China's Linux market will be generating more than $51m annually by 2010, up from just $11.8m last year, researchers predict. Despite fierce court battles in the US between litigious software vendor SCO and major companies using Linux, banks and industry in China are rapidly replacing older SCO Unix installations with Linux, IDC found.

It is not yet clear whether Microsoft's increasing pressure on major Chinese PC makers to bundle legitimate versions of Windows with every unit sold domestically will encourage or discourage sales of cheaper Linux-only machines in China. A government regulation announced on March 30 rules that legally licensed operating system software must be be installed on all locally-made PCs. The government did not specify any particular software, however.

Foreign firms are found to be increasing their presence in the China's Linux market, with particular success in the server market. A key growth driver last year was government procurement, much of which is not open to foreign Linux vendors, the US based research firm said. While steady growth will continue, IDC expects to see fewer government orders this year.

"China's Linux market featured unprecedented competition in 2005, which will continue well into 2006," said IDC analyst Nielse Jiang in a statement.

"As a direct result of such intense competition, price wars will be inevitable in 2006. Most of the public tenders closed with relatively low prices in 2005. Keen price competition continues to serve as a major barrier to the China Linux market."

Local and foreign Linux firms are already forming alliances as competition intensifies into an all out price war. Last, year, China Standard Software and US firm Novell established a strategic partnership, and Japan-based Turbolinux allied itself with local vendor, Co-Create. IDC foresees more such alliances this year, especially as the fall off in government procurement will increase pressure on local Linux companies.

At the same time, Linux firms in China are encouraging customers to look beyond simple cost savings, IDC reports. For example, last year, local vendors began to bundle multimedia and online education software with Linux desktops and to work with partners to develop e-commerce systems.

"Given the sizeable Linux Desktop government contracts, the market bodes well with the proliferation of new solutions that will pave the way for expansion into online transactions, office automation and home PC environments," said IDC's Jiang.

In related news, SCO announced today that it would make OpenServer 6, the latest version of its Unix operating system available in China.

"SCO is an important technology provider for China because the company provides the technology infrastructure for running many of China's largest banks and other institutions," said Tim Negris, executive vice president for worldwide sales and marketing, The SCO Group, Inc.