Legal, business pitfalls await Microsoft

Scott Hillis

SEATTLE: The good news for Microsoft Corp. is that the world's top software
company is finally waving goodbye to what was arguably the worst year in its
25-year history.

The bad news is that the coming year doesn't look any better.

Surely, Microsoft co-founder Bill Gates won't look back on the year 2000 and
smile. Not only did a federal judge order the company split in two, but its
once-torrid growth slowed to a more modest pace, the share price was cut in
half, and hackers embarrassingly made off with company secrets.

Microsoft had ended 1999 with a bang as its stock hit a high of $119-15/16 on
Dec. 30. Last Friday, it was trading at $49-3/16, near a year low of $48-7/16.

But Microsoft's greatest challenges, in both the legal and business arenas,
still lie ahead, analysts said.

"As I look out, I don't see anything to get really passionate about in
the Microsoft story near-term," said Rick Sherlund, a Goldman Sachs analyst
who is widely considered the top analyst on the company.

Many analysts had thought the Redmond, Wash.-based company, which makes the
Windows operating system and Office package of business software, had turned the
corner when it announced rosy results for its first fiscal quarter in October.

But those hopes were dashed last week when Microsoft warned that profits for
its second quarter and full year would fall about 5 per cent short of earlier
estimates due to a slumping PC market.

Off to bad start

The profit warning was Microsoft's first in 11 years, and only its second in its
14 years as a publicly traded company, and set a glum tone heading into 2001.

"The first half of the year is very risky," said Rob Enderle, an
analyst with Giga Information Group, a technology consultancy. "There's a
lot more downward pressure on revenue than upward pressure."

The problem is that consumer buying of PCs has slowed dramatically while
sales of Windows 2000, Microsoft's flagship operating system for powering
business computers and networks, hasn't gained traction yet due to the long-time
corporate customer's need to evaluate and carry out such an upgrade.

"At a foundation level, certainly Windows 2000 has to do better for
Microsoft's fortunes to turn back toward the positive," said Dwight Davis,
an analyst with Summit Strategies.

Windows 2000, unveiled in February, is the springboard for Microsoft's
sweeping .Net plan to weave the Internet into all its products and eventually
start selling software as a subscription service rather than on boxed CD-ROMs.

But although the company trumpets .Net as a new phase in computing and the
Internet, it must win over thousands of independent software developers to help
bring that vision into sharper focus.

"The company is still struggling with a clear-cut definition of what
.Net is and what it does," Davis said. "It is not a bad unifying
vision and initiative but because of the breadth and complexity, it is very hard
to articulate."

Continued...

Whistler while you work

Two bright lights on the horizon are releases of the next version of Windows,
dubbed Whistler, and an update to Office.

"These are each very compelling products that will showcase the
excitement of the personal computer. It's up to us to do a great job bringing
these two break-through products to market with a great deal of
enthusiasm," Microsoft chief financial officer John Connors told analysts
last week.

Those are scheduled for the second half of next year, but analysts are
skeptical that Microsoft, with its history of pushing back product release
dates, can deliver the goods on time to lift results.

"I'm a little bit leery of predicting when Microsoft's products will
actually arrive. They have a tendency to slip a little bit," Davis said.

It also remains to be seen whether Microsoft's ventures into handheld
computers, interactive television, and video games will bear fruit.

Many seem to be counting on US Federal Reserve chairman Alan Greenspan
pulling the US economy back from the brink of an all-out recession next year.
Microsoft is counting on businesses opening their wallets to upgrade their
equipment. A credit crunch won't help.

"A better economy is going to help (Microsoft), which is more a function
of Greenspan," said Scott McAdams, president of Seattle-based brokerage
McAdams Wright Ragen.

McAdams said he expected Microsoft's results to improve in 2001 since they
will be held up against this year's ho-hum numbers, which were compared against
those racked up amid the heady days of the dotcom gold rush.

George W to the rescue?

Even if everything else falls into place, it will be impossible to ignore the
biggest cloud hanging over Microsoft's head - the US government's antitrust case
that threatens to bust it up.

Republican George W. Bush's election victory is seen as a plus for the
company, but it is unclear how much influence the new president can wield, since
Microsoft has already been found to have violated antitrust law.

Some legal analysts have said a Bush administration would be more likely to
cut a deal with Microsoft, but few see the company emerging entirely unscathed.

"At the very least, that's a distraction for their executives, and while
the election of Bush indicates that the remedies will be less harsh, there will
still be remedies, so they still have to deal with that," Enderle said.

Barring any settlement, the case is almost certain to be appealed to the
Supreme Court.

In a brief filed with a US appeals court in November, Microsoft denied it
held a monopoly or had violated antitrust law, and asked that the breakup ruling
be thrown out.

The next phase in the case is due on Jan. 12, when the government is to file
its brief to the court.

(C) Reuters Limited 2000.