Microsoft’s splashy dive into the $10 b SMB market

WASHINGTON: Microsoft, facing slower growth of its core Windows business after a decade of frenetic growth, has made a aggressive drive into consumer electronics with its Xbox video game console and its futuristic plans for a new generation of "smart" appliances wired with its software.

But analysts say that the success, or failure, of its less-celebrated, but equally new Business Solutions division could prove to be the bigger and more immediate influence on its future sales growth.

As the cost of technology continues to fall, shop owners, builders, real estate companies and other small- and mid-sized businesses are turning to computers and software to implement big-business know-how in tracking inventory, sales contacts and customer information as well as payroll and accounting.

At stake is a fragmented market already targeted by other software heavyweights such as Oracle Corp. and Siebel Systems Inc. hoping to move in and reap billions to make up for slower spending by big companies on accounting, payroll and customer management software.

"Business Solutions is the dark horse," said Matt Rosoff, analyst at Directions on Microsoft, an independent researcher.

Created last year as an amalgamation of Microsoft's online "bCentral" service for small businesses and the $2.4 billion acquisitions of business software makers Great Plains and Navision, the software giant's Business Solutions division is one of its best bets to boost growth, analysts said.

"A lot of attention goes to Xbox and Microsoft's consumer products these days ... But out of all their new businesses, this one has the best chance of success," Rosoff said.

Although the world's largest software maker unveiled a rush of new products last year and was known to be releasing a new version of its Office software later in 2003, Microsoft had been quiet until January on its plans for business software.

That changed recently with the launch of Microsoft CRM for Customer Relationship Management, its first foray into the competitive market for programs that lets corporate sales and support staff keep track of customers.

Although it missed its targeted launch by the end of 2002, Microsoft CRM is the division's first major home-grown product, one that it thinks will resonate with customers since it is integrated with Microsoft Office, the company's second-largest money-maker after Windows.

"This is not an enterprise system that's been slimmed down," said David Thatcher, general manager of Customer Relationship Management at Microsoft. "This was built from the ground up for the mid market."

Indeed, Microsoft is betting that it can build its Business Solutions division into a $10 billion business by 2010 that will make up a quarter of its total revenue.

Even when including sales from Great Plains and Navision, established businesses that Microsoft acquired to beef up its fledgling division, Business Solutions pulled in $135 million in revenue last quarter, just 1.6 percent of the software giant's total quarterly sales.

To turn business solutions into a billion-dollar business, Microsoft is stitching together a complicated network of nearly 4,000 employees, at least six overlapping product lines and operations from far-flung locations such as Fargo, North Dakota, and Denmark into a single business group.

To sweeten the appeal of its software for mid-sized businesses, Microsoft also announced a plan last year to provide financing for customers, its first comprehensive financing program for a growth market.

"We now have critical mass," Satya Nadella, corporate vice president at Microsoft for product development, said.

Microsoft Senior Vice President Doug Burgum, former chief executive of Great Plains, has been charged with forging the new division and with a mission to score sales in a fragmented market long ignored by tech heavyweights.

The way that Great Plains and Navision sold their software -- mainly through resellers that consult closely with end-users, nearly mirrors Microsoft's own marketing approach.

Also, since their budgets are more flexible than larger corporations, which typically need to spend millions of dollars at a time to upgrade, mid-sized business are more likely to be regular buyers of software and outsourcing services, analysts said.

For example, Microsoft CRM costs anywhere from $400 to $1,300 per user -- a fraction of the cost for high-end customer service systems.

Another twist to the challenge is that Microsoft is looking to give its Business Solutions division global reach from the outset. Microsoft acquired Danish software maker Navision to do just that, and in one fell swoop managed to get a foothold in most of Europe's major markets.

"The European marketplace (for small and mid-sized business applications) is much more fragmented and diverse. The competition is extremely local," said Preben Damgaard. co-CEO of Navision, "For that reason, we have to be more local than the locals."

© Reuters