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It was clear how seriously Microsoft was taking the risk of customer defection when CEO Steve Ballmer cut short his Spring skiing holiday in Switzerland and diverted the corporate jet to Munich, the 'IT capital' of Germany.

Called in by the head of Microsoft Germany, Jurgen Gallmann, Ballmer was there to mount an eleventh hour defence against the imminent loss of a flagship account. His job was to use a combination of charm, munificence and corporate muscle to dissuade Munich's mayor and 80 councillors from switching the city council's 14,000 desktop PCs from Windows to the free, open source operating system, Linux - a move that Ballmer knew could trigger a flood of future major account defections.

And what he was offering was certainly generous: the Windows XP desktop operating system and Office XP applications software for 14,000 PCs, supplemented with copies of the VirtualPC terminal emulation software (for legacy application access) and licensing and support terms extended well beyond the norm, all for the bargain price of EU27.3 million, according to reports.

What is more, if the authority found out later that it needed more licences than originally budgeted for in the deal, then any further charges would be waived, leaving it free to roll out as many copies as needed.

Never before had Microsoft offered such generous terms. Not only did it represent a discount of some 90% on what Microsoft would normally charge, but it came in EU2.9 million less than the alternative on the table from Nuremberg-headquarter open source software supplier SuSE and systems giant IBM, whose bid centred around SuSE Linux 8.2 and OpenOffice/StarOffice applications.

Nevertheless, worried about follow on costs, the mayor - and city councillors - were unmoved by Microsoft's high-level lobbying, formally announcing in late May that the City would phase out its use of Windows NT and other Microsoft desktop products and migrate all users to Linux - the biggest ever snub the software giant has had to stomach.

It was hardly a snap decision. The Bavarian local authority had been examining alternatives to Microsoft on the desktop since November 2001 - around the time Microsoft announced details of its new 'Software Assurance' licensing prices and structures.

"The reason [we looked at] alternatives to Microsoft was the supposition that a Microsoft solution, on the basis of its monopoly status, would mean an increase in future costs," said Markus Viellvoye, a communications manager with the city council.

The findings of a study commissioned from a local consultancy were delivered in December 2002 and recommended the wholesale switch to Linux. "Although the Microsoft solution was technically and economically just as easy to implement due to legacy systems already in place... the Linux/open source solution offered a strategically more qualitative result and return on investment," says Viellvoye.

The city council's selection process was lent weight by several events in 2002.

First, in June of that year, the Federal Ministry of the Interior struck a deal with IBM under which public sector organisations in Germany could source low-cost, Linux-based computers. Then came the decision by the northern state of Lower Saxony to move 11,000 police computers from Microsoft Windows to Linux starting next year.

There were partial defections elsewhere. Although Microsoft had thwarted a proposal to migrate the 5,000 PCs used by the German federal parliament, the Bundestag, to Linux, legislators did decide their 180 servers would be Linux-based.

Such central government endorsement and momentum meant that the City of Munich would not be going out on a limb.

An equally strong influence was Microsoft's heavy-handed imposition of Software Assurance. When it was introduced on 1 August 2002, some analysts warned customers that it would increase the average organisation's Microsoft licensing bill by up to 45%.

At that point, migrating to desktop Linux presented significant technical issues for major organisations, with individual installations requiring command-line tinkering to ensure that they ran reliably. But Linux software suppliers - principally MandrakeSoft, Red Hat and SuSE - have undertaken a considerable amount of work in the last year to ensure that their distributions of the operating system run reliably out-of-the-box.

Furthermore, both SuSE and Red Hat have introduced desktop distributions of their products that are designed specifically for enterprise use and can be tied into central management tools.

The fall out from the City of Munich decision has barely started. Plenty of CIOs will now be looking on with interest as the Linux roll-out begins in February 2004 - and re-assessing their options as a result. Meanwhile, they will also no doubt be poring over the details of the deal that Ballmer was happy to offer Munich and pondering what new leverage Linux gives them when negotiating with Microsoft.