Microsoft Corp, the world's biggest software maker, lost a contract to sell its Windows operating-system programs for 14,000 Munich government computers because the city is switching to rival Linux.
The conversion will begin next year, the city said in an e-mailed statement. The city didn't announce what company will be hired to make the change. Linux is freely distributed software, so developers can see and change the code and distribute the results.
Microsoft has identified Linux as one of the biggest threats to its sales. Chief Executive Steve Ballmer had lobbied German officials, including those in Munich, to use the company's programs. More than two dozen nations are considering proposals to promote or require the use of Linux in government offices.
The city's decision "sets a signal for more competition in the software market" and makes sure Munich doesn't have to rely on just one vendor, Mayor Christian Ude said in the statement.
International Business Machines Corp will work with German Linux-software maker SuSE AG to bid on the Munich contract, said Jim Stallings, IBM's general manager for Linux, in a statement.
Shares of Redmond, Washington-based Microsoft fell US$0.38 to US$24.41 at 4pm New York time in NASDAQ Stock Market trading.
The switch by Munich, Germany's third-largest city, may help determine software purchases by other regional governments.
Germany's Interior Ministry has agreements with Microsoft and IBM.
Agencies can decide which contract to use or to buy products from another company.
Last year, the German Interior Ministry signed an agreement with IBM that guarantees discounts on IBM's Linux-based computers for federal, state and local government agencies. Germany last month renegotiated a contract with Microsoft, securing lower prices without committing to exclusively buy its products.
"The agreements give all agencies the chance to implement Microsoft products at favorable prices without the requirement to exclusively use Microsoft products," said German Interior Minister Otto Schily in a statement last month.
Microsoft is still hoping to sell software to Munich. The company "will continue to work closely with [Munich] to explore additional programs and offerings that best meet the needs of Munich's citizens and businesses," spokesman Hans Juergen Croissant in a statement.
Microsoft provides lower-cost or free software to governments and schools that can't afford it through an initiative that began last year. The program also helps compete with Linux, which is distributed for free over the Internet or at low cost by companies such as Red Hat Inc and IBM, Microsoft said.
Windows runs more than 90 percent of personal computers. In the market for running server computers, Linux is forecast to grow faster than Windows.
The German city of Schwaebisch Hall, in the state of Baden-Wuerttemberg, also is replacing Microsoft programs with Linux.
Separately, the company said it won a contract with the city government of Frankfurt to use Microsoft's programs. Microsoft offered the city "inexpensive and flexible terms," including allowing municipal offices to pay for software in installments, said Microsoft spokeswoman Alex Mercer. Terms weren't disclosed.