Microsoft Aims to Unstick 'Laggard' Label

Indeed, research firm Gartner estimates that more than 60% of Microsoft's Windows customers worldwide are using a version older than XP, the latest release. Meanwhile, a Gartner survey last year of U.S. medium and large businesses found that 60% of 1.6 million users represented were still using Office 2000, one version behind Office XP.

"They're their own biggest competitor in terms of the products," Michael Silver, a VP in Gartner's client computing group, said of Microsoft.

But Charlie Di Bona, an analyst with Sanford C. Bernstein, disagrees about desktop software sales driving interim growth before Longhorn. He argued that Microsoft may even see its Windows and Office desktop business pull back in the next fiscal year as people await Longhorn's release. (He has an outperform rating on Microsoft and his firm doesn't do investment banking, but its parent, Alliance Capital, holds Microsoft shares.)

Rosoff and Di Bona agree, however, that Xbox video-game console sales could be a meaningful top-line contributor if Microsoft launches a new console next year, as widely rumored. Because Microsoft's Xbox was later out of the gate than rival Sony's (SNE Quote) PlayStation 2 console in 2001, many industry observers believe Microsoft may try to be first in the next round of console wars.

Microsoft's home and entertainment division revenue, primarily made up of Xbox sales, totaled $2.9 billion in fiscal '04, representing nearly 8% of total revenue. But Xbox sales have slowed because of price cuts, which are typical at this point in the video-game console cycle. And those price cuts put an additional squeeze on the bottom line, increasing Microsoft's operating loss in the home and entertainment division by 2% in fiscal 2004.

Bonavico believes that Xbox will become profitable within the next 12 months, although Microsoft CFO John Connors said in July that Microsoft's home and entertainment business could be profitable in fiscal '07, which begins in July 2006.