Microsoft Feels Like Lead

Intel(INTC Quote) took center stage last week, issuing new sales targets that represent a bit of an improvement over earlier expectations. But the chipmaker's new forecast wasn't strong enough to convince some institutional investors that the tepid PC estimates are too conservative. "I don't see growth in the PC market of more than 10%," Bill Gorman, a vice president of PNC Advisors, said after Intel's midquarter update.

A number of analysts also say that Intel's forecast may be weaker than it appeared, since the current quarter has 14 weeks, one more than usual.

Microsoft founder Bill Gates often jokes that his company's biggest competition is Microsoft. He's right of course. Despite some inroads by Linux, Windows and Office are still in a league of their own.

The trouble is, it is taking more and more of an effort to push consumers and businesses into upgrading their hardware and software. Simply put, many people are happy enough with what they have, despite well-publicized security flaws and other problems with the company's software.

Consider Microsoft Office, the company's gigantic compilation of applications for the desktop, and Windows itself, Microsoft's flagship product. The Microsoft corporate divisions that sell them -- "Client," which handles Windows, and "Information Worker," which sells Office, accounted for 55% of the company's $10.8 billion in revenue in the December quarter. (Client revenue equaled $3.2 billion; Information Worker revenue was $2.8 billion.)

But after spectacular sales growth in early fiscal 2003, and two straight quarters of double-digit, year-over-year sales growth in 2004, Information Worker's sales slowed dramatically, and by the second quarter of fiscal 2005, they were down 3% from a year earlier.

The reason for the slowdown isn't difficult to discern. Microsoft dramatically changed the terms of its licensing agreements in 2002, prompting many businesses to switch to annuity-style agreements, which are recognized ratably over two years, instead of up front. In addition, the release of Microsoft Office 2003 gave sales the kind of bounce you'd expect when a major upgrade is released.