Web server prices are tumbling as software companies battle for business from small and medium sized enterprises (SMEs).

In response to growing pressure from Linux vendors, Microsoft is setting a low price for its Web Edition of Windows Server 2003, which ships next month.

Designed to be used as a single-purpose web server, the software is aimed at midsized companies that do not need powerful management features.

Although UK prices have not been released, the costs will be on a par with those in the US, where Microsoft plans to charge $399 for the Web Edition server, which is aimed squarely at undercutting Linux vendors.

The Standard Edition of Windows Server 2003 will be $999.

Linux vendor Red Hat has also introduced a new Linux server package, basic ES, which will sell for $349 annually compared to $799 for the standard edition.

UK prices have yet to be set, but Red Hat said they will be comparable with US prices.

Mark Tennant, Windows Server product marketing manager at Microsoft, explained that Windows 2003 Web Edition is based on customer requirements for a single-purpose web server. But he admitted that the company is "looking for opportunities in the market".

"Linux is one of the players in that space and it's a market we would like to play in. Now there is more choice for customers," he said.

A Red Hat spokesman explained that basic ES is not a response to Microsoft. "We are moving further and further into the enterprise, and the different pricing levels reflect the different levels of support needed within the enterprise," he said.

"The basic ES product is aimed at SMEs to fulfil requirements such as file and print."

But Tony Lock, senior analyst at Bloor Research, suggested that Microsoft's new product puts it head-to-head with Linux.

"It is clearly pitched at limiting the functionality of the operating system so that it can only deliver capability requirements for web offerings and compete with Linux at the server level," he stated.

But Lock warned users not to be seduced by low prices. "All businesses should be looking beyond a marketing price war and at the total cost of ownership, training, availability and how new technology will affect their business," he said.

Peter Scargill, national IT chairman at the Federation of Small Businesses (FSB), agreed that price is not the only issue.

"It is about a lot of other issues such as support and applications," he warned. "You can't just pick up the phone for Linux support. It's fine if you've got days to look up what you need on user groups."

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