February 12, 2003 2:40 PM PST

Microsoft preps new Office 11 beta

Microsoft is expected to release next month a second test version of a crucial upgrade to its Office desktop application software.

The initial test release of Office 11--the code name for the product--was shipped to about 12,000 testers in October. In a familiar pattern, the software titan is expected to make this second testing version more widely available. Microsoft has taken a similar approach with past upgrades to Office and its Windows operating system.

Office 11 Beta 2 will be geared more toward enterprise customers, said Microsoft executives.

This new version of Microsoft's cash cow comes as analysts question how well the software will be received by customers. While Office still controls more than 90 percent of the desktop office market, customers say they see fewer new features that would compel them to upgrade to the latest versions.

Some customers have even investigated lower cost alternatives. Although a new licensing plan will help keep customers in the Microsoft fold, any slump in sales could make a big impact on the software maker's balance sheet. Office contributes nearly one-third of Microsoft's overall revenue.

With Office 11, Microsoft's new strategy is to focus more on features targeted at businesses, as the company tries to expand its reach into larger customer relationship management (CRM) and enterprise resource planning (ERP) applications to complement its broader product lines.

New features
The new Office 11 Beta 2 is expected to include two new Office products, OneNote, a new note-taking application, and InfoPath, a tool for building and sharing Extensible Markup Language (XML)-based forms.

Only a small number of testers were given InfoPath, formerly code-named XDocs, with Beta 1. Microsoft has not finalized bundling plans for OneNote or InfoPath, which could ship separately from the main Office package.

Like Beta 1, the new testing version is expected to include the Access database, Excel spreadsheet, FrontPage Web site creation and management software, Outlook e-mail, contact and calendaring application, Publisher content creation package, PowerPoint presentation creator and a word processor.

Testers will be able to take advantage of new digital ink capabilities that allow users to write on screens using a penlike device. The support is available in portables running Windows XP Tablet PC Edition.

For enterprise customers, the most valuable part of Office 11 may be support for XML, a crucial technology for delivering Web-based services and for linking applications. But it is uncertain whether Microsoft will do anything in Office 11 Beta 2 to open proprietary schemas, or XML dialects, that could restrict how enterprises make use of the technology. Major applications Word and Excel would be able to save documents in XML as well as Microsoft's .doc format. InfoPath will widely use XML to extract data from Office files into formlike documents.

"InfoPath is part of the XML revolution that is being reflected across all Microsoft products," Microsoft Chairman Bill Gates said on Tuesday during a speech given at the company's Most Valued Professional Summit held at its headquarters. "But in order for the XML revolution to happen, one piece of it has to be rich viewing: The ability to create rich schemas and have right user interaction with XML documents; and that's InfoPath. Being part of the offering really provides that critical piece."

Hurdles into businesses
One issue for Microsoft is the significant number of larger customers who have purchased licenses for Office XP--Office 11's predecessor--but who have yet to install the software. That means those customers might not adopt Office 11 for years. In an informal survey conducted in October during Gartner's annual symposium, 31 percent of U.S. IT managers said their companies used Office 97, 56 percent Office 2000 and 6 percent Office XP.

At the same time, a significant number of customers opted for the older Office 2000 over the newer XP last year.

"Office 2000 gained its market share by about 15 percent last year," said Gartner analyst Michael Silver.

In the past, release of a new version of Office has been a significant event for Microsoft. Office is one of the company's two flagship products. In the most recent quarter Microsoft's Information Worker division, which is largely made up of Office, accounted for $2.4 billion of the company's $8.5 billion in revenue and $1.88 billion of the $3.25 billion gross profit.

Typically, Microsoft sees a surge in sales following the release of a new version of Office, but analysts don't expect to see much of an increase when the new productivity suite ships. One reason is the Licensing 6 program. In May 2001, Microsoft announced the new licensing program, where customers would have to pay upfront, typically under two-year contracts. This "Software Assurance" program guarantees them access to the latest Microsoft technology when it becomes available.

Licensing hang-ups
Microsoft fully enacted the licensing 6 program Aug. 1. Late sign-ups unexpectedly boosted the company's deferred revenue--essentially, cash in the bank accounted for during the course of the licensing contracts--past $9 billion in the first fiscal quarter.

Still, analysts estimate as many as two-thirds of customers chose to skip the program. One reason: Licensing 6 raised upgrade fees anywhere from 33 percent to 107 percent for many customers, according to Gartner.

Many Microsoft customers have complained about the new licensing plan. "We have not signed the Licensing 6 program," said Josep Guallar-Esteve, senior systems network administrator for Eastern Radiologists in Greenville, N.C., a large radiological practice serving seven hospitals. "We are going with OpenOffice/StarOffice/WordPerfect suites. They are getting better and don't have such abusive contracts bundled with the software."

If Microsoft faces any problems delivering Office 11, those snags could come back to haunt the company in a few years, say analysts. Customers typically sign up for Licensing 6 under 24-month Software Assurance contracts.

"People are trying to figure out what Software Assurance really means, and the only data they have about whether they should buy it is Microsoft's track record delivering products," said Paul DeGroot, an analyst with Directions of Microsoft. "If Microsoft can't deliver you an upgrade within 24 months, purchasing SA for 24 months starts to become an issue."

Late summer or midyear?
Microsoft earlier had said the product would be available around midyear. The company is now saying late summer. "Customers will have the final Office 11 product in their hands by the end of the summer," said a Microsoft spokesman.

Some analysts remain skeptical that Microsoft will meet its target date, given the earlier slip in the schedule. But the impact of any delay will most likely be minimal.

"To me, midyear and end of summer are two different things," DeGroot said. "If you're a university student, end of summer could mean end of September, which is quite a bit later than midyear. I guess they could say they have until Sept. 30 to qualify for midyear. That's fudging it."

Even if Office 11 slipped into the fourth quarter because of unexpected problems found during testing, any real customer impact would likely be "symbolic," DeGroot emphasized. If large customers follow past behavior, they will take up to a year testing the new version of Office before widely deploying the productivity suite anyway, he added.

 

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