AT&T Tests Linux to Replace Microsoft's Windows on 70,000 PCs

A decision by AT&T to abandon Windows would be Microsoft's biggest loss to the 13-year-old Linux system. A surge in viruses and efforts to cut costs have driven customers to look for alternatives to Windows, which dominates the $10 billion market for PC operating systems.

``Just like every other chief information officer in the country, I have to worry about reliability, security, productivity and lowering my costs,'' Hossein Eslambolchi, AT&T's information chief, said in an interview. AT&T, the largest U.S. long-distance phone service provider, will make a decision by the end of 2005.

Microsoft, which is growing more slowly than Linux in the market for server computers, is now under pressure in personal computers, where it has a 95 percent share. Linux gained a foothold in Europe, where the city of Munich decided in June to switch 14,000 PCs. South Korea, China and Japan are jointly developing a Linux product as an alternative to Microsoft.

``It translates into pricing pressure'' on Microsoft, said Brendan Barnicle, an analyst at Pacific Crest Securities in Portland, Oregon, who rates Microsoft shares ``outperform'' and owns them. Microsoft gets about 80 percent profit on each Windows PC sale.

The pressure from Linux comes as Redmond, Washington-based Microsoft's sales growth declines to its lowest rate ever. The company in July predicted growth of as little as 4.3 percent this year, down from an average 38 percent a year in the 1990s. Windows contributed about one-third of Microsoft's $36.8 billion of sales in the year ended in June.

Shares of Microsoft dropped 3.3 percent the past year, partly on concern about slowing revenue growth. Microsoft spokesman Mark Martin declined to comment.

Virus Attacks

Bedminster, New Jersey-based AT&T, seeking to cut costs after 18 consecutive quarters of falling sales, has 20 to 30 researchers examining Linux, Eslambolchi said.

A surge in virus attacks on Windows spurred AT&T to consider using Linux, Eslambolchi said. AT&T could also save 50 percent to 60 percent on the cost of desktop software by using Linux, he said. He wouldn't be more specific.

``I still have concerns about security'' in Windows, Eslambolchi said. ``We have had more viruses attacking PCs in the last six months than in the previous 10 years.''

Security

Computer viruses and worms attacking Microsoft's Windows more than quadrupled in the first six months of 2004 compared with the same period a year earlier, according to Cupertino, California- based Symantec Corp., the largest maker of anti-virus software. There were 10,000 Windows computer viruses as of June 30, according to Symantec.

Linux is considered more secure than Windows and less vulnerable to viruses, Goldman, Sachs & Co. analyst Rick Sherlund, wrote in a note to investors yesterday.

Linux was created in 1991 by Finnish college student Linus Torvalds. The Linux code is available free on the Internet and can be downloaded and modified by users. It has been promoted by companies including International Business Machines Corp., Hewlett- Packard Co. and Red Hat Inc., which sell products and services for the Linux system.

Linux is expected to grow to 6 percent of PC operating system shipments in 2007 from less than 3 percent now, market research firm IDC says. About 23 percent of servers, which run corporate networks, used Linux last year, compared with 58 percent on Windows, according to preliminary numbers from IDC. The firm forecast Linux will grow faster than Windows through 2007.

``Investors should anticipate some marketing success of Linux on the desktop,'' Sherlund wrote. ``Of potentially greater risk to Microsoft is the perception that Linux is more secure than Windows.''

May Not Switch

Like Eslambolchi, about 45 percent of chief information officers say their interest in Linux is increasing, a Merrill Lynch & Co. study shows. Cisco Systems Inc., based in San Jose, California, said in July that it too may offer Linux as an option to its 35,000 employees.

AT&T may stick with Windows if Microsoft can provide better security, Eslambolchi said.

``If Microsoft solves the security problem, and I think they will, I may not have to switch,'' he said.

AT&T's evaluation of Linux is part of an upgrade of desktop computers that is likely to happen in 2006 or 2007, Eslambolchi said. AT&T will either stick with a form of Windows XP, buy the next version of Windows, or switch to Linux, Eslambolchi said.

Eslambolchi, 47, is ranked by Baseline magazine as the highest- paid chief information officer in the U.S. He was paid $4.3 million and was awarded stock options worth $1.5 million last year, according to regulatory filings. Eslambolchi is also the president of AT&T Labs and president of AT&T Global Networking Services.

More Leverage

Some companies may express interest in Linux to gain leverage in contract negotiations with Microsoft, said Charles Di Bona, an analyst at Sanford C. Bernstein & Co. in New York.

``The talk about controlling which operating system you use is more posturing than anything else,'' said Di Bona, who rates Microsoft shares ``outperform'' and said he doesn't own any.

Any defections from Windows may be limited as companies find that switching to Linux has costs beyond the price of the software, Di Bona said. He said training and other costs associated with using Linux may make it too expensive to switch.

in http://quote.bloomberg.com/apps/news?pid=10000103&sid=aZ2JnBlm5tOs&refer=us