prices it charges for its products. Revenue and operating margins might consequently decline also if the open source movement continues to gain market acceptance.
But an analyst who closely follows Microsoft said that while Microsoft genuinely perceived the open source software movement as a threat, it was unlikely to adjust its pricing any time soon in response.
"Microsoft's response up until now (to the open-source movement) has been non-monetary," Directions on Microsoft Research Director, Rob Helm, said. "It's loosened up access to source code, made more efforts to support the government market, and created online communities that mimic those that support open source development projects."
With Microsoft's desktop operating-system market share at more than 90 per cent and still growing, any threat to Windows from a system like Linux remained a distant one, Helm said. Where Microsoft faced near-term pressure was in the market for server software. It was here that Microsoft hoped to expand its Windows NT/2000 market share but found itself fighting the growing open-source groundswell.
It also faced growth challenges in the acutely price-sensitive government and educational markets, he said.
"Sometimes, Windows may be overkill for (those markets)," Helm said. "Outside the US, there's political pressure to not be too dependent on Microsoft for government functions. There's a long-term threat there."
In the SEC filing, Microsoft contrasted its commercial software development (CSD) model with the open source movement.
The financial investment in software inherent in the CSD model benefits end users, Microsoft said.
"The company believes that the CSD model has had substantial benefits for users of software, allowing them to rely on the expertise of the company and other software developers that have powerful incentives to develop innovative software that is useful, reliable and compatible with other software and hardware," Microsoft said.
If Microsoft was to vanquish this threat and overcome challenges posed by a weak global economy, it would have to offer users compelling reasons to buy its software, the company said.
"The company's revenues would be unfavourably impacted if customers reduce their purchases of new software products or upgrades to existing products because new product offerings are not perceived as adding significant new functionality or other value to prospective purchasers," Microsoft said.
Microsoft began adding the open-source risk disclosure to its quarterly SEC filings because "it just seemed like an appropriate place to list it, along with other uncertainties," a spokesperson said. "Microsoft had been publicly acknowledging those concerns for quite a while."