Peering Into the Microsoft Future

In follow up analysis to Friday’s Microsoft ruling, Steve Lohr says that Microsoft’s biggest challenge may be Linux:

while Microsoft has squelched the competitive challenge posed by Internet browsing software, the “Internet threat” that so worried it in the 1990’s is still alive and well, though in a very different form.

The rise of the Internet has affected the technology industry in three main ways, each of which tends to discourage monopoly power. First, no single company controls the Internet’s crucial technical standards. Second, it is a low-cost technology and though essentially a communications technology, it has helped accelerate the advance of low-cost economics in computing generally. Third, as a decentralized technology, the Internet holds the promise of dispersing market power.

Today’s embodiment of the Internet threat to Microsoft is Linux, an increasingly popular operating system and a real potential rival to Microsoft’s Windows. The business problem of competing against Linux is far trickier for Microsoft than was thwarting the early Internet challenge from browsing software and Netscape Communications, the commercial pioneer in browsers.

This time, for example, the competitive weapons in the Microsoft arsenal will be fewer because a federal appeals court has ruled that the bullying of industry partners and rivals to protect its monopoly was illegal. And Linux, an operating system written and updated by a worldwide community of volunteer programmers and distributed free, is a more elusive target. It already has broad industry support, and no single company stands behind it.

The Linux strategy is to undercut Microsoft, just as Microsoft was once regarded as a leading practitioner of low-cost economics in pricing its personal computer operating systems for high-volume sales.

“Linux is a huge, long-term threat to Microsoft because it completely reverses the economic landscape,” said David M. Smith, an analyst at Gartner Inc. “In market after market, Microsoft has come in from the bottom and said we’re cheaper. It can’t do that with Linux. How can you get cheaper than free?”

A group of small companies charge for supplying technical support and added software features to Linux, including Red Hat, SuSe, Ximian and Lindows. But I.B.M. has also embraced Linux, giving the alternative operating system much greater momentum and credibility among corporate customers. And I.B.M. is the company Microsoft executives regard as their principal rival these days.

Remember, unlike what Bill Gates says, competition is good.