W2K Week: Gazing Into Microsoft's Cloudy Crystal Ball - TheStreet

You wouldn't know it from talking with

Microsoft

(MSFT) - Get Report

people, but this week isn't exactly the Second Coming. But around Redmond, Wash., it sure feels that way.

With a gestation period perhaps longer than that of any other commercial software product in history -- and with enough product names and code names along the way to confuse even flow-chart-happy techies -- Microsoft's new high-end operating system,

Windows 2000

(a.k.a. "W2K") will be rolled out with a tech-industry-style glitz-o-rama show in San Francisco Thursday.

Carlos Santana

headlines the Big Show, and another 100 "rollout events" around the world will help focus what Microsoft hopes will be unprecedented attention on its new baby.

Microsoft has done a brilliant job of preparing the way for Windows 2000's expected success. It is surely the most beta-tested product in computer-industry history. By flooding its corporate customers (and many outsiders, who actually

paid

for the highly questionable privilege of using buggy prerelease versions of W2K) with betas over the past couple of years, Microsoft achieved several important goals:

  • It built demand through the tease of offering beta testers the feeling of "insiderness" on the product.
  • It encouraged those beta testers to talk up the product among their peers and friends.
  • It got the product used in a great variety of settings, by many kinds of PC users, so bugs surfaced earlier than usual -- when they could, one hopes, still be fixed, prerelease.
  • It got generally good press for a product that in theory didn't even exist yet.
  • It discouraged, or at least stalled, its corporate Windows NT 4.0 customers from moving to Linux.
  • It avoided tempting the Justice Department bear out of his cave by not aggravating antitrust issues already in litigation.

I'd say the strategy has worked. Pent-up demand for the new features in Windows 2000 was already substantial; Microsoft has increased that demand through smart prerelease marketing.

I worry less, perhaps, than the strategists at Microsoft about the Linux threat, at least for now. While it is certainly true that Linux is already being used in a large majority of

Fortune 500

companies -- and in tens to maybe hundreds of thousands of middle-market companies -- that's a long way from saying Linux has become, or is likely to become in the near future, the company-wide operating system in those shops.

While Linux promoters see its open-source movement roots, its ease of modification and a purchase price of zero as the big advantages of Linux, in Corporate America, those advantages are trivial. Businesses feel

better

, not worse, paying for their software, because that delivers a presumption of seriousness of purpose -- and the reasonable expectation of good postsale tech support. And businesses are not nearly so eager to modify an operating system as are Linux programmers.

I think the biggest advantage of Linux by far is its stability. I have a Windows NT 4.0 machine in my shop that's been running without being rebooted for stability purposes for almost two months, which I consider quite an accomplishment. But I have a Linux machine that hasn't been rebooted for 15 months, period.

Windows 2000? Well, a machine here that's been running a beta of Windows 2000 Server for about three months has yet to be rebooted, which is impressive. (And that under-reports the stability of W2K, since the last time we took that box off-line and rebooted, it had nothing to do with stability, but with moving to a later beta release.)

Businesses want and genuinely need a truly stable operating system for their mission-critical applications, as well as a genuinely

scalable

one -- that is, an operating system that can accommodate whatever growth they throw at it without running out of steam.

Windows NT has not been a winner in either stability or scalability. Linux

is

a big winner in stability, but has not been sufficiently challenged on the scalability issue yet.

Microsoft's real job with Windows 2000 Server and Advanced Server is to prove to the business community and IT managers that it is far more stable and scalable than Windows NT has been. And in the process, to keep Linux in the "interesting, but... " penalty box, where it now resides, at least in most corporate settings.

I think Microsoft will succeed in those challenges, and I think it will be a big hit for the company. The build will be slower than Microsoft claims -- I think the company knows that very well, despite its bombastic, hit-it-out-of-the-park pronouncements -- and this will be a hugely profitable product for the company over time.

W2K will also provide a profitable and durable code base for other Microsoft adventures, into set-top boxes and more, in the years to come.

So how much of this is marketing frenzy, and how much drops to the bottom line?

Notwithstanding the slow build I see for W2K revenue, per

this morning's column, I expect to see Microsoft's earnings for the current quarter, ending March 31 and reporting April 20, push past 50 cents a share, or a dime better than most estimates. (I also expect, when those earnings are reported, to hear the usual Microsoft combination of cheerleading and naysaying from CFO John Connors, as he "guides" us to lower expectations than we might have for the next and final quarter in this fiscal year ... so Microsoft can once again top the estimates when it closes this fiscal year at the end of June.)

What about the effects, near- to mid-term, of W2K on Microsoft's stock price?

I think we'll see a small, predictable share-price bump as W2K comes out this week, and then gets good press over the next few weeks. Expect another bump in anticipation of and following that positive, consensus-beating earnings report coming out in April.

Absent the Justice Department situation, I think we'd see an easy doubling of Microsoft's stock price over the rest of the year, with the usual stock split in Microsoft's announcement of its year-end results July 19. (That would be 15 months after Microsoft's last 2-for-1 split, March 29, 1999, or right about on schedule.)

But we

can't

discount the effects of the DOJ antitrust litigation.

If Microsoft reaches a settlement that is widely perceived as a generally good (read: largely meaningless) one for the company and buries this antitrust action, we could see the stock shoot up 50 points in a day, 100 points over the first week after the announcement. I think Microsoft is substantially undervalued, wobbling around 100; it really does have enough stored-up energy for that kind of wild breakout.

But a Draconian DOJ win, such as splitting up the company, could depress the stock for months to come, regardless of Windows 2000's contribution to earnings. The company would stay in court, appealing a bad trial result, for months; the stock would stay in jail, too.

Since as I have so often written here, I believe Microsoft will find a way to settle itself out of this mess, I look favorably on the company's prospects on Wall Street over the next year. But the external factors here are just too great;

Microsoft's fate is no longer in its own hands.

And that makes the stock a speculative play, as far as I'm concerned.

Historically, it's always been wrong to sell Microsoft or to underestimate its ability to grow, whatever the market conditions. That's probably still true today. Windows 2000 adds even more power in the engine room for the kind of robust growth we've been used to with 'Soft.

If Microsoft finds a way to settle itself out of the mess in Washington, then stand back, Nellie: This could be an explosive year for the company so many love to hate. If not ... well, W2K is a nice product, anyway.

Coming next: W2K's effect on PC and server makers.

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 any securities mentioned in this column, although holdings can change at any time. Seymour does not write about companies that are current or recent consulting clients of Seymour Group. While Seymour cannot provide investment advice or recommendations, he invites your feedback at

jseymour@thestreet.com.

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