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MS: Windows 98 no blockbuster

The latest upgrade to the Windows operating system will not drive sales like its predecessors did, Redmond says.

Central to Microsoft?s sober expectations for the coming fiscal year is the company?s attitude toward Windows 98--that it'll be a block that builds on its operating system, but not a source of blockbuster sales.

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Windows 98, which is scheduled to ship in the first quarter of next year, to drive the same type of revenue growth that recent OS upgrades have, said Greg Maffei, incoming chief financial officer, at the software giant's annual financial analyst meeting.

"Only in years when we have blockbuster releases have we had growth rates well over 25 percent. None of us is projecting Windows 98 to be a blockbuster like Windows 95. It?s an important upgrade, but it won?t have the same financial impact."

The company isn?t going to push Windows 98 with the same marketing hype that surrounded the Windows 95 launch.

"You can?t present it as the second coming of Christ, because it isn?t," said chief operating officer Bob Herbold. "It?s a sensible upgrade."

Meanwhile, the division that sells the Office 97 application suite last week reported a 21 percent jump in 1997 revenues for the quarter ending June 30. But the division's revenue growth slowed compared to previous years.

Maffei noted that the "first and foremost" source of Microsoft's problems next year will be slowing PC shipments and the company?s saturation of the desktop software business.

Other reasons Microsoft isn?t predicting a blockbuster year: There will be fewer chances to cut expenses, and there will be increased spending in both research and development and sales and marketing--despite the lack of marketing enthusiasm so far devoted to Windows 98.

Microsoft expects to boost research and development spending to $2.6 billion in fiscal 1998 from $2.2 billion in the fiscal year just ended.

The company also fears that a flat stock price will affect employee compensation programs, which are heavily padded with stock options.

"In fiscal '98, I expect to grant 30 to 35 million options," said Maffei. "It?s an enormous amount of value we deliver to employees."

Microsoft's fiscal 1998--which runs from July 1, 1997 to June 30, 1998-- will not see any major product releases, or at least not early enough in the cycle to report significant revenues before fiscal 1999 begins. But at least one financial analyst didn't see the slowdown as a reason for consternation.

"[It's Microsoft's] typical doom-and-gloom scenario: growth levels coming down, saturation in their core markets," said Rob Owens, research analyst at Pacific Crest Securities in Portland, Oregon, in an earlier interview. "But go back two quarters ago, and a hell of lot people bought a lot of Office 97. We're just now seeing the size and power of the company to lever off the installed base."

Owens sees Microsoft's main revenue stream in the near future coming from its NT operating system and related BackOffice products (see related story). Microsoft is making no secret of its desire to replace Windows 95 with NT Workstation as the main desktop in the enterprise, leaving Windows 98 as the long-term consumer and small-business operating system. A corporate shift from 95/98 to NT Workstation would make it easier to install NT Server as the enterprise operating system in large companies, a market that the company is just beginning to crack.

"The big wild card is NT Server," said Owens. "It's not completely displacing mainframe systems and Unix boxes, but it's moving in. If they knock it out of the park, you'll see more than 25 percent growth year over year."

Microsoft shares fell today to 138, down 3-1/2 over yesterday. The shares came in far short of its pre-earnings report figure of 149-1/2. Microsoft, in its quarterly earnings report, met expectations but did not vastly exceed them as has been its historic trend.