Microsoft says it's fighting on two fronts against netbook Linux, browsers

Sometimes it takes a few days for a long financial report to ruminate before a professional journalist manages to find a juicy tidbit lurking in the middle. Not surprisingly, the first journalist to find one in Microsoft's annual report filed with the US Securities and Exchange Commission last Friday was TechFlash's Todd Bishop. In his report yesterday, Bishop noted that Microsoft -- the company which European regulators continue to allege abuses its dominant position in multiple markets for even greater gains -- paints a picture of itself facing significantly greater threats from stronger competitors in two key market areas: the "UX" brands of operating systems, including Linux and Unix; and netbooks, whose rise in popularity has opened up a toehold for Windows' rivals.

The Client division of the company, Microsoft's annual report states, "faces strong competition from well-established companies with differing approaches to the PC market. Competing commercial software products, including variants of Unix, are supplied by competitors such as Apple, Canonical, and Red Hat. Apple takes an integrated approach to the PC experience and has made inroads in share, particularly in the US and in the consumer segment. The Linux operating system, which is also derived from Unix and is available without payment under a General Public License, has gained some acceptance, especially in emerging markets, as competitive pressures lead OEMs to reduce costs and new, lower-price PC form-factors gain adoption. Partners such as Hewlett-Packard and Intel have been actively working with alternative Linux-based operating systems."

While Microsoft is evidently casting itself as a fierce competitor, the battle lines it draws for the SEC in its theoretical market map is that of a fortress defending itself from strong, simultaneous attacks on two sides. At least one group of attackers is curiously grouped: Apple is portrayed as a "UX" operating system vendor, along with Red Hat and now Canonical, the organization behind the popular Ubuntu Linux distributions. It then breaks Apple out a bit as a leader in "integrated" PC approaches, implying that Apple can use its leadership in premium hardware to push its premium software; and then brings up HP and Intel in almost the same breath, implying that they may jointly be able to do the same for Moblin-based netbooks.

The forces on the other front may be more comfortable bedfellows with one another: the makers of Web browsers other than Internet Explorer, which the company has elsewhere portrayed as responsible for muddying its planned Windows 7 launch in Europe.

"The Windows operating system also faces competition from alternative platforms and new devices that may reduce consumer demand for traditional PCs," the annual report reads. "Competitors such as Apple, Google, Mozilla, and Opera Software Company offer software that competes with the Internet Explorer Web browsing capabilities of Windows products. User and usage volumes on mobile devices are increasing around the world relative to the PC. OEMs have been working to make the Google Android mobile operating system more compatible with small form-factor PCs or netbooks."

That was a risky statement for Microsoft to make, since it blatantly and unabashedly places itself in the center of the "traditional PCs" camp, which most analysts will agree faces significant threats from other evolving form factors. Microsoft doesn't acknowledge Chrome OS here, although it does credit unnamed manufacturers (read: Acer) with independently attempting to adapt Google's Android OS to netbooks.

Operating income for Microsoft's Client division, which is responsible for Windows Vista (not Windows Server), declined 17% last year to $10.86 billion, on 13% lower revenue.