I'm a fan of
, both as a supplier of good to great software and as a powerhouse of an investment. Though many ABM (anyone but Microsoft) zealots in the PC business naysay its success, claiming it has succeeded purely on marketing, chutzpah and maybe worse, not on innovation -- and I'll start hearing from them minutes after this column appears -- I think a fair reading of the record suggests Microsoft has won on both counts: good to very good products and good to great marketing. No sin there.
Could some of those products have been better? Sure ... and they did get better, in each successive release. Could the marketing hype have been toned down some? Again, sure -- but marketing hyperbole is hardly unusual in the computer business, nor limited to Microsoft.
Finally, could some of Microsoft's incredible success have had something to do with its financial clout? Again, of course: a strong balance sheet -- and the willingness to use that balance sheet, as Microsoft has -- is always a huge advantage, in any industry.
But in the end it comes down to products. In every case, contemporary releases of Microsoft applications have been better than the competition. Word 9x has been consistently better than
WordPerfect for Windows, for example -- and I count Microsoft's big wins with those products as arising from product quality, not just cash and bash.
Next month, Microsoft will start shipping its next blockbuster application, Office 2000. And sometime later this year, probably, it's going to ship its next blockbuster operating system, Windows 2000 (nee Windows NT 5.0). I already know Office 2000 is an exceptional product -- I've been using it for some time -- and I'm inclined, from what I've seen of Windows 2000 betas, to think it's going to be solid, too.
But I don't think either is going to find the instant market success that Microsoft applications and operating system releases have traditionally enjoyed. And because the overwhelming majority of Microsoft's revenue and profits -- 80%-plus -- come from Office and the various versions of Windows, if I'm right, that's going to put a dent in that legendary Microsoft growth curve.
Every quarter for a long time now, Microsoft's CFO has told us the great new numbers -- almost always better than expected -- and then warned that this just can't continue.
Gregg Maffei said that again last month, after Microsoft reported third-quarter earnings of 35 cents a share, topping the
consensus estimate of 25 cents. And he repeated the now-standard Microsoft CFO mantra: This can't last. Maffei said sales will probably be up in Microsoft's next quarter, with the release of Office 2000, then probably sag, as Y2K-related delays in corporate spending and slipping Windows NT 4.0 sales begin to take their effect.
I think we should listen to Maffei this time, despite the familiar tune. Yes, in the past those quarterly warnings of more modest results ahead were largely spoken to manage our expectations, so the next quarter's operating results would look even better. Microsoft's hardly alone in managing analysts that way.
But this time, you should listen ... and, maybe, act.
Because I'm increasingly convinced that this time, a slowdown really is coming.
For many months now I've been talking to my corporate clients and contacts -- typically, the decision-makers, or at least those on the sign-off lists, on moving to new software releases -- about their Office 2000 plans. Virtually all have seen and at least played with it; many have been rolling out late betas in a modest way among their kitchen cabinets of ear-to-the-ground advisers. Almost to a person, they like it, and compliment Microsoft on the improvements over Office 97 -- especially the greater "Web-centricity" of Office 2000. The new product allows users to prepare and post to a corporate intranet their own material, for example, far more easily and accurately than earlier products have.
But literally to a person, they're not planning on upgrading their companies to Office 2000 anytime soon. This isn't just Y2K hesitation, and it's not because they're worried about the stability of the first release of Office 2000.
They say, time and again, "Nice stuff ... but we don't need it."
Because as they look around, they find that very few of the people they support really need or want what Office 2000 can do better. Office 97, now nearly ubiquitous, is a strong, comprehensive package ... of which perhaps only 20% is used by the typical American office worker. Sure, there are computer jocks who pivot their tables in Excel 97, prepare fancy animated presentations in PowerPoint 97, develop complicated templates and macros in Word 97, and so on.
But they're the determined few, not the revenue-producing many.
So the corporate computing managers I've been talking with say they'll probably buy some Office 2000 licenses for their high-profile early-adopters, and will allow others who specifically ask for Office 2000 to move to it. But they're not nearly ready to undertake the huge technical and training costs of updating something so fundamental as the basic productivity software in use in their companies ... let alone pay Microsoft for all those Office 2000 licenses they'd need in a companywide rollout.
I've told Microsoft people this, and I see, almost always, in their faces a shudder of recognition: They've heard this, too, from their customers. And they desperately want to break out of that "power user" ghetto Office 2000 seems headed for.
I don't think they will, at least for some time. Office 2000 will eventually become the new standard, displacing most copies of previous editions ... but over a much longer product-adoption cycle than most securities analysts and PC-heads think. You and I may love what Office 2000 can do -- and maybe we'll even use some of that gee-whiz stuff. And yes, there is a significant if not huge number of gotta-have-its around the country who always have to have the latest version of computer products.
But in the broader market, where Microsoft makes its money, Office 2000 sales are going to ramp up, I believe, much more slowly than Microsoft says they will. And Maffei's familiar prediction of flattening or even -- gasp!-- temporarily sagging revenue growth will come true.
I don't want to be anywhere around Microsoft's stock when that happens.
What about the contribution from Windows 2000 (NT 5.0)? Well, the release date for the final version of the most-delayed product in Microsoft's history is still uncertain; most observers now peg its arrival at October to November of this year. (Be wary of such forecasts, no matter the source: Microsoft has repeatedly changed its release dates on this product, and with limited corporate interest in deploying Windows 2000 while Y2K worries remain, Microsoft might well keep the product in house for another quarter or two, to fine-tune the code.)
Meanwhile, Windows 2000 has been fragmented into at least four separate products: Professional, for corporate desktop use, plus Server, Advanced Server and Data Server. All that division and redivision and reworking of the underlying NT 5.0 code base has made Windows 2000 stability a worry for some corporate managers.
But far more say that though they're interested in the possibility of moving their servers to Windows 2000, they aren't likely to act anytime soon. Too many choices; too much uncertainty; too much pain. Linux gets a lot of press and a fair amount of corporate attention, too -- though few corporate network managers are anywhere near ready to consider actually adopting Linux yet. The hemorrhaging of
Netware customers to NT has largely been stanched, thanks to strong leadership from Novell CEO Eric Schmidt and a rationalization of the Netware line. And while Windows NT 4.0customers have talked for years about their eagerness to move on to the next version, most have by now, with much work, much frustration and a series of minifix Service Packs from Microsoft, decided they can live with what they have.
In sum, I don't think we're going to see big early volume for Microsoft in Windows 2000 licenses, either. Not just not this year, but not next year, either. Again, this slow start for Windows 2000 won't be mainly because of Y2K issues, which will in a sense be a self-resolving issue, but because the pain and problems of a companywide operating system upgrade are so great that network managers think twice -- then again and again and again -- about putting themselves, their companies and their job security through that wringer.
As with Office 2000, Windows 2000 will unquestionably become an important corporate standard, and will eventually displace almost entirely Windows NT 4.0. Just not very quickly.
All that does not augur well for a continued climb in revenue at Mister Softee, nor for a steady rise in the share price. Certainly Microsoft has withstood very well the buffeting of the past three quarters in a Washington courtroom, but that court's final decision, and the odds the bookies will lay on the success or failure of Microsoft's appeal, will eventually take their toll on the share price, as well. Microsoft could do an
here, settling with the
, but there just doesn't seem any midground on which the two could agree; a settlement would be a very good thing but doesn't seem likely.
So, Microsoft bull though I've been, I think there are rough seas ahead for Big Redmond over the next few quarters. Microsoft will undoubtedly remain one of the great growth and profit engines of the U.S. economy, long term -- but if you're a Microsoft investor, it might be smart to think about taking a breather for a while ... while Microsoft profits do the same.
Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, neither Seymour nor Seymour Group held positions in the companies discussed in this column, although positions can change at any time. Seymour does not write about companies that are consulting clients of Seymour Group, or have been in recent years. While Seymour cannot provide investment advice or recommendations, he invites your feedback at