Linux is like, for example, CRT technology. It's not a product; it is a technology which is in a part of products available from a number of sources. It is provided by a community of researchers, who work on the improvements they or their employers consider important.
Linux, itself, is not user-friendly; it is full of exposed wires and dials, like a CRT. Of course, you can get a case which has plugs in the back and knobs and buttons on the front: the system libraries and system utilities.
With these, you have a system which is about the equivalent of a monitor; it is reasonably friendly and easy to use, but it doesn't do anything in particular. Next you need stuff to attach to it: more libraries, standard programs, desktop environment, etc.
The user-friendliness work that's being done now is as related to Linux as VCR interface design is to CRT technology. MicroSoft essentially only sells the equivalent of TVs with integrated VCRs; Linux proper does, in fact, compete with Windows, but only with a relatively small part of it, and that is not the part that users interact with directly. And it is not, by itself, a product, so it is not marketted, nor is it (by itself) even useable by anyone but serious hobbyists. Of course, its features matter to the end user, much as the end user cares about picture quality and interference with a TV. It will not "go out of business" or "fail"; rather it may go unused for certain applications.
The real question people mean to ask is: will anyone even produce desktop software using Linux that will become widely-used? My guess is that, before MicroSoft's grip on computer users is loosened that much, the desktop metaphor will be dead. At some point, some other pattern of interaction will come into style, and MS will find that most of Windows and their other software is now outdated.