Microsoft's answer to Linux

Linux gets a good share of the headlines, but Windows server software is grabbing a good share of the dough.

In reporting its second-quarter financial results Thursday, Microsoft said revenue at its Server and Tools division, which caters to business customers, grew 18 percent year over year. Licenses sales of Windows server, which competes head-to-head with open-source software Linux and other server operating systems, grew 17 percent year over year.

Despite the threat posed by open-source products, Microsoft server software sales have been growing at double-digit rates for several quarters. Meanwhile, revenue from its current cash cows--its Windows desktop and Office products--have been flat or growing in the single digits, analysts noted.

Owing to the release of the "Halo 2" video game, Microsoft's Home and Entertainment division was also a strong performer in the second quarter. But server software offers the best prospect to recapture the rapid growth and fat profits Microsoft saw from Office and Windows in the past decade, said Greg DeMichillie, an analyst at researcher Directions on Microsoft.

"They're selling into a growing market, whereas the desktop client market is not growing much and there's not share to take from the competition," DeMichillie said. "In servers, historically they don't have a monopoly--they have under 50 percent market share."

Server and Tools, which brought in $2.8 billion last quarter, has begun to rival the size of Microsoft's other giant breadwinners. The Client segment had revenue of $3.2 billion, and Information Worker, which sells Office, pulled in $2.8 billion. Home and Entertainment, meanwhile, was at $1.4 billion.

The Server and Tools group sells Windows Server 2003, Microsoft's Exchange messaging server, SQL Server database, development tools and other server software. Competitors include Linux distributors Red Hat and Novell, as well as back-end Java software makers such as IBM, BEA Systems, Oracle and Sun Microsystems.

This summer, Microsoft plans to release SQL Server 2005, code-named Yukon, which analysts expect will give the company's server business another bump.

"We believe the market here represents a large opportunity both for installed base upgrades and new acquisitions, particularly as Microsoft benefits from a much-improved business intelligence suite with the Yukon release," noted a JP Morgan research report issued Friday.

Also, the release of Yukon will free up more software engineers to work on Longhorn, JP Morgan said.

But even the positive numbers from its Servers and Tools group do not hide the intense competition. Microsoft, in fact, consistently singles out open-source development as a challenge to its business model.

"Risks to our opinion and target price include a highly competitive software industry and a rapidly changing technology landscape, such as a more rapid adoption of the Linux operating system than we currently anticipate," Standard and Poor's analyst Jonathan Rudy wrote in a recent note on Microsoft.

Indeed, a key challenge for Microsoft remains its ability to convince business customers that the total cost of using Windows server and development tools is cheaper than Linux and open-source middleware tools, after the costs of licenses, support and maintenance are figured in, DeMichillie said.

"There's a lot of upside if they can execute and make the case that they're the lower cost solution," he said. "The question is, can they really make the claim that they are lower cost than what Linux and IBM can put together?"

[nealda]

Government sanctioned monopoly...

...collecting government sanctioned taxes. Have you paid your Microsoft tax this year? Congratulations! You've just made them even more powerful.

[NicholasDonovan]

Not Even Close.... Microsoft is losing market share

Ahh... No. Much of those licenses were not for new servers they were renewals and a few upgrades.


Reviewing Microsoft's 10-K statements is in my opinion, a unique work of obliquity. It's difficult to tell where some product lines begin and where others end.


You can say that Windows Servers may have grown 18% however many of those server sales are to also support client infrastructure such as development platforms and client/server.


Additionally, CNET would do well to research the actual growth rates of Linux servers.


According to IDC "The installed base of servers expands 41% larger in 2003, 37% larger in 2004 and remains 26% larger at the end of the forecast period in 2008."
(Dec - 2004 IDC Report)


So tell me again why Microsoft's numbers adjusted growth rate of approx. 11% are a big deal against Linux?


Better luck next time C/ZD-Net,


Nick

Measurement metrics?

Let me get this straight. Because Microsoft's server products cost more per unit ( by a large measure) and the companies are paying more for less with Microsoft, it's a wonderful thing. Perhaps for Microsoft, not necessarily for their customers.