U.S. Office 2000 sales lower than expected

One of Microsoft's key product lines seems to have missed out on the company's earnings party, at least in the United States.

Globally, sales of Office 2000--Microsoft's desktop software suite and one of the most important products for the company's bottom line--increased an impressive 19 percent in Microsoft's first quarter of fiscal 2000, contributing to the company's record revenues announced yesterday. But in the United States, Office 2000 sales were lower than expected.

Blame it on the number 2000. With the Windows 2000 operating system effectively delayed until next year, U.S. corporate customers are putting off software upgrades. Microsoft plans to officially launch Windows 2000 next month. But customers won't recieve the software until next March, analysts estimate. Further, spending on the Y2K technology glitch remains an issue for corporations.

Office 2000, which includes perennial bestseller applications such as Word and Excel, went on sale June 7. The Office line of products commands nearly 90 percent of the market for business productivity software and come as a standard feature of many PCs.

While Office 2000 sales were strong overseas, particularly in Japan and Europe, sales were slower than expected in the United States, Greg Maffei, Microsoft's chief financial officer, told analysts. Neither Maffei nor analysts expect Office 2000 sales in the United States to really soar until Windows 2000 ships in volume sometime next year.

Corporate foot-dragging in the United States can be attributed to information technology managers' preference to update their PCs once, with both Office 2000 and Windows 2000, instead of performing two separate, and labor-intensive, updates, said Microsoft officials.

"Some customers are waiting to touch the desktop once with Office 2000 and Windows 2000," Maffei told analysts yesterday.

Maffei said he expects Office 2000 sales to spike when Windows 2000 ships.

Andrew Brouseau, an analyst with Cowen & Company, has another plausible reason for the spike in Office 2000 sales overseas during the first quarter of fiscal 2000: While many Microsoft customers in America purchased the product one quarter ago, Microsoft didn't begin selling Office 2000 in Europe until this past quarter.

Brouseau also agreed that many companies are waiting to upgrade desktops to Office 2000 and Windows 2000 simultaneously.

"We think a lot of organizations are likely to upgrade their operating system and desktop all at once rather than in pieces," he said. "There are components that Office 2000 can take advantage of that make sense in waiting to upgrade to both."

Analysts see other reasons for the lag in U.S. Office sales. Finishing Y2K-related updates most likely has distracted IS departments and consumed scarce budget dollars over the past few months, they say. But by year's end, as big companies finish Y2K work, many may opt to buy Office 2000 licenses in preparation for Windows 2000's expected March debut, Microsoft executives reason.

One analyst sees yet another reason for the lag: miscues in Microsoft's marketing plan.

According to a report by Don Young, an analyst at Paine Webber, Microsoft may have erred in its marketing approach to Office by concentrating on sales to chief technology officers at large corporations instead of to retail buyers.

Microsoft attempted to appeal to corporate buyers by emphasizing Office 2000's new features for lowering total cost of ownership, according to Young's report, issued today. Apparently, not all chief information officers (CIOs) bought that approach--or bought Office 2000--given the lower-than-predicted deployment rates.

Microsoft is now taking its Office 2000 message directly to American consumers, hoping to drive retail sales. The company "is broadening its marketing aim to generate more end-user demand for the product," according to Paine Webber.

Online hosting
One additional channel for Office in the long term may be online hosting applications. As reported by CNET News.com, Microsoft is hatching a plan to offer hosted versions of Office.

While, so far, few details of a Microsoft Web-based application plan have come to light, Microsoft president Steve Ballmer told reporters last month that the company is planning to offer Office--which generates between one-third and one-half of Microsoft's total revenues--as a Web-based service in the future.

's="" bottom="" line="" for="" at="" least="" two="" three="" years.="" =""> Whatever the reasons for the Office lag, they didn't deter Wall Street's enthusiasm for Microsoft. The strong earnings report spurred an afternoon rally today on the Nasdaq exchange. And, several brokerage firms, including Morgan Stanley Dean Witter, SG Cowen, and Lehman Brothers raised their estimates for Microsoft today. Credit Suisse First Boston reaffirmed its strong buy rating for Microsoft.

News.com's Erich Luening contributed to this report.