Linux is making inroads into its server revenue and starting to bite at its most dominant market -- desktop PCs. Larger software vendors are eyeing the midmarket and small business space Microsoft has traditionally done best in.
It has been suggested some Microsoft customers have threatened to adopt Linux in order to bargain a better price for their software.
Following a spate of viruses and worms over the last few years, the security of Microsoft products is also under increasing scrutiny. The company's managing director, Steve Vamos, tells ZDNet Australia  how it's responding to these challenges.
Q: Is Microsoft concerned that large enterprise software players like SAP and Siebel are shifting into midmarket at the same time Microsoft is trying to establish its enterprise software credentials? Which is the bigger threat -- SAP or the open source MySQL database?
A: Microsoft always faces strong competition -- it's a given. At Microsoft Australia, our focus is on identifying and relating as best as we can to the needs of our customers in different segments of the market place -- not on the actions of our competitors.
We believe our mid-market offering delivers value beyond that of our competitors. Microsoft Business Solutions offers business application software -- traditionally only available to the enterprise and with an enterprise-size price tag -- to businesses in the mid-market. We've got a range of products from Microsoft Navision, which are great for manufacturing and distribution, to Microsoft Great Plains 8.0, which just launched in the Australian market and provides tight integration with Microsoft Outlook. Such integration is something the traditional enterprise ERP vendors simply can't offer the mid-market.
Microsoft has long embraced a partner model and this is no different with our business solutions. We believe that by arming our partners with technology, tools, and resources, our customers will get the best possible value and experience with our products. This level of support and expertise, delivered through our partners, is a key differentiator of the Microsoft offering.
Microsoft's SQL Server is a leading database in the industry and is going from strength to strength. Like any competitor, we keep an eye on MySQL but again, you have to strike the right balance of looking over your shoulder versus servicing your customers.
Again, at the end of the day our focus is on making sure we do a better job of connecting with customers. We always work with our customers to help them understand our technology and leverage the value our technology provides.
Using the example of Telstra, Linux developer Jeremy Allison said at the LinuxWorld conference -If you're not piloting a Linux desktop program, you're paying too much for your Microsoft client software." How far will Microsoft drop its prices in order to prevent a customer moving to Linux (not just on the desktop)? What do you say to loyal Microsoft customers who will end up paying more by not threatening to switch platforms?
I think it is presumptuous and incorrect to suggest that customers have been paying for and purchasing Microsoft software without going through the process of considering the value of that investment and how it compares to alternatives. Our customers have always wanted to establish the value of any further or additional investment made in Microsoft.
There are very few customers who approach evaluations of alternative technology on the basis of, -Oh boy, we will show Microsoft by doing this!"
We have been successful because the Microsoft platform and the solutions that we offer are great value for money in the eyes of many customers. As a customer, I would be offended by the suggestion that I don't consider all the options before me, or that I simply give my business to a particular vendor without thought.
We have a strong position in the marketplace because our products consistently provide our customers with the best solution for their business, and because we continue to evolve the way we produce, package, and offer our products. Customers today want to hear more about value and return on investment and less about specific features and functionality. Features and functionality do play into the equation, but from a Microsoft perspective, we are very dedicated to showing our customers the value of our products.
For example, I can't speak for Telstra, but I do believe they demonstrated due diligence by way of a thorough assessment, and concluded that our technology was fit for purpose, and provided best value for money. Ultimately, we were successful in showing the value of our software, just as we have many times in the past with many customers.
Microsoft's -Get the Facts" campaign claims the long-term cost of ownership of Windows is lower than that of Linux alternatives. Does this TCO calculation include projections of the damage caused by hacking, Trojans, and network worms that exploit vulnerabilities in Windows compared with the number that affect Linux?
I don't think one can realistically calculate security within TCO. Security is an issue that affects the entire IT industry. Hackers are out there and security flaws aren't going to go away in the short term: not for Windows, not for Unix, nor for Linux. It's an unfortunate fact of life.
Yes, there are more hackers targeting the Windows operating system -- it's a more valuable target for hackers who operate with the primary aim of doing damage because there is a larger surface area in terms of real customers.
I think one of the critical aspects of the security issue is problem resolution, and Microsoft's systematic approach. Microsoft has a security response centre that is constantly scouring code for any flaws and subsequently developing patches -- it's regarded as the best in the industry today.
Page II: Microsoft Australia managing director Steve Vamos talks to ZDNet about the company's changing competitive landscape, security issues, and the best way to sell software in Australia.
Many people suggest the -many eyes" theory somehow eliminates or reduces the risk to open source software but I'm not convinced. Flaw resolution takes much longer with Linux than Windows and recent statistics show that Linux security flaws are increasing by 21 percent, whereas Windows flaws remain the same. I don't think it's a question of access to code; it's a question of methodology. Unlike the open source model, Microsoft pays software developers to find and fix flaws, conduct quality assurance, check for application compatibility and ensure installation is seamless. The processes we have in place, the industry partnerships we have developed and our continued commitment to security makes me feel very comfortable about our approach.
In July, Steve Ballmer said Microsoft needs to sell its products better, for example by offering more tailored products. Has there been any progress on this for the way Microsoft Australia sells software to business customers?
Yes. For example, in the past year, Microsoft Australia has gone -vertical." Specifically our enterprise sales and services teams have aligned themselves around specific markets to ensure we have a deep understanding of our customers' businesses and industries, that we are partnering with the right industry organisations, that we have hired experts with experience in these markets and that we are, most importantly, working closely with our customers to ensure we are meeting their needs.
We've had some really great success with this approach. Take for example our financial services practice -- in Australia, many leading financial services organisations are running Microsoft software to do their mission-critical business and this isn't legacy -- these companies have signed Enterprise Agreements in the past year because we've had teams working with them to help them design and implement an architecture for success, now and in the future.
There are very few customers who approach evaluations of alternative technology on the basis of, 'Oh boy, we will show Microsoft by doing this!'
The other great example is Microsoft Office Student & Teacher which has seen terrific sales in retail outlets. This is because of that fact that we have positioned a great alternative for the home environment as people can get three installations off the one licence at a very competitive price. While not products for C-level executives, I believe both SBS2003 and Office Student & Teacher are great examples of Microsoft tailoring products to meet customer needs.
After several postponements, Microsoft will finally end support of Windows NT 4.0 at the end of this year, but there is still a not insignificant number of customers using this old operating system. Are customers resisting Microsoft's push to upgrade?
The feedback we have been receiving is that many of our customers want to make the move from NT 4.0 to Windows Server 2003, as they realise the benefits to be gained in terms of increased reliability, efficiency, and security.
Indeed, while all customers will benefit from Windows Server 2003, customers running Windows NT 4.0 Server stand to gain the most given the huge technical advancements made since the release of NT 4.0 nearly eight years ago. We've seen a significant shift from the NT 4.0 platform since the launch of Windows Server 2003 in April last year.
Most of those remaining on NT 4.0 do so because they have older line-of-business applications that they cannot migrate or afford to redevelop right now. This means they must take a gradual approach to upgrading. While official support for Windows NT ends at the end of this year, customers yet to migrate their custom-written applications can negotiate extended support for the platform with us. We're keen to work with them to ensure a smooth transition.
One tool that will help customers migrate from NT 4.0 is the soon to be released Virtual Server 2005, as they can then run the old operating system in a virtual session on new more reliable hardware, which means fewer physical servers to maintain and reduced risk.
What has been different about running the show at Microsoft compared to ninemsn or Apple? What have some of the challenges been?
All the companies are very different. It's hard to compare Microsoft to ninemsn or Apple. What's fantastic about Microsoft? For me, it's commitment to continuous improvement. Whether it is strengthening our relationships with customers and partners to demonstrate a very clear and strong value proposition, or putting our efforts behind stopping child pornographers, or dedicating ourselves to improving not only our security but also raising the issue for the industry to rally around -- when we make a commitment, we really go for it.
This commitment is augmented and really delivered on by our clear technology vision. The work we are doing with future products in incredibly exciting. We've got some really great innovations in the pipeline -- commitments that we made years ago that we are delivering on today.
Microsoft is leading the innovation of seamless access to communications, information and services -- whatever and wherever you are -- from a wide range of devices. I'm confident that through the .NET Framework -- the integrated innovation of our platform -- we will provide these services.
What's exciting for me at Microsoft is the opportunity to be part of a company that isn't just innovating in technology, it's committed to becoming stronger in the way it connects with, and delivers value to people.