NEW YORK (CNN/Money) -
Historians tracing the tectonic movements of Microsoft have at their disposal a nifty shortcut: the company's habit of outlining its future through memos.
From 20-year-old Harvard student Bill Gates's infamous "Open Letter to Hobbyists" (in which he chided his fellow computer enthusiasts for not paying for software), to the 1995 watershed "Internet tidal wave" memo, to 1998's "Halloween" memo warning of the impending Linux threat, the company likes to use these screeds to hint at its next steps.
And so it did in a memo Gates sent to Microsoft (MSFT: up $0.59 to $55.84, Research, Estimates) employees in January, calling on them to embrace "trustworthy" computing. Gates wasn't asking his workers simply to do the right thing; rather, he knew that security would be a top priority in the post-Sept. 11 times. He also realized that security is one area in which Microsoft has fallen well short of the mark. "When we face a choice between adding features and resolving security issues," Gates wrote, "we need to choose security. Our products should emphasize security right out of the box."
As the need for security becomes more important, Microsoft finds that the problems that have dogged it for years -- Windows's inherent instability and susceptibility to hacks -- are now becoming major issues for corporate and government buyers. "Companies today are placing a higher emphasis on security," says Stacey Quandt, an analyst at Giga Information Group. Just last week, Microsoft had to post three advisories for "critical" security flaws affecting its Windows NT and 2000 servers. Rather than simply accept the Microsoft problems, corporate and government customers are voting with their feet. Many are marching to the Linux camp.
A recent study by Gartner Group's Asia Pacific office shows that 15 percent of the region's companies use Linux instead of Microsoft products -- nearly 2.5 times as many as did a year before. Hong Kong, India, Korea, and Thailand lead the region in Linux usage: Each boasts a penetration rate of 21 to 25 percent. China, no fan of Western influence, has recently begun awarding state contracts to Chinese firms that use Linux rather than Microsoft products.
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The Asia Pacific region isn't the only hotbed of Linux activity. The Peruvian congress is considering a law that would force all government computer systems to use open-source technology whenever possible. "Security is especially relevant for government vendors," Quandt says. "Governments are saying they'd rather use open-source technology because there aren't any unseen open doors into the system. But it's not only that. Linux offers better performance, more stability, and a lower cost. It's a threat to Microsoft, and there's no turning back."
While industry-watchers applauded Gates's "trustworthy computing" announcement, most say talking the talk isn't enough. On June 14 they got fresh evidence of this, when Microsoft admitted that it had inadvertently bundled the Nimbda worm in the latest version of Visual Studio .Net that it shipped to South Korean developers. Faced with such pressing challenges from abroad and from within the United States -- Quandt predicts that Linux will become the dominant server operating system in the United States by 2005 -- Microsoft must fundamentally change the way it thinks about and releases its software.
Some people think it's already too late. Michael Drummond, author of a 1999 book about Microsoft, "Renegades of the Empire," says that for Microsoft to change its "ready-fire-aim" method of rolling out software -- release first, capture market share second, fix later -- would be "one of the most significant corporate culture changes that a modern business could ever make. It's the way they've been doing it since day one," he says.
And there's the rub. For Microsoft to compete against the Linux enterprise threat, it must change the way it has been doing business for more than 25 years. And for this very reason, Microsoft's biggest problem isn't the courts in Washington, D.C. Today the problem lies in the company's Redmond boardrooms.
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