March 5, 2001 1:15 PM PST

Microsoft seeks revenue boost with rush Office release

Microsoft appears to be hell-bent on getting the next version of Office into customers' hands.

Within days of launching the Office XP preview program, Microsoft has released final, or gold, code to manufacturing. In past projects, a gap of up to two months has separated final beta, or preview, versions and the product's gold release. The rush this time may well be inspired by Microsoft's sagging financial fortunes recently, as the Office line has been one of the software giant's most reliable money-makers.

The current slowdown in technology spending "gives Microsoft a lot of incentive to get Office XP out fast and to get it out right," said Gartner analyst Chris LeTocq. "No other product is more important to their bottom line."

Microsoft's swift move means large corporate customers will likely get Office XP by mid-April, and some computer makers are expected to ship the software on new PCs as early as May 1. The product's official launch may not come until mid-June. The XP moniker, which stands for "experience," is part of a new naming strategy Microsoft revealed last month.

Redmond, Wash.-based Microsoft may have very good reason for the rush, analysts say. As much as 60 percent of people using Office rely on versions released as long as five years ago. At the same time, Office is Microsoft's cash cow, accounting for 46 percent of revenue and more than 50 percent of income. Office is a "productivity suite" that combines essential business functions such as word processing, spreadsheets and e-mail.

With corporate technology spending growing at a slower-than-expected rate and PC sales in a double-digit decline, Microsoft needs to boost Office revenue quickly, analysts say.

In a report issued Monday, for example, Merrill Lynch analyst Steven Milunovich concluded that technology spending growth may only be 5 percent or 6 percent this year. Analysts had earlier expected growth of about 15 percent.

Office XP Lead Product Manager Tom Bailey acknowledged that Microsoft is deadly serious about the new version.

"There's no question this release of Office is seen as one of the biggest things within the company ever," he said.

Sales squeeze
Microsoft last year had already seen much slower Office sales than expected. During the company's second fiscal quarter, for example, desktop applications revenue fell 2 percent year over year, to $2.49 billion from $2.53 billion.

Office upgrades felt the biggest squeeze from slow Windows 2000 sales, even before the fourth-quarter PC sales meltdown, analysts said. Typically, businesses hold off on Office upgrades for new PC purchases or operating system upgrades.

"The PC market is slowing down, and people tend to upgrade the operating system and Office version with the new hardware version," explained Technology Business Research analyst Lindy Lesperance. "If that revenue stream is slowing down, it's important to Microsoft."

Microsoft's biggest problem has been getting customers to move from older versions to Office 2000. "That just wasn't happening," LeTocq said. "There just weren't enough compelling reasons to go from Office 97 to Office 2000."

Gartner estimates that more than 50 percent of Office users rely on Office 97.

Bailey agreed the number is somewhere between 50 percent and 60 percent, adding that "the data would suggest there is about 5 and 10 percent still on Office 95."

Cost has been one factor preventing upgrades, even in last year's good economy.

"There's a cost to upgrading, so companies ask what is the benefit there," Lesperance said. "So it doesn't make sense for companies to upgrade every time but to skip a generation."

Gartner estimates the cost of switching Office versions is $400 to $800 per desktop, depending how well the company manages its infrastructure.

Targeting corporate giants
Microsoft's biggest concern is getting Office XP to corporate customers that purchase bulk licenses. Bailey estimates that these customers will receive Office XP CDs "no later than the latter part of April."

LeTocq explained the significance: "Large companies often will take advantage of upgrades--pick up new licenses--even before they are ready to do the actual upgrades." That amounts to badly needed Office sales that Microsoft can put in the bank right away.

"Whenever they introduce a new version, they definitely get a pop from upgrades," LeTocq said. "Typically, in years where they have a new release of Office, they get improved revenue generation."

Microsoft also hopes to take advantage of good timing. Office upgrades typically follow an 18- to 24-month cycle for churning out new versions, but corporations typically upgrade hardware about every three years.

The first wave of companies preparing for the Year 2000 technology glitch purchased PCs in 1998, and many of those are ready to upgrade this year. The majority also will be moving up from Office 97.

LeTocq described the new version's features as "nice-to-haves" for Office 2000 users but not "must-haves."

"But if you've got Office 97, Office XP begins to look very attractive," he said.

Overall, Microsoft has anywhere from 100 million to 120 million Office users relying on 95 or 97 versions--all which are candidates for Office XP.

Microsoft's rush seems more focused at larger corporations holding license agreements than with those looking to buy new PCs preinstalled with Office XP. Two PC makers that requested not to be identified said they expect to begin offering Office XP on new corporate systems as early as May 1, but likely no later than mid-May.

But one PC maker said Office XP is unlikely to appear on consumer systems before July or even August.

Rush job?
Microsoft Chairman Bill Gates and CEO Steve Ballmer on Friday signed off on the final Office XP code, which the company released to manufacturing.

Microsoft has yet to set an official launch date, which is expected to be somewhere between the end of May and mid-June. As previously reported by CNET News.com, the tentative date is May 31.

But analysts warn that Microsoft may have rushed Office XP out the door too quickly. The company typically goes through a more extensive beta process.

"Extensive testing is very important," Lesperance said. "The question here is was there enough?"

Microsoft may be making a trade-off for the sake of crucial sales, hoping to fix problems with a service release later on, LeTocq suggested.

 

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