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Microsoft's multiple personalities

Find out how software giant is faring in these 11 key areas: operating systems, business software, database management, video games, handheld devices, television, browsers, online services, instant messaging, cell phones and Office.

Microsoft's multiple personalities

By CNET Staff
November 1, 2002, 2:00 p.m. PT

Microsoft has been accused of many things over the years, but no one can say it's stagnant.

Despite a steep downturn in the technology market and an exhausting four-year battle with the federal government, the Redmond, Wash.-based software giant has continued to plow ahead with new products and services. The secret of its success: dollars, developers and endurance.

With nearly $40 billion in the bank, Microsoft has the financial muscle it needs to enter highly competitive arenas such as gaming and to stick with slowly developing markets such as interactive TV and cell phones. Meanwhile, the company's developers are steadily improving the bread-and-butter products: Office and various flavors of the Windows operating system. And its executives continue to dream up and evangelize emerging concepts such as the tablet PC and Web services.

The result is that four years after the government charged Microsoft with violating antitrust laws, the company has grown richer and more influential as it expands well beyond its PC origins.

Here's how Microsoft is faring in 11 key areas: operating systems, business software, database management, video games, handheld devices, television, browsers, online services, instant messaging, cell phones and Office:

Operating systems
Microsoft's operating systems, from Windows 95 to XP, still dominate the market, but Linux is making inroads.

Research firm IDC estimates Linux sales at a mere $80 million in 2001 compared with Microsoft's $10 billion, but the Unix-like operating system can no longer be easily ignored. Spurred by Linux, Microsoft now sells a lower-priced version of its operating system for low-end networked servers.

When Linux started gaining momentum in 1998 and 1999, Microsoft simultaneously disparaged it, saying it was inadequate for customers, while also holding it up as evidence of operating system competition. In 2001 and 2002, Microsoft expanded its campaign against Linux into the legal realm, attacking the license that governs how Linux software is collaboratively developed and shared.

But Linux has been tenacious. It's used by large companies such as Credit Suisse First Boston, Deutsche Telekom and L.L. Bean.

Leading Linux seller Red Hat is expanding deals with Dell Computer, Hewlett-Packard and IBM.

Furthermore, though Linux was once for amateur hobbyists, it's now embedded into numerous industry projects.
--Stephen Shankland

Business software
When it acquired Great Plains last year, Microsoft took its first significant steps into a multibillion-dollar enterprise software market dominated by the likes of SAP, Siebel Systems, PeopleSoft and Oracle.

Great Plains has just a small fraction of the business applications market, but that could change as Microsoft steadily unveils new products and services. As a division of the software giant, Great Plains accounted for about $300 million of Microsoft's more than $28 billion in revenue in 2002. SAP, the market leader, reported $7.24 billion in revenue in 2001.

But Microsoft hopes to succeed where SAP and other rivals have repeatedly stumbled--mass-marketing business applications to small companies. To extend its reach globally, Microsoft in July acquired Navision, a Danish business applications company with $181 million in annual sales.

Microsoft also intends to venture beyond Great Plains' established market in bookkeeping software with the introduction this year of a new set of applications designed to help companies streamline their sales and marketing activities. Also in development are applications aimed at helping service companies manage projects and bill customers, and another set designed to help retailers track inventory and gather sales information--tools Microsoft acquired with the acquisition of Sales Management Systems in May.

Business applications are a strategic market for Microsoft not only as a potential new revenue stream, but also as a way to seed new accounts for other Microsoft products, such as desktops, e-mail servers and database software that the company is linking together, analysts say.

Indeed, Microsoft's main message since acquiring Great Plains is how well the Great Plains applications will work with other Microsoft products, particularly its new line of .Net server software and development tools, the company's next-generation set of products. However, the company has yet to release the .Net version of Great Plains, and many resellers and customers have yet to grasp the point of Microsoft's .Net Web services strategy.

Other challenges for Microsoft include competition from SAP, Oracle and PeopleSoft, none of which are ready to hand over the small and midsize business market. Microsoft also faces the task of integrating and maintaining the numerous overlapping products it has acquired from Great Plains and Navision, while negotiating falling demand for business applications in a shaky economy.
--Alorie Gilbert

Database management
Despite a late start, Microsoft is slowly but steadily catching up to Oracle and IBM in the $8.8 billion market for database management software.

Microsoft, which first entered the market in 1988 by licensing Sybase's database software, has now vaulted past Sybase to take the No. 3 spot. Microsoft's 16 percent market share in 2001 is now more than five times the size of Sybase's and trails only leaders IBM and Oracle, which have captured 34.6 percent and 32 percent, respectively.

The software giant's share is more impressive considering the company only sells databases that run on its Windows operating system, while IBM and Oracle sell to both Windows and Unix customers.

Microsoft has already taken the lead in one key area. In the $2.5 billion Windows-based database market in 2001, Microsoft's SQL Server 2000 database surpassed Oracle for the first time with 39.9 percent of the market, followed by Oracle with 34 percent and IBM with 20.7 percent, according to analyst firm Gartner.

Analysts say SQL Server is attractive to small and midsized customers because of its low cost.

With SQL Server's Sybase connection a distant memory (the two companies ended their joint development efforts in 1994), Microsoft has spent a pile of research and development dollars improving features and making the database powerful and reliable enough for large applications.

Microsoft has touted its next-generation database, code-named Yukon, as having new data storage architecture intended to make it easier to find and use corporate data. In fact, a forthcoming version of Windows, code-named Longhorn, will use Yukon's data storage features.
--CNET staff

Video games
If every business Microsoft entered worked like the video game industry, the software giant probably never would have been dragged into court.

Nearly a year after entering the market with its Xbox game console, Microsoft is still the underdog, scrapping with Nintendo's GameCube for the No. 2 position and holding no realistic hope of catching up with Sony's dominant PlayStation 2. Worldwide Xbox sales were estimated at around 4 million this summer, compared with more than 30 million for the PS2.

Xbox sales in the crucial Japanese market have been a no-show, with the company needing six months to sell out its initial shipment of 250,000 units. Hackers are having a field day with the Xbox, and analysts say the console faces a rough future unless Microsoft can dramatically improve the roster of original and exclusive games.

The Xbox idea was born in 1999, when a few developers proposed that Microsoft use its software expertise as a wedge into the game-hardware business. Microsoft's motives are still a subject of debate, but many consider the Xbox a key element of the company's push to spread computing functions to the average living room.

The company's legal woes have had negligible impact on the Xbox. In fact, this is one market where Microsoft clearly isn't the besieged monopolist. That distinction goes to Nintendo, which in 1991 settled a suit filed by the New York state attorney general alleging the Japanese giant had an illegal monopoly over the games business. Nintendo settled by sending customers a coupon for $5 off a future game purchase.
--David Becker

By 1998, Microsoft was already on its second try with Windows CE, but still well behind in the effort to win a significant share of the handheld market. Early handheld buyers were rejecting devices that resembled a tiny PC in favor of the Palm Pilot, a device with no keyboard that required a strange type of handwriting known as Graffiti.

But ever the quick study, Microsoft that year introduced the palm-size PC, its answer to the Palm Pilot. But Palm was also plugging ahead, and in March it introduced the Palm III.

Palm has maintained a lead in overall market share, but Microsoft has steadily gained. The Palm OS now controls 50 percent of the market while handhelds running Microsoft's Pocket PC and Windows CE operating systems control 28 percent. By comparison, in the first half of 1999, Palm's operating system ran on 83.5 percent of devices, while Microsoft's ran on 9.7 percent.

Now Palm is struggling with a dicey split of the company into separate hardware and software entities, a low market value and a critical need to crack the enterprise market, an area where Microsoft has the advantage of being able to play to its strength--its long-established relationship with IT departments.

Meanwhile, the entire market for handhelds has declined, which could play to Microsoft's advantage, given it has $40 billion in the bank to ride out a slow market. Microsoft continues to adopt Palm-like features in its Pocket PC operating system, and Palm is moving in Microsoft's direction with a new operating system that requires ARM-based processors similar to those found in Pocket PCs.
--Ian Fried

Microsoft has three different irons in the television market, none of which have gotten hot yet.

The company tuned in to television when it bought WebTV in 1997, and it spent much of the next year adding features to WebTV such as a Web-surfing device, DSL access and other online features.

The goal was to make the television the gateway to the Internet for less PC-savvy consumers and to gain a foothold in the living room. But Microsoft was unable to make WebTV attractive to cable companies, despite its one million subscribers, and the unit gradually stepped out of the limelight. It is now part of Microsoft's services group and was renamed MSN TV last year.

Microsoft also developed UltimateTV, a service meant to attract the fast-growing number of satellite TV subscribers. The service had limited success, and in January the UltimateTV group restructured to become part of the television services group within Microsoft's MSN division.

In addition, the company is creating software for use in set-top boxes for cable companies. Microsoft started investing in various companies, most notably $5 billion in AT&T, but little has been seen beyond customer trials. The good news for Microsoft is that similar services from competitors such as Liberate also have been slow to catch on.

Microsoft's efforts were dealt a major blow in the middle of last year when AT&T said it was scaling down its ambitions and considering set-top boxes that would offer limited capabilities. Microsoft followed, also focusing on lower-end capabilities earlier this year.

Far from throwing in the towel, Microsoft is essentially building its own set-top boxes by adding televisionlike features into a new version of its OS called Windows XP Media Center Edition.

This enhanced operating system will allow consumers to use a TV remote control to catalog songs, videos and pictures, as well as to check TV listings. Consumers with TV tuner cards in their PCs will be able to record shows and pause live broadcasting.
--Richard Shim

There is no question that Microsoft has come to rule the technology once billed as its slayer. According to a recent market study by OneStat, 94.9 percent of Web surfers use Internet Explorer--a number wrenched from Netscape Communications in part through competition that a federal judge has deemed illegal.

IE is not only dominant, it's good. Reviewers have routinely given the latest versions of the product higher marks than competitors.

That's contributed to a partial reevaluation of the lesson of the browser wars. Top credit still goes to Microsoft's abusive tactics, which lay at the core of the Justice Department's lawsuit. But it's also true that Netscape stumbled by failing to keep up with Microsoft's frequent upgrades.

In retrospect, however, the stakes of the battle seem oversold. Once considered a replacement to the PC operating system--and thus a major threat to Microsoft's Windows franchise--the browser has so far failed to evolve much beyond its role as a mostly free tool for navigating the Web.

Microsoft's victory aside, browser choice remains for those who want it. Opera Software's browser has drawn a small but enthusiastic following willing to pay for its product, while Netscape's latest browser and its open-source Mozilla cousin have closed much of the performance gap on IE.
--Evan Hansen

Online services
Perhaps the most quixotic and stubbornly persistent of Microsoft's business ventures is its MSN Web portal and ISP initiative.

Conceived in the mid-1990s, MSN has shadowed America Online in its attempt to win the hearts and minds of Internet consumers. But the service has consistently disappointed.

Despite numerous attempts and massive investments, the online network continues to trail AOL by a huge margin. The last time Microsoft disclosed its numbers in January 2002, the ISP's subscriber base totaled 7.7 million. More recently, Microsoft has lumped together all of its subscriber numbers, including paid services such as extra e-mail storage and its online gaming service, to reach a figure of 8.7 million subscribers.

In contrast, AOL has some 35 million subscribers.

In mid-October, Microsoft launched its latest attempt to unseat AOL: MSN 8. The product weaves together its desktop PC software--for example, Outlook Express is embedded into the Internet Explorer Web browser. Parental controls are also improved. Microsoft will start charging for MSN Explorer, a souped-up Internet Explorer browser with links to other MSN Web services that up to now have been free.

As for Net access, the company has turned much of its attention to broadband. In June, Microsoft struck a deal to piggyback MSN onto telecom giant Verizon's DSL (digital subscriber line) service. MSN will offer its collection of MSN services--including the Web portal, instant messaging and e-mail--to Verizon's DSL subscribers.

Still, MSN is not alone in its broadband efforts. Yahoo recently launched a similar DSL partnership with SBC Communications, and AOL recently struck a distribution deal with AT&T Comcast's cable broadband network.
--Jim Hu

Instant messaging
In the summer of 1999, Microsoft entered the instant messaging market like a bull in a china shop.

When the software giant launched MSN Messenger, it included an unexpected feature: It allowed its users to communicate with AOL Instant Messenger users. AOL was not amused, and within days blocked MSN and criticized the move as a "hack" into its servers. A cat-and-mouse game ensued and eventually Microsoft relented, but the publicity war underscored that the company wasn't happy watching AOL expand its dominance in a popular Web application.

Since then, there's been an unwritten truce between the companies. Despite industry lobbying efforts to force AOL to open its instant messaging network, the rivals have quietly left their trenches after realizing that the lack of IM interoperability didn't hurt either company. Consumers are using both of their services side-by-side.

From October 2001 to July 2002, MSN Messenger grew from 22 million to 29 million users in the United States. AOL grew from 28 million to 33 million.

Meanwhile, Microsoft continues to view instant messaging as a central element of its .Net strategy, which will enable software sales through the Internet. Instant messaging has also become a highlight in its Windows XP operating system, which currently allows communication with MSN Messenger users.

As more corporations adopt instant messaging into their networks, there will be more calls for security and accountability in these services. Corporate instant messaging could also bring more revenue to the IM leaders if they charge companies for use of their service.
--Jim Hu

Cell phones
Microsoft this year introduced its software for cell phones--well after competitors Nokia, Ericsson, Motorola, Samsung and Symbian.

Nokia is already selling phones with the Symbian operating system globally, while phones running Microsoft's Smartphone software recently debuted in Europe but aren't yet for sale in the United States. Makers of operating systems for phones that combine the functions of a personal digital assistant and a cell phone see Microsoft's Smartphone 2002 as "a potential threat," said Jupiter Research wireless analyst Joe Laszlo.

All cell phone makers continue to struggle after a two-year telecom downturn, which has led to low market values and a desperate need to crack the enterprise market--where Microsoft has a clear advantage with information technology managers.

Meanwhile, the number of cell phones sold globally will likely decline in 2003, the second year in a row. The downturn plays to Microsoft's advantage because its cash hoard allows it to be patient.

On the other hand, Symbian, Nokia, Ericsson, Motorola and Samsung are all making improved phones, forcing Microsoft to scramble to add new functions such as mixed media messaging to keep pace.
--Ben Charny

While the antitrust trial largely focused on Windows, Microsoft's Office productivity suite is in some ways more important to the software giant.

When the antitrust trial started five years ago, Microsoft controlled between 85 and 90 percent of the desktop business application market. Office's share of the market today is more than 90 percent, according to Gartner.

The software giant is testing the next version of the suite, code-named Office 11 and slated for release in mid-2003. The suite, which includes a largely revamped Outlook e-mail client, will for the first time open Microsoft's lock on file formats long crucial to driving sales. Office 11 also will save files in Extensible Markup Language (XML), an open-standard format popular for delivering Web services.

But cracks are appearing in Microsoft's Office empire. In August, Microsoft launched its Licensing 6 program, which allows companies to buy upgrades at a discount. In making the switch, the company also eliminated the most popular way to buy upgrades, which in combination with other changes effectively raised most customer payment rates by 33 percent to 107 percent, according to research firm Gartner.

Customer dissatisfaction with Licensing 6 has led companies to consider alternatives to Office, such as Sun Microsystems' StarOffice. Corel, meanwhile, has inked deals with almost every major PC manufacturer in the past few months for them to use Corel's WordPerfect office software on low-end PCs, in place of more expensive Microsoft products.

Still, analysts expect only a small percentage of existing Office customers to abandon Office, because of the high cost of switching. Gartner estimates it costs companies $1,200 per user to move to StarOffice from Microsoft Office once training, lost productivity and other factors are taken into account.
--Joe Wilcox