I think MS is obsessed with Linux for a couple of reasons.
In one sense, it is probably the first real competition that they have faced, certainly since Win95. As you say, not so much on the desktop, but especially in server space and in the realm of embedded devices, where the much more favorable licensing terms and greater flexibility works very much in the favor of Linux.
In another, I think that that as Linux becomes more mature and usable on the desktop, it highlights the idea that the underlying operating system is becoming less important, as a specific individual piece, than it has been in the past. Although Windows, as an OS, is unlikely to actually go away, it will likely diminish somewhat as a primary product necessity. This will push the focus for the business on other products and venues. Even the flagship product of Office will start to feel this pressure, since unless you are one of the few who use a large percentage of the features, the need to upgrade to later versions of Office isn't necessarily a strong one.
This falls into the idea of the operating system as a commodity, with some small possibility that at some point in the future, the OS will be treated just like RAM or hard drives, etc., in that you get whatever brand you like or that does what you specifically want.
Additionally, Linux threatens MS in another way, apart from it's usability (or lack thereof, depending on your position), and that is in the context of escaping vendor lock in. When I worked as a digital engineer, one of the primary rules that we had (and one that took the most justification for exception) was the requirement for having at least two vendors for every part or subsystem that we used. The benefits of such a rule are obvious, you aren't subject to the risk that your product can be controlled (directly or indirectly) by an outside party.
It's kind of funny that you should mention that MS has essentially closed the door to third party extensions, since that's pretty much what Stardock is about. Although it seems unlikely, it is possible, however remotely, that a change in the OS or a new feature in the next version of windows could have a severe impact on Stardock.
And it's clear that Microsoft doesn't really like the idea that they can't have that lock-in. When Japan, China, and South Korea announced an initiative to fund and create their own operating system (probably based on Linux), Microsoft cried foul. Their argument that the governments shouldn't involve themselves in the choice at that level rings false, since they would certainly have no problem at all if the initiative were to fund more purchases of Windows.
Don't get me wrong, I'm no enemy of Microsoft, although I do think that they have played fast and loose with some of their practices. I use XP and Linux side by side (I develop on both platforms). However, I can speak quite adequately about the upgrade cycle (or more accurately, the lack of a compelling need to upgrade), as the ONLY reason I upgraded to XP was in order to take full advantage of Stardock products, most notably Windowblinds and WindowFX. Apart from those applications, there is nothing I do on Windows that I couldn't (and didn't) do on 2000. As for Office, I use office 2000 and it is highly unlikely that I will upgrade to any newer version, simply because I have yet to see a feature or capability that compels me to do so.
Also, on a practical note, Linux is at the point where I could use it exclusively for everything that I do (apart from my windows development). For me, it is ready for the desktop. The office suites available work perfectly with the types of documents that I have to deal with, the customizability is substantially better than Windows alone, and in many cases, can compete reasonably well with Windows + Stardock (however, the skin artists for windows are generally much better than the ones that focus on linux, with a few notable exceptions).
One good thing that has come out of Microsoft's attention to Linux has been that the competition has arguably compelled MS to further improve windows, especially where security is concerned.
