"In this environment of lean (information technology) budgets and concerns about Microsoft's attention to customers, noncommercial software such asand is seen as an interesting, 'good enough' or 'free' alternative," Ballmer wrote in his annual letter to employees summarizing Microsoft's market position and its goals for the coming year.
"Noncommercial software products in general, and Linux in particular, present a competitive challenge for us and for our entire industry, and they require our concentrated focus and attention," Ballmer wrote.
"IBM's endorsement of Linux has added credibility and an illusion of support and accountability," Ballmer continued, "although the reality is there is no 'center of gravity,' or central body, investing in the health and growth of noncommercial software or innovating in critical areas like engineering, manageability, compatibility and security."
Microsoft has become an increasingly harsh critic of. Last month, and a patent related to the Unix operating system. Many software industry analysts saw the deal as lending credence to SCO's charges that large parts of Unix source code have been copied into Linux.
Ballmer sent the memo to Microsoft's employees following an annual retreat he'd spent with other top managers. A refocused mission statement, involving a shift from just software to software and related services, evolved from. A top priority of this year's memo was to come up with further steps toward putting the mission statement into action, Ballmer wrote.
Wednesday's memo clearly identified Linux and open source as a growing threat to the company. Last year's missive barely mentioned Linux and open source as a challenge.
"There is always enthusiasm in our business for new concepts," he wrote. "So-called 'free software' is the latest new thing. We will rise to this challenge, and we will compete in a fair and responsible manner that puts our customers first. We will show that our approach offers better value, better security and better opportunity."
"While the noncommercial model may lead to many flavors of software, getting broad, consistent innovation requires coordination across many technology components. In the event of needed enhancements or fixes, the Linux development community, no matter how well intentioned, simply cannot advance Linux the way we can--and must--innovate in Windows," Ballmer wrote.
Ballmer also disputed suggestions that software and other aspects of information technology are reaching commodity status. "There is an interesting debate emerging in the industry today about the value of information technology," he wrote. "Some pundits are suggesting that IT no longer matters; that what was once a transforming technology has reached the end of the road in terms of innovation, that it ceases to be a source of business advantage once everyone has it, and that customers should just optimize for costs and outsource IT for efficiencies.
"Information is the lifeblood of business," Ballmer countered, "and software is what gives people and businesses the ability to harness it. Software is what enables us to collect, manipulate, access, store, share, analyze and act on information. It enables companies to constantly hone their competitive edge. So, contrary to the idea that we're entering a 'post-technological era,' I believe that taking software to the next level will be one of the biggest sources of value creation for customers, and that Microsoft is well-positioned to enable this and to benefit from it."
Ballmer preached the value of integration, ensuring that Microsoft products as seemingly disparate as server applications and mobile phone software work together.
"Some other vendors sell against integration," he wrote. "We see and deliver unique customer value because of integration."
Ballmer said Microsoft needs to focus on "strengthening the customer value in our end-to-end technology platform--client and server operating systems, client and server applications, and programming tools--which all integrate seamlessly and scale from the enterprise to the desktop to wireless mobile devices. These systems are better for users, developers and IT people because of the common architecture for development tools, management, application schema, interoperability, identity, data, etc."
Ballmer also touted, the much-anticipated successor to Windows XP that will dramatically change file management and other basic aspects of PC operation.
"Longhorn is our big bet on galvanizing the next big breakthrough--even bigger, perhaps, than the first generation Windows release," he wrote. "Virtually everything we're doing from a product standpoint will accrue to the Longhorn wave. In addition to the Longhorn client, there will be a Longhorn version of Office, Longhorn server enhancements, Longhorn development tools, and a Longhorn version of MSN."
Microsoft has not yet announced a definite schedule for delivering Longhorn, and Ballmer vowed that "we will do the work and take the time required to get it right, because it truly is the next quantum leap in computing, which will put us years ahead of any other product on the market."
Ballmer also acknowledged several recent Microsoft stumbles, including clumsy implementation of afor business customers. He said the licensing flap shows Microsoft needs to improve its communication with customers.
"We also must improve business consistency," he said "Customers love predictability, and rightly so. Licensing 6.0 was our hard-learned lesson about this."
Recent hacker attacks show Microsoft also has plenty of work left to do in security, Ballmer wrote. "Our Trustworthy Computing initiative is hitting its stride, and we have formed a group focused on adding core security technologies to all our products," he wrote. "Our customers are still hit with, and we have spent a lot of time what we need to do better. We are improving our approach to fixes, and our new integrated software update and distribution services will provide more businesses with the tools they need to deploy updates easily."
Ballmer also hinted at a more open approach to the way Microsoft deals with prerelease software. "We should look at communicating about new product design to customers earlier through online design discussion," he wrote. "For some products it makes sense to publish regular builds of new products online, for community feedback."
In an interview on Wednesday, Ballmer acknowledged that Microsoft may be borrowing some ideas from the open-source community on how to disseminate information to developers.
"We will learn good ideas from wherever they come," he said. "And if that (publishing of software for community feedback) sounds a little more like the way the noncommercial software community works, if we see good ideas there that we think we can adapt and still deliver the kind of value to our customers that we believe commercial software companies should deliver, then we will use good ideas."
News.com's Mike Ricciuti contributed to this report.