More companies are using the threat of Linux when negotiating deals with Microsoft, one of the company’s senior executives has admitted.

A year after a letter from Microsoft CEO Steve Balmer to his employees acknowledged the Linux threat looming on the horizon, Microsoft remains adamant that open-source software isn’t a serious competitor on the desktop today. However, it may well be forcing Microsoft’s prices down.

“It’s definitely more of a threat than it was,” said Nick Barley, director of marketing at Microsoft, when asked whether more businesses are telling Microsoft that they’re planning to migrate to Linux rather than to one of its own operating systems or applications in the hope of getting a better deal.

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Barley wouldn’t say how successful this tactic has been.

“It shouldn’t be successful if we have built appropriate value-based relationships with our customers, so that they appreciate the extra value that we offer,” Barley said, speaking at a Microsoft event in London. The ’20:20 Seminar Series: Microsoft Windows and Linux’ event was billed as an “open and honest technology discussion” and included speeches from Microsoft executives and independent parties.

According to Philip Dawson, senior program director at Meta Group, Linux poses just as significant a threat to Unix vendors as it does to Microsoft. He pointed out that it’s simply good business sense in negotiations with a potential supplier to make clear that you’re seriously considering using their rivals instead, even if you’re not.

“It’s true to say that Linux is a tool for trying to beat Microsoft up,” Dawson said.

Microsoft used Thursday’s event to try to dispel “the myths” surrounding Linux. A key plank in its argument is that open-source software isn’t cheaper in the long run because companies need to spend more on retraining IT staff who may be experienced in Windows software but not in the open-source arena.

“We asked an audience of 250 or 300 businesspeople today if they thought that Linux was a free option, and no hands went up,” said Nicholas McGrath, head of platform strategy at Microsoft.

McGrath also cited a series of recent customer wins, including the London borough of Newham’s decision to go with Microsoft rather than open-source options. McGrath claimed that Newham can look forward to potentially twice the productivity-associated cost savings than if they had gone down the open-source road.

Those familiar with the Newham case, though, say it is actually a prime example of Microsoft cutting its prices when facing the threat of Linux.

Last year, a consultancy firm called netproject presented Newham with an open-source alternative to using Microsoft, and it is thought that this forced Microsoft to put a much more attractive offer on the table.

Speaking in January after Newham had made its decision, netproject’s director, Eddie Bleasdale, said that “whenever netproject demonstrates an open-source solution to a Microsoft customer, they suddenly find Microsoft’s approach much more amenable.”

“Microsoft’s reaction to Newham’s decision to use netproject’s Secure Open Desktop Architecture proves that it is a credible and viable alternative,” Bleasdale added.

Netproject is now running an ‘incubator club’ for companies that want to learn about the potential benefits of open source.

McGrath declined to disclose further details about Microsoft’s deal with Newham, but said more information would soon be released.

Paul Hartigan, chief executive of PharmiWeb Solutions–who attended the event as an example of a satisfied Microsoft customer–said he would welcome more visibility regarding Microsoft’s pricing structure.

PharmiWeb recently chose to use Visual Studio .Net rather than J2EE or Eclipse, the Linux-based open-source tool, as the development environment for a portal it has built for the health-care sector. Hartigan said the top reason for making this decision was that Microsoft was a “one stop shop” for PharmiWeb’s various needs.