September 23, 2002 2:05 PM PDT

Microsoft server share jumps in 2001

Microsoft's share in the server operating system market jumped in 2001, according to a new report, yet analysts question whether the software giant will be able to offer a repeat performance for 2002.

The Redmond, Wash.-based company's market share for shipments of new server operating system licenses jumped to 49 percent in 2001 from 42 percent in 2000, according to a research report released by IDC on Monday.

Over the same time period, rivals either held steady or lost market share, the report showed. The IDC numbers represent sales of new licenses, not market share for server operating systems running on computers.

"We looked at Microsoft's growth in 2001 and found part of it was Microsoft's licensing programs, but we believe part of it was because already some Microsoft customers had gone into a large Windows 2000 upgrade cycle," said IDC analyst Al Gillen. "It's the combination of those two factors."

But analysts warned that Microsoft likely would not be able to sustain such gains in 2002.

"I don't think we can draw a straight line to 2002," said Gartner analyst Tom Bittman. "We've definitely seen a slowdown" in Windows server software shipments. He cited the economic downturn, as well as next year's expected broad release of Windows .Net Server 2003, as two reasons for the decline.

Competing products did not fare as well, according to IDC. Market share for the Linux operating system was constant between 2000 and 2001, at 25 percent. NetWare and Unix, which had both separately held around 15 percent of the server market, fell to under 12 percent last year.

Yet analysts believe that Microsoft didn't necessarily gain at competitors' expense.

"The share has shifted from year to year, but I don't know that Microsoft has taken share away from another vendor as much as another vendor wasn't able to grow its business," Gillen said.

Overall, the market for new server operating system license shipments shrank about 1 percent year over year in 2001.

Windows 2000 catch-up
In some ways, analysts expected Microsoft to see a big jump in server operating system license shipments, simply because so few companies switched to Windows 2000 immediately following its release. While Microsoft launched the software in February 2000, fewer than 5 percent of Windows NT Server systems had been upgraded by the end of the year, according to research group Gartner.

"In 2000, there were some cold feet," Bittman said. "We said that it was going to be a slow ramp up, and after six to nine months, things were going to kick in and 2001 was going to be a big year."

For many companies, Microsoft pushed too many changes into Windows 2000 to make upgrading fast or even easy. Active Directory--Microsoft's software for managing computers, users and other resources on a network--played an important role in delaying upgrades.

"For most organizations it took six to 12 months to get a hold on Active Directory," Bittman said. "For most, it took a good six months just to plan. So most people weren't ready until 2001."

Microsoft's repeated delays delivering its version 2000 successor, Windows .Net Server 2003, contributed to the sales momentum.

"The only thing that could slow that down is if the next release came out early or on time," Bittman said. "It's obviously late, people saw that coming and jumped in."

Conversely, analysts do not see the release of Windows .Net Server 2003 igniting a large round of new upgrades, particularly as many companies would have just moved to Windows 2000 Server.

Microsoft had planned to release Windows .Net Server 2003 last year but twice pushed back the launch date. The product is seen as a crucial component for delivering Microsoft's .Net Web services initiative.

Licensing divides customers
Microsoft's controversial Licensing 6 program also contributed to sales of new server operating system licenses, but unexpectedly. The company announced the new program in May 2001, putting the first phase into place in October.

But Microsoft delayed the full switchover until August, because of customer resistance to the program.

Licensing 6 compelled customers to switch to an annuity-based model, where they annually pay up front for upgrades under a two- or three-year contract known as Software Assurance. This effectively raised volume-licensing fees from 33 percent to 107 percent, according to Gartner.

Implementation of the plan led to a spike in new license purchases as companies scrambled to get on the most current version of Windows and, thus, remain eligible for discounted upgrades.

Microsoft benefited two-fold in the server operating system market, where the licensing strategy boosted Microsoft's share over competitors and locked companies out of choosing alternatives for two to three years.

But Bittman sees other repercussions of the Licensing 6 plan, one that is likely to hurt sales.

"There are more questions about Linux now--as in, 'Should I be considering it?'--than there were before," he said. He credited this shift to customers seeking lower-cost alternatives to Licensing 6.

Analysts estimate that as many as 60 percent or more of eligible customers chose not to sign up for the controversial licensing program before the July 31 deadline.

"Linux is not really driving Linux, it's Microsoft licensing that's really driving Linux," Bittman said. "What's really turning Linux into reality is backlash on Microsoft licensing."

Microsoft has to "change the value proposition," Bittman warned. "They sold because Intel servers were cheap. But now you've got Linux out there, which is also cheap. They kind of have to defend themselves the way Unix has done."

Still, Gartner does not predict any massive groundswell of support for Linux that would have any serious impact on Windows Server market share.

 

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