Microsoft Feels Like Lead

But the licensing shift is over. And with the next version of Office not likely to ship until Longhorn -- the successor to Windows XP -- comes to market in late 2006, there is no compelling reason for customers to upgrade.

"Microsoft is on to the upgrade game," says Nate Root, an analyst with Forrester Research. "They have to show buyers they've done more than move some buttons around on the toolbar."

This month's acquisition of Groove Networks, which makes software that allows workers to share documents and collaborate in meetings over the Internet, gives Microsoft sexy technology that can be added to Office and other Information Worker products. "We believe that Groove's products and technologies could be highly complementary to Microsoft's product offerings," says Goldman Sachs analyst Rick Sherlund.

Sherlund notes that Groove offers important security features, and says that Groove founder Ray Ozzie, who will become Microsoft's chief technical officer, is a visionary who may be able to influence his new employer's strategy and direction. Goldman Sachs has an investment-banking relationship with Microsoft.

Root is also enthusiastic about Groove's technology but warns that it will take some time for it to be integrated into next-generation products. "Remember, these programs have millions of lines of code. It will be a stretch to integrate it into Longhorn or Office 12," he says.

Similarly, the version of Longhorn scheduled for release next year is likely to be a significant improvement over Windows XP, but it will lack some of the snazziest features originally promised by Microsoft. "It will have nice-to-have features, but not must-haves," says Martin Reynolds, a vice president and research fellow at Gartner. Moreover, it will take businesses several years to get comfortable with the new operating system. The shift to XP, which has been on the market for almost four years, is not yet complete, he added.