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Microsoft loses Munich contract to Linux

By Philipp Encz and Dina Bass
Bloomberg News

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The City Council voted yesterday in a closed-door meeting 50-29 in favor of a detailed plan to switch to Linux from Microsoft's Windows, according to the ruling Social Democratic Party.

Munich will accept bids within a few months. International Business Machines and Novell will probably fight for the orders.

The switch will be the biggest PC defection to Linux ever, hurting Microsoft's efforts to keep Linux from gaining large PC customers, said Brendan Barnicle, an analyst at Pacific Crest Securities in Portland.

Windows software runs 95 percent of the world's personal computers. Linux accounts for less than 3 percent of PC operating-system shipments. That's expected to grow to 6 percent by 2007, market-research firm IDC says.

"This is a minor success for the companies that would like to see Microsoft lose its dominance in operating systems and office software," said Larry Jones, who helps to manage $2.5 billion, including nearly 2 million Microsoft shares, for Durham, N.C.-based NCM Capital Management Group. "It does demonstrate that it can be done."

Munich, which has dubbed the project "LiMux," spent more than a year studying how to make the switch. During that period, IBM stationed as many as 10 engineers at a time in Munich for free to help plan the migration, city officials said. IBM has adopted a similar strategy in government accounts in the United Kingdom and Brazil to win Linux customers.

Pro bono work

Novell donated "a few hundred man hours" to help the city craft plans for the switch, said Ernst Wolowicz, head of the city's information-technology department. Novell bought Germany Linux operating-system company Suse Linux in January. "IBM and Novell worked pro bono, supporting us with the development of the detailed plan," Councilwoman Christine Strobl, vice chair of the city's Social Democrats said before the vote. "Now the bidding will start, and we'll determine which companies will be chosen."

Windows for PCs accounted for 32 percent of Microsoft's $32.2 billion in sales in 2003, and Chief Executive Steve Ballmer last year offered Munich a lower price to try and keep the city's business.

Linux is available free over the Internet. Companies such as IBM and Novell modify it for clients and sell the software and related services, generally at a lower price than Windows.
 
Microsoft officials couldn't immediately be reached for comment. Martin Taylor, who handles the company's efforts to compete with Linux, said last week that the Munich contract represented "one city in one country that is deciding, through the help of IBM, to deploy Linux for their own very specific reasons."

"Most people that actually do a technology and/or cost comparison continue to choose Microsoft," Taylor said last week, citing contract wins Microsoft has had in Frankfurt and with Munich's department of education.

Microsoft had lowered its bid for the Munich contract to $23.7 million from $36.6 million, USA Today reported last year. The company declined to comment on the value of the contract.

"Our decision can act as a signal to other communities," Strobl said. "The reaction of Microsoft in the past year and in the last months demonstrated that."

Anticipated costs

Munich expects the project to have a startup cost of about $42 million, Strobl said.

The free assistance from IBM and Novell may have masked the costs of making such a complicated switch, Jones said.

"I'm not sure if Munich had paid for all that pro bono work and baby-sitting of the transition whether there would have been cost savings," he said.

"As you get into the second and third year of a transition, you have to question how much free support you will get and you might regret the decision if you don't have the internal capacity to sustain a system that's outside the framework of what most of the whole world uses."

Under the proposal, the migration would start July 1, with work on the main software applications starting in October, the Social Democrats have said. Munich expects that its own programmers will be able to provide most of the software.