News

Elop Describes Business Plans at Morgan Stanley Event

• By Kurt Mackie
• 03/03/2009

The Business Division has been particularly profitable for Microsoft, bringing in $4.9 billion in revenue in Microsoft's second fiscal quarter, which ended on Dec. 31.

The questions were less specific about Elop's division, focusing more generally on Microsoft's cost-cutting plans, how it will monetize its online services and the threat to margins posed by low-cost netbooks.

Elop rejected a pure cost-cutting focus, saying that in tough economic times, if a company can concentrate on a few tough bets, it can come out stronger. The idea echoes recent speeches by Microsoft's CEO Steve Ballmer, who has been floating the analogy of RCA, which invested in television technology research during the Great Depression, emerging later as a leader in that field.

Elop did point to some product consolidation that's happening in Microsoft's Online Services Division. Microsoft is considering combining its Windows Live and Office Live products after reviewing customer needs, he said.

Another focus that Microsoft has reconsidered is business intelligence, where Microsoft has tried to "democratize" the segment via SharePoint and Excel. Microsoft pulled back its Performance Point Server as a separate product and consolidated its features with SharePoint. That decision represents a retrenchment from Microsoft's vertical competition with companies such as Cognos and Business Objects, Elop explained.

On the question of profits, Elop pointed to positive opportunities with Microsoft SharePoint, Dynamics CRM and unified communications. Microsoft faces competition from Cisco Systems on unified communications, but Microsoft will tout the overall interoperability of its products as a major competitive advantage, Elop explained. Unified communications is a technology disruptor in the communications field, but it's still in the early stages, he said.

Another profitable area for Microsoft has been the enterprise agreement renewal rate. Elop described enterprise licensing as a "bright spot" for the company through its second fiscal quarter.

Elop acknowledged some complexities with Microsoft's software plus services strategy. For instance, he estimated that it costs about $18 per user per month for a typical company to provide e-mail to its employees. Microsoft makes about $3 off that cost in licensing fees. With Microsoft's hosted offering, the price drops to $10 per user per month. The savings from the service comes from mid-sized companies not having to hire staff to maintain an in-house application, he explained. The revenue reduction with the online service is not a problem because Microsoft sees the provision of hosted services as an opportunity to upsell customized solutions to businesses.

Elop said that Microsoft Office 14, when it appears, will represent an "embrace" of Microsoft's software plus services strategy. Office 14 is the newest version of Microsoft's productivity suite, with general release expected sometime in 2010. He added that Wave 14 will provide a very specific opportunity for use with netbooks, enabling monetization of SKUs.

Microsoft took some risks with Office 2007 because it changed the user interface, Elop said. That change was "a good bet to make" because people can now find features in Office more readily, he added.

Microsoft's approach to threats to Office from Web-based apps is to create a rich client and make it work well with both online and mobile versions. He said that people generally use online apps maybe two or three times a month for things like document sharing.

Finally, on the netbooks question, Elop noted that Microsoft's operating system now has an 80 percent attachment rate on netbooks. Previously, the low-cost, low-tech mini-laptops had predominately used Linux OSes. Elop didn't really answer the question of profits, as netbooks typically sell for just a few hundred dollars. He said that the current forecast for netbook purchases was that they will account for less than 10 percent of sales.