Analysts wonder if Microsoft's best years are behind it

Journal Record, The (Oklahoma City), Sep 22, 2000

SEATTLE (NYT) -- Bill Gates grinned from ear to ear as he soaked in a standing ovation from thousands of employees of Microsoft, bused in from the company's Redmond, Wash., headquarters to Safeco Field here for a pep talk.

The occasion was Microsoft's 25th anniversary. On the bus ride to the Seattle ballpark, employees received free box lunches with fortune cookies bearing the message: "Thanks to you, our future is bright." Gates did not disappoint the troops, promising in his address that "the best is yet to come."

Outside of the Microsoft fold, however, investors and consumers alike are wondering what's in store for the company's next quarter century -- and if its best days are behind it.

There are signs that the company may not be able to sustain its blistering growth. Its stock is down 40-plus percent since the beginning of the year. Sales of its next-generation operating system, Windows 2000, have been off to a slow start, depressing revenues for the last quarter of its 2000 fiscal year. Microsoft's sales grew just 16 percent in its fiscal year ended June 30, the first time in at least 10 years that the rate has dipped below 20 percent.

"I don't think Microsoft has any chance of growing over the next 25 years at the same rate they have been growing," said Tom Bittman, vice president and research director of the Gartner Group, a Stamford, Conn., consulting firm.

While Microsoft's dominance of the personal computer is undisputed, the red-hot growth in PC sales is beginning to cool. At the same time, the explosion of the Internet has meant the proliferation of other forms of computing, from palm-size organizers and cell phones to wireless "Web pads" and game consoles -- all markets where Microsoft is yet unproven.

Finally, Microsoft faces the possibility it will lose its appeal in the lengthy and bitter legal battle against a federal antitrust suit and be forced to split into two companies -- one selling computer operating systems, the other developing software applications.

The company will learn next month whether the appeal will be heard directly by the U.S. Supreme Court. Microsoft has argued that the government's antitrust case is "completely unsuitable for direct appeal" because of its complexity, and that federal Judge Thomas Penfield Jackson, who heard the lawsuit, made "serious and substantive procedural errors."

The government is seeking the direct appeal, which is permitted in major antitrust cases if four of the nine justices favor it, rather than an initial review by a appeals court. The normal appellate process could delay a final resolution for another two years.

In the meantime, Microsoft is trying to push ahead.

"Will Microsoft be going away anytime soon? Absolutely not. Will there be a complicated period of change? Yes, and it's not going to be an easy ride," said Judith Hurwitz, chief exeutive of the Hurwitz Group, a technology consulting firm in Framingham, Mass. "IBM went through this 10 years ago. They were top dog. For decades, they could do no wrong. Then they got slammed. It took IBM a while to regain its leadership. It was a very painful transition for IBM. The same will be true for Microsoft."

To be sure, Microsoft isn't sitting still. In June, it unveiled a broad Internet strategy called Microsoft.NET, meant to gradually transform the entire company's business from selling individual software licenses to a subscription-based business model where customers pay regular fees for access to Microsoft's latest software and support services.

The company is also investing heavily in software for interactive television, pocket-size PCs, and portable devices such as MP3 digital music players. Next year, it will enter the market for game consoles. Microsoft also plans to beef up and consolidate its fractured MSN Web properties.

All of this is good, analysts say, but investors should expect slower sales growth while Microsoft finds its way. "They'll be challenged to show annual growth much stronger than 15 to 20 percent," said Andrew Brosseau, managing director of SG Cowen Securities in Boston.

One key challenge for Microsoft, Brosseau says, is to move from providing software for desktop computers to supplying software and services for large businesses and Internet-related companies. "The desktop business is simply getting too mature for the kinds of growth they're accustomed to," Brosseau said. "It's a transition that's going to take some time for them to make."

Of course, no one is saying the personal computer will disappear, and some industry observers believe it will become the hub for coordinating all things digital. As for growth, Microsoft could try to maintain momentum by going global with its desktop business, says Tim Bajarin, president of Creative Strategies, a consulting firm in Silicon Valley.