Microsoft for the first time has named Linux distributors Red Hat and Canonical as competitors to its Windows client business in its annual filing to the U.S. Securities and Exchange Commission.

The move is an acknowledgment of the first viable competition from Linux to Microsoft's Windows client business, due mainly to the use of Linux on netbooks, which are rising in prominence as alternatives to full-sized notebooks.

"Netbooks opened Microsoft to the possibility that some other OS could get its grip on the desktop, however briefly," said Rob Helm, director of research for Directions on Microsoft. "Now it's alert to that possibility going forward."

In its annual Form 10-K report for the fiscal year ended June 30, Microsoft cited Red Hat and Canonical -- the latter of which maintains the Ubuntu Linux distribution -- as competitors to its client business, which includes the desktop version of its Windows OS.

Previously, Microsoft had only noted competition from Red Hat to its Server and Tools business, which includes the Windows Server version of the OS for server hardware, in its 10-K reports.

"Client faces strong competition from well-established companies with differing approaches to the PC market," Microsoft said in the filing. "Competing commercial software products, including variants of Unix, are supplied by competitors such as Apple, Canonical, and Red Hat."

The filing goes on to note, in a thinly veiled reference to netbooks, that Linux has gained what Microsoft characterizes as "some acceptance" as an alternative client OS to Windows, in particular in "emerging markets" where "competitive pressures lead OEMs to reduce costs and new, lower-price PC form-factors gain adoption."

It also mentions the work of Microsoft's own OEM (original equipment manufacturer) partners Hewlett-Packard and Intel to support Linux on PCs.

Seattle-based blogger Todd Bishop called attention to Microsoft's acknowledged change to the competitive landscape in a blog post on the TechFlash Microsoft Blog. He also posted a link to Microsoft's 10-K filing.

While Linux on servers is a well-established market among business customers, Linux as a viable alternative to Windows on PCs has never taken off. However, the emergence of the netbook as a low-cost, smaller form factor to the traditional notebook PC has certainly changed that, so much so that Microsoft lately has been pushing a lightweight notebook as an alternative to netbooks, Helm said.

"Microsoft would like the netbook to go away and be replaced by lightweight laptops -- ones with long battery life that cost enough to justify running full Windows on them," he said.

Helm added that Microsoft is trying to discourage the production of inexpensive computers where Windows becomes the most expensive component because it can't make as much money on Windows on these devices, and they could drive down the price of Windows.

Microsoft's current Windows client OS, Windows Vista, had too large a hardware footprint and was too expensive for netbooks, giving Linux an opening in that market when it emerged late last year. However, Microsoft's eight-year-old Windows XP OS is still the dominant system for netbooks, and the release of Windows 7 in October will feature a Starter Edition that is especially geared toward that market as well.