Updated from 5:01 p.m. EDT

Shares of Adobe Systems ( ADBE) sank Wednesday after Microsoft ( MSFT) unveiled a potential rival to Adobe's Acrobat product line. The jury is still out, however, on the magnitude and timing of the competitive threat.

On Wednesday, Microsoft CEO Steve Ballmer announced plans to deliver the newest addition to the Office family, called XDocs. But taking advantage of Extensible Markup Language, or XML, XDocs will enable office workers to create forms tapping different types of data from multiple sources and also send data from forms to different parts of a business.

The first version of XDocs is slated for release in mid-2003, about the same time the next version of Office will be launched.

The possibility of XDocs competing against Adobe's Acrobat products, including its portable document format (PDF) and ePaper initiatives, weighed on the Adobe stock. Shares of Adobe declined $1.27, or 6.4%, to $18.70 in heavy trading.

"If you think of PDF the way Adobe would like it to be thought of -- as a final form and also as an intermediate container -- XDocs could rip the lid off PDF as an intermediate container," said David Yockelson, executive vice president and director, electronic business strategies at Meta Group. "XDocs looks like a much more pliable and potentially more powerful way to aggregate pieces of data from places that happen to be spitting out pieces of XML."

However, Yockelson noted that PDF is "pretty XML-friendly," and Adobe is working at adding business integration features through an agreement with German software giant SAP ( SAP).

And Adobe is expected to launch a new version of Acrobat in the first half of next year. The company also has been getting more involved in forms management as part of a broader effort to infiltrate the enterprise, Goldman Sachs analyst Steven Kahl wrote in a note Wednesday. The eventual winner, Kahl said, will be whoever can best integrate forms and content creation with broader businesses processes.

Still, "the MSFT news indicates that this will be a highly competitive market in the future," added Kahl, who has a market perform rating on Adobe. Goldman Sachs expects to receive or intends to seek compensation for investment banking services with Adobe in the next three months.

Harry Vitelli, senior director of product management in Adobe's ePaper division, said Microsoft's move validates what Adobe has saying for the last couple years -- that creating documents, collaborating with them and extending them outside the enterprise represents a "vibrant, changing market" that also is going through a sea change associated with connections to back-end systems.

Vitelli said Acrobat has supported XML for at least a couple of years. "PDF is the only format in the market today where you can say it looks exactly as it appears on paper, it prints the way you want it every single time, and you can secure it so someone else can't forward it or read it," he added.

Although XDocs comes from the world's largest software maker, whose Office suite already commands more than 90% of the desktop productivity applications market, its success is still contingent on a number of things. Among them, according to industry analysts: The existence of data in an XML format and upgrades to Office 11, the next version of Office, which will incorporate far more XML features.

Indeed, because of those two issues, among others, XDocs is unlikely to be a significant threat in the near term, said Paul DeGroot, an analyst who follows desktop products for Directions at Microsoft, a Kirkland, Wash.-based research firm that tracks the software giant.

DeGroot noted that significant back-end programming has to be done before XDocs becomes useful. "XML authoring is very complicated and quite difficult," DeGroot said. "It's mainly something that programmers worry about at this point. Common folk don't generate XML except fairly accidentally or with tools that aren't particularly well-suited to it."

Wall Street analysts focused on the threat of XDocs being at least three quarters away, but DeGroot said he thinks it's even farther out.

"Let's face it. This product is a long way from seeing the light of day," he said, noting it's only version 1 that launches next year. "The conventional wisdom is it takes three tries for Microsoft to get it right. They've demonstrated in a lot of cases these days they can do it right in two tries," DeGroot said.

Meanwhile, customer upgrades to Microsoft Office are not yet a predictable matter, said DeGroot, in part because of recent changes to Microsoft's licensing model that encourages enterprises to upgrade their Microsoft products. Microsoft reports there are 300 million to 350 million Office users in the world, though only about 175 million to 200 million are paid users.

Acrobat, meanwhile, is the standard in electronic forms in both the consumer and corporate market, wrote U.S. Bancorp Piper Jaffray analyst Gene Munster in a note Wednesday. He rates Adobe outperform, and his firm hasn't done banking with the company.

Adobe reports that more than 400 million copies of Acrobat readers, which are free, have been distributed worldwide, but does not disclose the number of customers who have bought software to create the Acrobat documents read by those readers.

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