Microsoft's Biggest Enemy Now: Apple, Linux, or Itself?

In a meeting with financial analysts last week, Microsoft CEO Steve Ballmer laid out who he thinks are the biggest threats today to Windows on the client side. Surprisingly, Apple wasn't number one. It wasn't number two or three either.

Referring to a pie chart at the meeting that gauges threats to Windows, Ballmer said that Windows itself, both licensed and pirated, were the top two threats to Microsoft in the client OS space, followed by Linux, then Apple. Ballmer quipped: "Windows license, number one market share. Number two market share goes to Windows pirated, or unlicensed. That's a competitor that's tough to beat; they've got a good price and a heck of a product, but we're working on it."

Ballmer followed with a carefully-worded mockery of Apple's "point or more" market share growth over the past year. "A point of market share on a number that's about 300 million [number of PCs shipped worldwide in 2008] is interesting. It's an interesting amount of market share, while not necessarily being as dramatic as people would think."

"Number two market share goes to Windows pirated, or unlicensed. That's a competitor that's tough to beat; they've got a good price and a heck of a product." Steve Ballmer, Microsoft CEO, quipping about how Microsoft has to compete with itself.

Though Linux's 0.88 percent OS market share hardly qualifies as a threat, Linux does compete with Microsoft in more areas than Apple and it is much cheaper. "Cheap" takes on an appealing sound in an economic recession.

Clearly, Apple has been hit by the economic downturn in the past two months. It has seen dips in Mac sales and market share, and even announced a small round of layoffs Wednesday.

But is Ballmer truly wary of Linux? Is he just trying to disparage Apple as usual? It's hard to tell. Industry experts interviewed for this story say the folks at Redmond will continue to face threats on all sides and even from within.

Linux Attacks on More Fronts

Matt Rosoff, an analyst with independent research firm Directions on Microsoft, mostly agrees with Ballmer about the threat pecking order, saying that Linux trumps Apple as a threat, but that Microsoft's biggest rival is itself.

"Macintosh computers are a threat in precisely one market - upscale consumer PCs, a small part of the overall PC market," Rosoff says.

"Linux is a bigger threat because it competes in more areas such as server OSs, embedded systems and increasingly on client PCs with the rise of low-cost netbooks," he says.

But Microsoft's biggest threat to Windows OS growth, says Rosoff, is the idea that existing PCs with older versions of Windows are good enough. "Consumers and businesses may have no incentive to replace them until they break," he says.

Apple Clout May Increase with New OS

Veteran industry analyst Roger Kay, president of Endpoint Technologies, says he doesn't see Linux as a threat to Microsoft now or any time in the future, and says it would be a mistake for Microsoft to take its eye off Apple.

"Apple can move as a unit. The Linux crowd can't," Kay says. "Linux is just a collection of philosophically aligned developers without a well-financed backer. I'd be much more leery of Apple, a company with [US]$25 billion in cash and a crack team of technologists and marketeers."

Likewise, Tim Bajarin, president of tech consulting firm Creative Strategies, says that Microsoft is in no position to take Apple lightly. He believes Apple has the superior client OS, but that Windows 7 is a big improvement over Vista and should help Microsoft keep their market share steady.

"However, Apple's newest OS will be rolled out this summer and could bring more attention to the Mac platform, especially if it is rated better than Windows 7," Bajarin says.

Linux Sits Pretty on Smartphones, Netbooks

In addition to competition on client PCs, Bajarin points out a potentially more fierce battle brewing: smartphones.

The clash for OS dominance in the smartphone market puts Microsoft up against the wall, says Bajarin. Here, Microsoft is dueling with not only Apple, but Linux-based Android from Google as well as the Palm and Symbian OSs. And Google, of course, poses a much larger threat to Microsoft overall, with its dominance of the search market and ever-strengthening grip on Web-based applications that threaten Microsoft's productivity app market share.

Bajarin expects to see major vendors backing Google's Android OS on smartphones and netbooks starting this year. "In this space, Microsoft has to be just as concerned about Android as Apple," he says.

The Enemy Within

Another Directions on Microsoft analyst, Michael Cherry, contends that Microsoft's size requires that it watch all sides. "Apple and Linux both create some pain for Microsoft," he says.

Cherry says that Apple will continue to threaten Microsoft on laptops, desktops and smartphones, plus has set the bar very high for customer satisfaction. He adds that "even if Apple does not gain market share, there will always be comparisons to its design and quality."

The threat of Linux, Cherry says, depends on how the consumer market moves, and whether or not corporations follow.

"If there is truly a migration to low-cost machines with less hardware resources, then customers may be more open to Linux than a version of Windows that is restricted only to work on the available hardware."

He adds that the economic recession may accelerate Linux adoption.

"I think customers will pay a slight premium to get Windows, but at some point they could become indifferent to the OS to save money."

Like his Directions on Microsoft colleague Rosoff, Cherry thinks Microsoft's biggest threat is Windows users that do not feel compelled to change to a newer version of the OS.

"This means Microsoft not only has to convince us that they are better than Apple or Linux, but also that their latest version is better than the one we are using - so much better that we are willing to go through the expense of upgrading."

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