Microsoft Crowds New Space

Microsoft(MSFT Quote), which is steadily expanding its reach beyond Windows and Office, has become a leading player in the $5.7 billion market for business intelligence software.

A new survey by market researcher IDC shows that the software giant grew business intelligence, or BI, revenue by 25% to $353.1 million in 2005, which was faster than any of its major rivals -- and it now ranks fourth behind Business Objects(BOBJ Quote), ($795.3 million), privately held SAS Institute ($582.4 million) and Cognos(COGN Quote) ($567.2 million).

Significantly, Microsoft made most of its gains in market share before the release of its SQL Server 2005 update, which contained a number of important BI enhancements, and well before its 2006 acquisition of Proclarity, a technologically advanced BI provider.

Microsoft is already siphoning license revenue from the pure-play software makers, says IDC analyst Dan Vesset, the co-author of the study. Business Objects, for example, has seen its license revenue slip to $201 million in the first half of this year from $209 million a year earlier.

Cognos, which grew BI revenue by a very healthy 23.1% in 2004 couldn't sustain the momentum and grew by less than half as fast --10.9% -- in 2005.

This year, the market has punished the whole sector, knocking shares of Business Objects down by 40%; Hyperion Solutions(HYSL Quote) by 13% and Cognos by 10%. Microstrategy(MSTR Quote), meanwhile, is flat.

Business Objects didn't help itself by first issuing second-quarter earnings guidance of 30 cents to 33 cents a share, then lowering expectations to 25 cents to 28 cents a share in a July 6 pre-announcement, only to post actual earnings of 31 cents a share in late July.

Commented JMP Securities analyst Patrick Walravens in a note to clients: "We are also disappointed by what we view as the material inaccuracy of Business Objects' pre-announcement and believe it does not reflect well upon the state of Business Objects' internal performance management systems." JMP doesn't have an investment banking relationship with Business Objects.