Microsoft in essence is a software producer, and is very good at this, to a point that this is one of its main strengths, by this I mean they do not produce hardware, nor are they heavily involved in services. Sadly it is my believe that this may prove to be their Achilles heal.

Microsoft relies heavily on the sales of its two main stable mates, Windows and Office, this in itself is again a strength and a weakness, it does allow them to focus on providing a good operating platform suitable for most needs, from the home single user system to major business systems. Downside this means they are heavily reliant on sales of systems to new users and upgrades to existing users. In the home this is mainly for punters who purchase for three reasons, word processing, emailing and surfing the net. No problems here you might say, only there is a problem. This being cost, in many cases the purchase of a home computer has reached a point where in some cases the cost of the windows and office suite can be almost 50% of the cost of purchase. One could argue that if you want good software and support then you must pay for this, and I am a great believer that you pay for what you get, however with the costs of these two items fast approaching luxury costs for some people are looking elsewhere for solutions.

With business, well in many cases the needs are the same, except for the need for programs such as PowerPoint and Excel, possibly Access, although in most cases these people are more likely to be using much more powerful packages such as IBM DB2 or Oracle, which do not need windows, this is a problem for Microsoft.

So you say what's you point, my point is Linux offers the same solutions as Windows, and is produced by the open source community, which has its good points and bad points. The main downside in the past has been, lack of software available, lack of compatible drivers, file compatibility, no Object Desktop (the one short fall that really bugs me) no criticism of Stardock, just that I would like to be able to do with Linux what I can do with windows. Having said this Linux has entered the mainstream, with support or ownership from some of the big guns, IBM, SUN, Novell, Corel to name a few, which will inevitably mean that quality and support will and has improved. The other problem was using Linux from installing onwards was really for those who really understood UNIX/Linux. With the release of Lindows and Xandros as well as many others this problems no longer exists.

So you say what makes Linux such a threat to Microsoft, simple the cost is much lower for all users, and all other issues have been solved. Today you can download most Linux solutions for free, or if you want support and docs, a smaller fee. This December there will be another player enter the market, Sun Microsystems, with the release of Project Mad Hatter, as a business solution this is unmatched by MS, especially on the cost of licenses.
$100 per user with this you get Sun's “Java Desktop System” which at this stage will be released on SUSE Linux, Sun Star Office, Mozilla Web Browser, Evolution Email, sun's security systems and many other third party software solutions. If you do not need to run windows specific programs why would you bother with windows. This is a compelling argument for home users and business alike.

While the advent of Linux has spelled the end of market dominance of MS, I believe this is a long way off, however MS's total lack of support of this system does belie (at least to) common sense. What I mean by this is they do not seem to even want to produce any product for this platform, which leaves the playing field for Linux wide open, if in the future more and more users move to this system, it will means that this will leave sales of program suites like office out of the market for this chunk of sales thus eating into potential and existing clients.
I do believe that Linux is here to stay and is a viable and very good alternative to MS Windows, and in the future will take more and more market share from MS, telling clients that it in the long term is more costly and the like will not help MS in the future, should they bury Windows? No. however they do need too look at their strategy in dealing with this issue as unlike OS2 this one is not going to die, and is already getting support in a large way. Just look at China and Japan, both are jointly pouring billions into development of a Linux system which can take over in their countries as the preferred OS. In the case of china this must be a worry to MS as this is a very large emerging market. Having said all this I do not for one minute believe that MS got to where it is today by being shortsighted, and do believe that they have a plan B ready, lets hope so for their future.
Just one other point, Windows is a good system, no doubt about it, but very expensive, and this is what will loose them market share.