Look, who's laughing all the way to the bank!
Microsoft: Windows 98 Is Small Potatoes
Stock of the Day (Archive)
Jun 08, 1998
Say what you will about The Department of Justice's case against Microsoft (Nasdaq:MSFT - news) . One thing is clear: the publicity surrounding the imminent release of Windows 98 is something that Microsoft couldn't have bought -- at least for under a half billion dollars.
Not bad for a company that only plans on spending $10 million to promote Windows 98, which is a far cry from the $200 million that Microsoft spent on touting the virtues of Windows 95.
Fact is, Windows 98 is in the public eye not because it's going to have the same impact that Windows 95 had when consumers were going from the Windows 3.1 platform, or because it's a must-have product. Instead, Microsoft finds its latest product basking in the spotlight because Janet Reno and her Justice colleagues are taking Microsoft to task over it. Indeed, consumers now have their curiosity piqued, say experts, because if the government is intent on keeping everyone from having Windows 98, it must be something special.
Windows 98, however, isn't all that.
According to most of those who've reviewed the latest software, Windows 98 is nothing more than a minor upgrade, an upgrade that really isn't necessary for those who already have Windows 95. The consensus? Spend your $90 to $100 on something else.
And Microsoft officials seem to be expecting just that. Greg Maffei, Microsoft's CFO, told analysts during the release of its most recent earnings that he didn't expect Windows 98 to have nearly the impact that Windows 95 had. Said Maffei: "I would caution those who have large revenue estimates for retail sales for this product, particularly in the fourth quarter," and continued saying, "the sales guys would differ, but I don't expect the same magnitude of uptick that we experienced with Windows 95."
Even so, Microsoft hardly depends on operating systems sales. Windows 98 is projected to only bring in around $500 million during the upcoming fiscal year, a paltry sum compared to the $17 billion plus in revenues the company is expected to see during the same time period. Yes, Microsoft's Windows product is the category killer -- 96 percent of the 90 million desktop and portable computers last year were installed with the Windows environment -- but other products, which are certainly helped out by the software giant's monopoly of the desktop, drive sales growth at Microsoft.
The company's Microsoft Office controls nearly 95 percent of the $5.3 billion worldwide market for applications that combine desktop tools such as word processors and spreadsheets.
The company's Windows NT Server, which manages files, printing, e-mail and database programs for networked users, leads this particular segment of the market with a 40 percent share for 1997, up from 24.5 percent one year earlier. Considering that this particular segment is the key to the enterprise business as a whole -- which Fortune magazine estimates to be worth some $80 billion -- it's no small matter that Microsoft continues to make substantial gains here.
A glimpse at Microsoft's schedule for product releases may help to explain why Microsoft's stock price has held up fairly well, especially in the face of the DOJ's assault on the company.
After the Windows 98 release, set to launch on June 25, the company expects to ramp up its latest NT product, NT 5.0, sometime during 1999. The NT product will offer companies the same features that Windows 98 does in the consumer market, most notably a fully integrated Internet Explorer browser. According to David Readerman, an analyst over at NationsBanc Montgomery Securities, the product is expected to generate $5 billion over the 24 months after its released next year. He has a "buy" rating on Microsoft.
After NT 5.0 is released, next comes BackOffice. Following that, Office 99 makes its debut.
So despite the fact that everyone is making a big deal over Windows 98, it's not as important as one would think -- especially in terms of its overall contribution to Microsoft's revenues. And while it's true that the Internet capabilities Microsoft is trying to bundle with Windows 98 will be important down the road, short-term haggling over Windows 98 isn't likely to hamper Microsoft. Moreover, Microsoft may give in to some of Justice's demands, thereby pacifying the company's critics and Justice. Don't be surprised to see other Internet browsers on the desktops that run Windows. By then, of course, it could be over for some of Microsoft's competitors.
Until the government and Microsoft go to court in September, Microsoft will be allowed to ship Windows 98 in its current form. This allowance, in fact, is what has some people thinking that Windows 98 could enjoy brisker sales than previously expected.
Consumers, wanting to beat Justice to the punch, may buy Windows 98 -- and the bundled Internet Explorer -- before the government orders Microsoft to ship the software without it.
Finally, if Justice somehow throws a wrench into Microsoft's Windows 98, and somehow delays shipping or slows down the adoption of the software, it will be the makers of peripheral hardware, companies that make printers, joysticks, digital cameras, scanners, etc., that suffer. The Windows 98 platform allows PCs to work with the next-generation universal serial bus (USB) conector. The USB connector makes peripherals easier to hook up and faster to run.
For Microsoft, the best-case scenario going forward is that courts will find that Windows 98 isn't the devil that 20 attorneys general and Justice would have everyone believe. It's difficult to determine just how everything will play out, but rest assured that Microsoft can ultimately live with any decision that is handed down. After all, its newest operating system is expected to contribute just under 3 percent of its overall revenues for next year.
That's not a whole lot for a company that will derive $16.5 billion from areas that have nothing to do with Windows 98.
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