Microsoft dips on Ballmer's Linux warning

MarketWatch: Infrastructure, June 25, 2003

Wall Street suffered an adverse reaction to Steve Ballmer's warning that open source and Linux software presents the company with a competitive challenge.

In an annual state-of-the-union company wide email to employees, Ballmer said the challenge to Microsoft from open source and Linux software requires "our concentrated focus and attention."

Microsoft's share price subsequently dipped during trading on Nasdaq while shares in at least two open source vendors soared. Red Hat Inc closed up 9.86% at $8.70 and VA Software Corp jumped 44% to $2.16 by the close of trade. Microsoft dropped 3.14% to $24.09.

SG Cowen Securities Corp noted Ballmer's memo weighed on the company's share price while headlines reported the document put "knee-jerk pressure" on Microsoft's stock.

Ballmer was effectively repeating concerns expressed by executives in a Securities and Exchange Commission (SEC) filing earlier this year, in which they said free software and server-side Linux posed a significant threat to Microsoft's business model.

The sentiment of the email, though, had particular poignancy for Ballmer. Microsoft's chief executive interrupted his Swiss skiing holiday to visit Munich in an attempt to persuade the city's major to stick with Windows and not adopt Linux. City officials, though, recently decided to spend $30m moving 14,000 computers from Windows to Linux and remove Office in favor of OpenOffice

Ballmer's 13-page e-mail did seek to inspire employees, and possibly investors, though. He noted IBM Corp's endorsement of Linux added an "illusion" of support and accountability while dismissing free software as a passing fad.

He said Microsoft's power over Linux was its ability to innovate and pointed employees to the company's next major operating system project--Longhorn. Ballmer called Longhorn Microsoft's "big bet" with Longhorn versions of Office, server enhancements, development tools and MSN planned.

Summing up the last 12 months, Ballmer noted there had been two areas where Microsoft slipped: licensing, with the user revolt against Licensing 6.0, and security. He said recent attacks proved Microsoft has plenty of work left to do in security.