Microsoft sees open source software as a more pervasive threat to its business than ever, threatening the company's market share and potentially forcing price cuts, according to a filing with the Securities and Exchange Commission (SEC).

The 10-k filing, submitted at the beginning of this month, cites open source as a threat to Microsoft's businesses in servers, clients, productivity software and even handheld computers, as well as posing a challenge to the company's general business model. While Microsoft has long warned shareholders of the dangers posed to it by open source - as it is required to do by law - the latest filing presents the threat as more comprehensive and immediate than in the past.

"To the extent open source software gains increasing market acceptance, sales of our products may decline, we may have to reduce the prices we charge for our products, and revenue and operating margins may consequently decline," company officials stated in the document.

A major concern is the growing acceptance of Linux on the server and desktop, Microsoft said. On the server side, "Linux distributions rose slightly faster on an absolute basis" than Microsoft's own fiscal 2004 growth in server shipments, reflecting several major deals that went in Linux's favour, the company said. Allied Irish Bank, the Bergen city council and the French Ministry of Equipment have all announced significant Linux deals in recent months, while Munich city council is pushing ahead with a large deployment of Linux desktops despite concerns over the future effect of software patents.

Microsoft said the large number of applications now compatible with Linux have made the platform more appealing on the server side, and acknowledged IBM's influence in pushing Linux. "IBM’s endorsement of Linux has accelerated its acceptance as an alternative to both traditional Unix and Windows server operating systems," Microsoft said.

Linux and Unix variants topped the list of competitive threats on the client side, with Linux gaining ground as a cheaper alternative to Windows, Microsoft said: "The Linux operating system... has gained increasing acceptance as competitive pressures lead personal computer OEMs to reduce costs." Linux could even be a challenge on embedded devices, with companies such as Sharp and Motorola using it for mobile phones and PDAs, Microsoft said. The company noted that OpenOffice.org, a free, open-source office suite based on Sun's StarOffice, "is gaining popularity in certain market segments".

As a business model, open source - which allows companies to share the research and development costs for software - poses a growing threat to Microsoft's commercial business model, the company said. It singled out as a particular threat "recent efforts by proponents of open source software to convince governments worldwide to mandate the use of open source software in their purchase and deployment of software products".

For its part, Microsoft has taken an active part in discouraging governments from using open source, with its own programme to reveal Windows source code to select customers, and its anti-Linux "Get the Facts" campaign. Microsoft also backs lobbying groups such as the Initiative for Software Choice, which argue that governments shouldn't show preference for open source.