Microsoft Banks on Business Upgrades

New software line-up, including a SharePoint Server update, aimed at improving business processes.

(Redmond, Wash.) Bill Hartnett got accustomed to the screaming. As Microsoft Corp.'s manager of software sales to financial services companies, Hartnett used to get pelted with complaints about the security and reliability of Microsoft's products.

Hartnett speaks openly about those dark days because he's sure they're well past. He and his colleagues contend the company is about to give businesses compelling reasons to not just tolerate Microsoft, but to be thrilled with it.

The occasion is the launch of crucial upgrades to Microsoft's most widely used and most profitable products. All at once, Microsoft is releasing Windows Vista, an update of the Office "productivity" package that includes Word, Excel, Outlook and PowerPoint, and server software that handles behind-the-scenes functions.

The products will begin to be available for business users Nov. 30, with a consumer release of Windows and Office on Jan. 30.

Even in a less competitive world, the enormity of the launch would make this a crucial time for Microsoft. Vista has been delayed so long that it has been five years since the last overhaul of the operating system, which runs 90 percent of the world's personal computers. Office last got refreshed in 2003.

But the stakes are particularly high now. Savvy competitors using the Internet are challenging Microsoft's status as computing's vital plumbing provider. Meanwhile, Microsoft is spending some of the vast fortune it has amassed in desktop software to branch out with expensive splashes in video games and music players.

In other words, this is no time for Microsoft to deliver a dud in the core of its franchise. Next Thursday's corporate launch of Vista, Office and server software is being called "A New Day For Business," meaning Microsoft's customers, but the phrase applies in Redmond just as well.

Microsoft executives claim that computer users who upgrade to Vista or Office, but especially both together, will be dazzled by how much more productive they can become. The company spent years studying how people use its most popular programs and retooled the user interface accordingly, trying to make it easier to find and use features.

It also worked to make its software sturdier than ever -- less prone to crashes and less vulnerable to hackers. Because of that and new tools aimed at pleasing corporate technology staffs, Microsoft estimates the labor costs of supporting a machine running Vista will be $507 per PC a year, down from $542 with Windows XP.

Despite the improvements, many analysts don't expect corporate technology buyers to rush to buy PCs with Vista or Office 2007 upgrades. Surveys have found that fewer than half plan to adopt Vista in its first year of release.

That's largely because switching can be a complicated, costly process. Many organizations only recently upgraded to Office 2003.

And while Vista and Office may look better, a lot of the features are likely to be seen as nice-to-haves rather than must-haves.

"If you look at Vista, you say, `What's the killer app?'" said Forrester Research analyst Ted Schadler. "Somebody else will build a killer app on it, but until you get a killer app, you don't see the power of the platform."

His Forrester colleague Kyle McNabb, who tracks business computing, believes the most powerful new item from Microsoft won't be something PC users can see. It's Microsoft's server software -- particularly the Sharepoint document-management service -- that McNabb believes has been best reshaped.

This is no small matter. Together, Sharepoint, the Exchange e-mail offering and Office software rang up $14.5 billion of Redmond's $44.3 billion in revenue in the last fiscal year, which ended June 30. That exceeded Windows sales of $13.2 billion.

These segments are so profitable -- that combined $27.7 billion from business software and Windows sales produced $19.9 billion in operating income -- that they all but float the company, letting Microsoft's entertainment and online divisions lose money.

Still, competitors have made important inroads -- one reason that Microsoft stock remains cheaper today than when Windows XP launched in 2001.

Open-source offerings such as Zimbra, an e-mail service that competes with Microsoft Exchange, have grabbed customers with lower sales prices and a more flexible delivery method. Zimbra founder Satish Dharmaraj thinks the Office 2007 launch is a great opportunity for his company, since it forces companies to think about what to do with their e-mail systems.

Other rivals, including Google Inc., are increasingly hosting Office-like applications over the Web for free, supported by ads. For now, that threat to Microsoft is somewhat muted, since most businesses probably would rather pay for software than let their workers be distracted by ads all day. Even so, Microsoft has been racing to develop ways to deliver its software over the Web as well.

And it's not just a bunch of gnats targeting Microsoft. IBM Corp. sells a range of productivity applications and Web services. Database leader Oracle Corp. has been maneuvering closer to Microsoft's territory by pledging to support open-source products.

Proof that Microsoft is watching closely came in the recent $400 million cooperation pact it signed with Linux vendor Novell Inc., a deal aimed at strengthening Microsoft's hand against other open-source players. Even after the agreement was signed, however, Microsoft and Novell were squabbling over its details.

Microsoft's best chance of continued riches from the business sector likely lies in its products' ubiquity. Just about every PC user is familiar with Microsoft programs. That tends to make it safe for many companies, and a risk to use something else.

Of course, that ubiquity is also a hazard for Microsoft. Its software is the ripest possible target malicious hackers could exploit, so they do. And being everywhere often ties Microsoft's hands. Microsoft considered more radical changes to Vista, for example, but feared whether users and third-party software developers would be able to adapt.

This landscape means that "Microsoft's always going to be a half-step to a full step behind" many of its rivals, said McNabb at Forrester. But at the same time, he added, "they don't have to be the innovation leader."


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