From Business Week
Will Windows 2000 Rescue Microsoft in
2001?
The new operating system's slow start isn't helping the company's stock
price. One analyst, however, sees the program gaining rapidly next year
It's hard to be pessimistic about a company that
owns as much as 90% of its target market. But that's
exactly how Microsoft ( MSFT ) investors have
been feeling recently. Since hitting its one-year high
in December, 1999, of nearly $120, the stock has
mostly been sliding, and sits at $67 3/8 as of the
market's Nov. 10 close. A big part of the problem is
the pending antitrust judgment against the company,
which is still in the appeals process. But just as
important is the fortune of Windows 2000,
Microsoft's new server operating system.
To put it bluntly, Microsoft goes where Windows
2000 goes. If the new program is adopted as widely
as Windows 95 was, Microsoft will have a new,
fabulously wealthy market to dominate. If it fails to
win new converts, Microsoft's stock will probably continue to head south.
According to Microsoft, of course, Windows 2000 is right on target and
enjoying enormous success.
Until recently, the initial returns were grim. Numerous news reports of the
software being bug-ridden and unstable led many corporations to approach it
with caution. Hence the fall in Microsoft's stock. But during the week of Nov.
6, one Wall Street analyst changed his outlook for Windows 2000 to a much
more optimistic one.
SERVER STRATEGY. Whether he is correct could have huge implications for
Microsoft's stock price. Dubbed "the most important computer program in the
history of humanity" by one of the Microsoft execs who led the effort to create
it, Windows 2000 is certainly the most important program in Microsoft's
history. That's primarily because of the 90% figure noted earlier. Sure,
Microsoft dominates desktop computers -- but that's a low-growth market, if
not a shrinking one. Where could the company turn to maintain its customary
20% to 30% annual revenue growth?
The answer is the server market. Servers are the high-powered computers that
run networks. While the desktop computer market continues to grow at only
about 10% a year, server growth is closer to a 30% average annual increase,
according to computer research firm Dataquest. In 1993, Microsoft began its
assault on the server market with the introduction of Windows NT, a new
operating system for network servers.
NT has had some notable successes -- mainly in the low-end server market, of
which NT owned about 35% by 1999, according to research firm IDC. But
it's too underpowerd and unstable a program for most corporations to trust
with their mission-critical networks. That's why Microsoft poured billions of
dollars over the past three years into developing Windows 2000, the successor
to NT. Windows 2000 promised to be scalable and stable, while also including
several snazzy new features. Microsoft's hope was to use Windows 2000 to
dominate the fractured server market, which was divided by almost a dozen
competing operating systems.
DISSENTING VOICE. The new program was released officially in February,
2000, but no one expected it to win many immediate converts. Very few
companies will adopt a new operating system during the first 12 months of its
life, preferring to wait until the bugs are worked out. The real target date to
determine Windows 2000's success would be the first two quarters of 2001.
Even so, troubling signs have begun to appear that companies simply weren't
happy with Windows 2000. Reports surfaced of frequent crashes, problems
with bugs, and an inability to manage a network of more than a handful of
computers. One Microsoft critic, programmer Eric S. Raymond, brands
Windows 2000 as "the biggest train wreck in corporate history."
But before throwing your handful of dirt into the grave of Windows 2000,
listen to Michael Stanek, an analyst with Lehman Bros. On Nov. 7, Stanek
released a report saying that he was upping his price target on Microsoft's
stock from $85 to $115 because he was much more optimistic about
Windows 2000 adoption rates for next year.
CENTRAL CONTROLLER. The reason for Stanek's changed view has to do with
one of the trickiest features in the new operating system, called Active
Directory Services, or ADS. That feature allows a central administrator to
control the network. Traditionally, control of who accesses the network, and
when it is accessed, is decentralized -- maybe in the hands of dozens of
different network supervisors. Microsoft competitor Novell ( NOVL )
revolutionized network control by introducing a piece of software that allows a
single overseer to control access to the entire network.
Novell's product, called Novell Directory Services, was wildly popular but still
lacked one crucial factor: It wasn't part of an operating system. That meant it
was just another piece of add-on software meant to simplify users' lives -- but
which might just as easily end up making everything more complicated.
Microsoft set out to develop a similar directory product that was built into its
new server operating system, making it easier to use and more powerful.
But all those good intentions proved to be a major stumbling block for
Windows 2000. Corporate IT managers groaned at the concept of a built-in
directory. For one thing, they feared it would lock them in to buying only
Microsoft software in the future since it didn't work well with other operating
systems that might be on the network. For another, it was probably the most
complex element within Windows 2000, which means that it is also the most
vulnerable to computer bugs and problems. Initial reports showed that many
managers resisted adopting Windows 2000 because of the ADS feature.
MISSING PIECE. Stanek surveyed several corporations about their plans for
Windows 2000 and was surprised to see that many of them were planning to
adopt the new software -- but without ADS. Previously, most observers
thought Microsoft would do everything it could to discourage companies from
disengaging the ADS feature. In addition, many feared that the software would
be much less stable and prone to breakdowns without ADS operating.
That hasn't been the case, according to Stanek. "Our research indicates that
[information technology] administrators can deploy Windows 2000 without
ADS and still capture many of the compelling benefits of the upgrade now," he
says. He goes on to predict that two-thirds of Windows 2000 installations in
2001 will be done without ADS. Previously, the assumption was that almost
every incident of Windows 2000 would occur with ADS enabled.
If Stanek is correct -- that companies are finding it easy and favorable to
deploy Windows 2000 without ADS -- it could drastically alter some of the
pessimistic forecasts of Windows 2000's fortunes. Stanek claims Microsoft
will meet its goal of 30% revenue growth next year. He forecasts that the
company will earn $10.3 billion, or $1.93 per share, on revenues of $23.7
billion in fiscal 2001, which ends in June, 2001. Nevertheless, he vigorously
points out in his report that his findings will have little or no effect on the final
quarter of 2000 since few companies are spending much this year on Windows
2000.
"COULD BE UPSIDE." No other Microsoft analyst I contacted was willing to
comment on Stanek's research. One analyst, Melissa Eisenstadt of Credit
Suisse First Boston, did note that the past quarter's results, which Microsoft
reported in late October, showed higher-than-expected Windows 2000 sales,
which bodes well for the all-important first two quarters of 2001. "The
earlier-than-expected momentum in Windows 2000 suggests there could be
upside to our revenue forecast," she wrote in an October report.
While most eyes are on Microsoft's tussle with the Justice Dept., shareholders
should also pay attention to Michael Stanek's prediction. If it proves to be
correct, it would provide a tremendous boost to a stock that right now is down
on its luck. |
