Microsoft CEO Steve Ballmer didn't mince his words when he Wednesday wrote in a memo to all Microsoft employees that noncommercial open source software, particularly the Linux operating system, was a "competitive challenge."

With companies keeping a tight lid on IT spending during these tough economic times, "free" software, he wrote, is an "interesting alternative" to commercial software. Complicating the situation, he continued, are companies, like IBM, whose support of Linux "has added credibility and an illusion of support and accountability."

The memo came on the heels of an annual retreat that Ballmer spent with other top Microsoft executives. While the document covered a bunch of issues, ranging from innovation and product development to people and productivity, it clearly identified Linux and open source as a growing threat to the company, requiring action at the highest level.

Interestingly, Ballmer's remarks on Linux followed some recent open source developments in Germany, one of Microsoft's key international markets but also one with a rapidly growing Linux fan club.

Last month, for instance, the Munich city government, after several months of intensive research and debate, decided to migrate its entire computer network to Linux, dropping Microsoft's Windows system in the process. Munich, Germany's third largest city, will equip all of the 14,000 computers in its public administration with Linux and other open source office applications, in a move that could encourage other big German cities to follow suit.

Munich chose Linux despite new favorable licensing conditions offered by Ballmer, who took time out of his busy schedule in April to visit government officials in Germany.

Microsoft has been scrambling to find ways to retain huge public sector software contracts in Germany ever since the government, in an effort to lower costs and increase security, agreed last year to a partnership with IBM for the delivery of computers with the open-source Linux operating system to the public sector.

True, Germany may be one tiny dot on Microsoft's global radar, but its growing support of Linux is sending a powerful signal to other governments, organizations and enterprises considering open source as an alternative.

The IDG News Service is a Network World affiliate.