It may well be true, as Paula details today, that desktop Linux is going nowhere fast in the U.S. Microsoft's willingness to let users back-off upgrades and stick with XP may have stopped the potential rot in its market share. But it is taking enormous effort for Microsoft to hold its server market share against Linux' inroads in the enterprise.
Another important point. The U.S. is not the world, and Microsoft sells more than just Windows.
Many governments are actively pushing people toward Linux, for political reasons. It's not just code ownership. Ubuntu actually leads Microsoft in localization, having built teams in many languages -- India alone has hundreds of languages. Not all are official, on either a federal or state level. Open source lets local people deliver support for these languages.
On the application front, the browser wars live again thanks to Firefox. IBM's decision to join the Open Office group and give away its Symphony suite gives the ODF format an enormous boost. And Microsoft Office probably means as much or more to Redmond's bottom line these days as Windows.
That's why Microsoft is focusing its efforts in other directions, like its perennially money-losing videogame unit, and why it's innovating on interfaces, like its Fluent interface, which it's pushing as a way to maintain Office market share.
There is growing competition for Microsoft, across the entire front of open source, both here and around the world. I happen to think it makes Microsoft a better company. Big Green is worried and that's a good thing, because it has much to be worried about.