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By Ian Fried, 5 February 2003 10:42

NEWS Microsoft is warning that the success of the open source movement could hurt its sales, potentially forcing the software giant to cut prices and sacrifice both revenue and profits. "To the extent the open source model gains increasing market acceptance, sales of the company's products may decline, the company may have to reduce the prices it charges for its products, and revenues and operating margins may consequently decline," Microsoft said in a filing last week with the US Securities and Exchange Commission. In the filing, the giant paints a picture of two contrasting business models - its commercial software development model, in which a single company bears the costs of developing software and reaps the financial benefits of the work, and the open source model, in which, says Microsoft, "software is produced by global 'communities' of programmers, and the resulting software and the intellectual property contained therein is licensed to end users at little or no cost". A Microsoft representative was not immediately available for comment. Companies often include cautionary language in their regulatory filings about potential risk factors. Other threats listed by Microsoft include potential litigation, the fact that many of the company's newer products are unprofitable, and 'General Economic and Geo-Political Risks'. However, Microsoft has long criticised the economic underpinnings of the open source movement. In the regulatory filing, Microsoft specifically calls out the threat that some government agencies may switch to open source software. South Africa is promoting the concept, and Germany is paying companies to build equivalents to Microsoft's Outlook email software and Exchange communications software. The pressure from the open source movement is not just financial, as the availability of open source software puts pressure on Microsoft to open up the code that underlies its own products. The company has already agreed to open its usually secret source code to the UK, Chinese and Russian government. CNET News.com's Stephen Shankland contributed to this report.