Dow Jones Newswires -- April 24, 2000
SmartMoney.com: Microsoft Unwired
By ALEC APPELBAUM
NEW YORK -- We have met Microsoft's (MSFT) biggest threat, and it is Microsoft.
After the company announced a disappointing quarter at the end of last week, analysts rushed to downgrade it. Microsoft's poky sales growth in corporate software, they said, portends the end of its reliable earnings improvement. A government breakup aside, the company's core business of
computer software seems to be tapering off. The real growth opportunities may come in software for wireless applications - an arena in which Microsoft has never been particularly successful, and one for which it may be culturally and technologically ill suited. "Microsoft might atrophy on the PC platform as IBM (IBM) did on the mainframe platform, while robust growth shifts to handheld and wireless devices," wrote Rick Sherlund of Goldman Sachs in a note pulling Microsoft from the bank's Recommended List.
And you thought cutting words about Microsoft came only from government lawyers.
More than the distant and unquantifiable prospect of a government-ordered bust-up of the company, what seems to have Wall Street in a tizzy is the growing sense that Microsoft is missing out on a vital new business category. "The investment community is very nervous that a company that should be leading [due to] its market cap, isn't leading," says Rob Enderle, a veteran Microsoft watcher with the Giga Information Group.
Instead, investors see leadership coming from Palm (PALM), its upstart competitor HandSpring and various phone companies. Outfits like Bell Atlantic (BEL) are trying to shake off their own slow growth by hawking wireless Internet service to their large base of cellular subscribers. These companies look, increasingly, like the "pure plays" in the fast-growing category, and Microsoft - breakup or no - looks like it may have met its match.
Not that Microsoft has been caught entirely flat-footed in the world of pocket-sized gizmos. It's been brewing new wireless offerings since 1998 and working in conjunction with phone manufacturer Ericsson (ERICY) since last December. And Chairman Bill Gates, who kicked himself upstairs to the office of Chief Software Architect in February, presumably spends some nonlitigious time crafting
new worlds for Microsoft to program. Last week, the company unveiled its new Palm adversary, the PocketPC, which features live media and the full Windows 2000 set of applications.
The problem, though, is that Microsoft hasn't shown that it can thrive under the wireless business model. The company has grown so huge by getting license revenue from copies of its software. In wireless, by contrast, companies generate revenue from services: AT&T Wireless and its rivals measure revenue in minutes of use, and Palm improves its flagship product by loading it with Web access and shopping opportunities. And services are an area Microsoft has never commanded particularly well. The company is used to making money through selling new generations of a product in a box and bundling such products together. That's easier to do with operating systems than with complete services. Perhaps as a result, Microsoft's services have been harder to bundle together and to distinguish from their competition. (You don't see the government racing to penalize Mr. Softee's online travel agency, Expedia (EXPE), do you?)
Microsoft will compete energetically in any business that threatens Windows, of course. As venture capitalist Bill Frezza sees it, Microsoft has always made ambitious leaps into whatever market it sniffed, even shipping a pen-based version of Windows when that seemed trendy during the early
'90s. The company has so much cash that it can afford to invest in fleeting trends and aggressively fund the marketing of its entry into businesses that do grow into real markets. (Its free email service, Hotmail, fueled 26% revenue growth in its content and commerce group last quarter.)
But to seize the wireless market, Microsoft has to make major strides in two kinds of software. Wireless dominance, Giga's Enderle reminds us, requires strength in the operating system that consumers use and the "back-end" software that manages the Internet connection. Microsoft's
expertise has overwhelmingly been in software that sits on a hard drive, while rivals such as Sun Microsystems (SUNW) have excelled at network software. The partnership with Ericsson helps Microsoft, not least because it gives the company access to lots of software developers. But
Microsoft can't promise to incur lower costs or build more enticing services than its integrated rivals - especially if a court order ends up reducing Microsoft's own integration.
Now, Microsoft has time to recover its footing. Frezza, an early-stage investor at Adams Capital Management who has watched lots of wireless-data businesses come and go, sees the next two years as the twilight of the dawn. The wireless networks that carry information clog so quickly, he says, that wireless Internet access will serve only limited purposes for at least three years. And these applications - reservation confirmations and other glance-worthy data - scarcely seem poised to unseat spreadsheets, word processing or even email. So whatever havoc wireless applications wreak
on Microsoft's core business, the company has time to develop smart enough technology to ensure that it can be the one stealing at least some of its customers.
But other factors work against Microsoft. Even as the company hawks PocketPC, rivals are forging new alliances over networks; wireless chipmaker Qualcomm (QCOM) announced a 10% stake in free Internet service provider NetZero (NZRO) Monday. While it will take years to build the so-called next generation of networks, Microsoft has years' worth of work to do before it can persuade investors to look at it as a rocket again. |
