While Windows Revenue Drops, Linux Nears the $1 Billion Mark

Revenue of the open-source OS expected to hit $1.2 billion in 2013

In a time when Microsoft is feeling the full impact of the global economic downturn, the open-source Linux operating system is flourishing. While Windows client revenue has let the Redmond company suffering in the 2009 fiscal year, producing three quarters inferior when compared to FY2008, Linux revenue continues to grow and is right on track of making the open-source OS a $1 billion a year business. Market analysis firm IDC estimates that between 2008 and 2013 Linux revenue will deliver a compound annual growth rate (CAGR) of no less than 16.9%.

"The economic downturn is impacting nearly every IT market segment and has placed its mark on the Linux server operating environment and client operating environment markets,” revealed Al Gillen, program vice president, System Software at IDC. “The long-term prognosis for Linux is good, but we see 2009 as a turning point for the nature of Linux adoption and deployment, as customers rationalize through the new economic realities and factor in other considerations such as the best way to use virtualization software. In the end, the markets of tomorrow are going to behave differently than the markets of the past."

IDC forecasts that Linux revenue will pass the $1 billion mark in 2012, and in just a single year it will grow by an additional $200 million, reaching $1.2 billion by 2013. Meanwhile, following years of growth, Windows revenue has been shrinking since the end of 2008. For the past three fiscal quarters ending with mid-2009, Windows client revenue has been considerably smaller compared to the same quarters of FY2008.

Q1 2009 is the only quarter of Microsoft’s past fiscal year when the Windows client division posted better results over 2008. In Q2 2009 Windows client revenue dropped from $4.3 billion in the same period in 2007 (Q1 2008 for Microsoft ended in December 2007) to just $3.9 billion. For the next three months, Windows revenue reached $3.4 billion, approximately $600 million less than the $4.0 billion in Q3 2008.

The difference in Windows client revenue between Q4 2009 and Q4 2008 is larger than the entire Linux revenue projected for 2012. Windows dropped from $4.3 billion to just $3.1 billion. According to IDC, Linux revenue jumped by no less than 23.4% between 2007 and 2008.

"The dynamics we are seeing here are fascinating. The convergence of the difficult economic conditions, the maturing of enterprise virtualization software, and the increasing use of replica copy deployments of Linux server operating systems is leading to a shift where the success of the market is increasingly defined by the installed base rather than by the number of brand new subscriptions or deployments being made," Gillen added.

Still, it’s not all good news for Linux. IDC notes that the Linux server operating system subscriptions will suffer a contraction in 2009. However, as the market analysis firm said, 2009 is a turning point for Linux adoption and deployments. Net new subscriptions of Linux server OS are expected to recover through 2013.

Customers will continually increase to take advantage of the inexistent price tag that is associated with Linux. IDC forecast that free Linux server operating system deployments will outpace new subscriptions in the next four years. Nonpaid Linux server deployments will jump to 43.3% from just 41.4% in 2007. "This phenomenon is not unique to Linux – as we see the same trend playing out with Windows server operating environments," Gillen noted. “We find that more customers are seeing nonpaid Linux as a viable solution for certain non-critical business needs, despite the lack of commercial applications and the potential support challenges that come with a non-commercially-supported distribution."

Red Hat and Novell dominate the Linux market, IDC revealed. The two Linux vendors account between them for over 90% of all Linux subscriptions sold in 2008. Also together, Novell and Red Hat enjoy over 94.5% of all revenue generated by Linux worldwide in 2008.

Unlike Windows client, the Server and Tools division at Microsoft has been growing for the most part of FY2009. It was only in the final quarter of FY2009 that revenue dropped compared to the same period of FY2008, from $3.7 billion to $3.5 billion. But the Microsoft Server and Tools business revenue increased between FY2008 and FY2009 from $13.1 billion to $14.1 billion.

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