Linux and Microsoft

Microsoft sells Windows much higher than it needs to do breakeven (much higher than marginal cost). This means it loses sales in some low willingness-to-pay customers through piracy. People might pay $10 for an original MSFT CD, but not $hundreds. In the past, Microsoft winked at these pirates because at least they were standardizing on Windows, and may end up paying more in the future.

Poorer countries, such a Thailand, are often havens for this sort of software copying. In the past, Microsoft did not enforce its copyright there the way it does in the US. But now that sales are slowing and the world has standardized, they are trying to price discriminate between countries (and customers) -- charging a high price in the rich US and a low price in poor Thailand. That's the thinking behind $37 Windows/Office in Thailand.

Linux made all of this possible because customers could claim it was a viable alternative to Windows and so give Microsoft some real competition. I am guessing that, right now, Windows *thinks* OpenOffice/Linux is more of a threat than it really is (I'm not sure if push came to shove, the same people who were threatening to defect actually would) and so is perhaps a little too willing to drop their price. Whatever the degree of actual substituability between Windows and Linux, there is at least some now and there will be more in the future. Look for more scuffles like the current one between MSFT and the Israeli government in 2004.