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Microsoft's fortune rides on Windows 2000, analysts say


February 8, 2000
Web posted at: 8:43 a.m. EST (1343 GMT)

by James Niccolai

(IDG) -- With the launch of its Windows 2000 operating system on Feb. 17, Microsoft will try to move up the software food chain by beginning its assault on the lucrative midrange server business. At stake for the company will be its ability to keep growing at the fairytale rate it has enjoyed for the past half decade, industry analysts said.

The new OS will also play a key role in determining whether Microsoft retains its dominant role in the computing industry in the years to come, analysts said. As the focus of IT computing shifts from local networks to the Internet, Microsoft will try to hawk Windows 2000 as a reliable platform on which companies can build e-commerce sites and other types of Web-based applications and services.

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"Windows 2000 is an operating system that is so critical for the overall success of Microsoft that it is hard to state it strongly enough," said Daniel Kusnetzky, a program director with research firm International Data Corp. (IDC) in Framingham, Mass., echoing an opinion expressed by several analysts.

Since it launched Windows NT 4.0 in 1996, Microsoft has bulldozed aside competitors in the departmental server business -- most notably Novell and IBM -- to help it report financial results that have wowed investors and sent its stock price soaring. The software vendor shipped more than 2 million copies of Windows NT in 1999, up almost 400,000 from 1998, to give it the lion's share of new server OS unit shipments, according to recent figures from IDC.

But its rate of growth in the server OS market, while still strong, is tapering out, analysts said. Because Microsoft already owns such a large slice of the market for file, print and other low-end types of server, achieving the giant percentage gains it has enjoyed in previous years has become almost impossible.

"Microsoft has gotten to a size where it's almost impossible to outgrow the market," Kusnetzky said. "The surprising 60 to 70 percent growth period is over."

Microsoft could reverse that trend by selling its new OS in the type of midrange servers used to manage thousands of PC clients, run massive databases and serve up busy e-commerce Web sites. Currently dominated by Unix vendors like Sun Microsystems and Hewlett-Packard, the midrange market promises higher returns on sales and is one that Microsoft has long coveted. Issues of scalability, however, not to mention highly-publicized concerns over the stability of Windows NT, have kept the software vendor for the most part locked out.

With Windows 2000 Microsoft hopes to change that. The company claims that the millions of dollars and years of work hours it has invested in the product have produced an OS that is reliable, scalable, manageable and secure enough for demanding enterprise applications. It points to success stories like Dell -- a close ally of Microsoft -- which uses Windows NT to conduct millions of dollars' worth of business through its online store, as proof that its software is reliable. Microsoft is already using Windows 2000 on 300 servers that run its heavily trafficked Web site, as are a few early adopters like Barnes & Noble.

Analysts said feedback from Windows 2000 beta testers has been favorable, once they became accustomed to its differences from NT. "Windows 2000 brings a lot of technology to the table. It looks a lot more stable and reliable than Windows NT, and that's the biggest thing Microsoft has going for it," said Al Gillen, a research manager with IDC.

"After six years of development it ought to be ready by now," said Laura DiDio, a senior analyst with Giga Information Group.

The experiences of beta testers may tell only part of the story, however. Winning in the data center will require Microsoft to create software that performs at its best heterogeneous environments, and that means high levels of interoperability -- something the company hasn't exactly excelled at, analysts said. And where Windows software dominated many LAN environments, Microsoft will need to accept a diminished role if it wants to play in the enterprise computing room.

"Their challenge is to become a good corporate citizen, which means not always being the star of the show but being a supporting player," IDC's Kusnetzky said. "That might mean sometimes standing under the spotlight; at other times it means taking a seat in the orchestra pit."

Delivering products in a timely fashion will be another factor. Microsoft originally said it would deliver Windows 2000, formerly called Windows NT 5.0, back in 1997. The version of Windows 2000 aimed at higher-performance servers, called Windows 2000 DataCenter, isn't due to ship until mid-year. This month three versions of the OS will debut: Windows 2000 Professional, the desktop client; Windows 2000 Server; and Windows 2000 Advanced Server.

The company has hyped its operating system so much that expectations are sky high, and after numerous delays Microsoft may get only one chance to prove itself, analysts said. IT managers responsible for choosing the critical server environments that keep their businesses up and running won't look kindly on teething problems, and a string of early, publicized failures could cause a major setback.

"Unless Microsoft can prove that Windows 2000 is all of those things -- highly interoperable, consistent and reliable -- they can damage themselves and lock themselves out of the computer room for the next decade," Kusnetzky said.

Continuing Microsoft's financial success isn't the only thing that makes Windows 2000 a vital release for the company. In a computing environment that has changed rapidly since the release of NT, in which the Internet, electronic commerce and Web-based services look set to predominate, Windows 2000 will be key to helping Microsoft expand its sphere of influence and remain a dominant player in IT computing, analysts said.

Microsoft last month unveiled an initiative called Next Generation Windows Services. Along with Windows DNA 2000, NGWS aims to provide software and tools that allow companies to build new types of services for e-commerce and accessing information and services over the Web. Microsoft hasn't provided specifics about NGWS, but technologies in Windows 2000 are likely to be wedded closely to the new initiative, said Larry Perlstein, a research director with Dataquest in San Jose, Calif.

New members in Microsoft's BackOffice family due later this year, including SQL Server 2000 and Exchange 2000, are also closely tied to features in Windows 2000, in particular a new directory services feature called Active Directory. Such close ties between Windows 2000 and other products in the pipeline intensify the pressure to make Windows 2000 a success, said Carl Howe, a senior analyst with Forrester Research in Cambridge, Mass., who sees Windows 2000 as "the future of the company."

Microsoft could have picked a quieter year to release its new OS. It will face several distractions over the next 12 months, including its ongoing Java lawsuit with Sun, not to mention any fall-out it may incur from the U.S. government's antitrust action. At the same time, while it tries to break new ground at the high end of the market, it faces a potential rival at the low end in the form of Linux.

Analysts interviewed for this story were unanimous that Microsoft's position isn't likely to be eroded in the near term. While customers won't jump to its new operating system overnight, many expect to upgrade their desktop and server NT environments quickly starting at the end of the year, and demand for the company's software at the departmental level will continue to grow at a healthy clip, Giga's DiDio said.

"The anticipation and the pent up demand for this product is tremendous," she said.

The jury is still out, however, on its ambitions at the high end of the market and its efforts to become a leader in providing software and services for new types of Web-based applications. Microsoft has deep pockets and a giant pool of programming talent and has shown a deft ability in the past for identifying new markets and moving into them, Dataquest's Perlstein noted.

IDC's Kusnetzky was more cautious. "Microsoft has presented a grand vision that is so all-encompassing it will be very hard for any software product to live up to it," he said. "It's going to be a significant challenge."

James Niccolai is senior U.S. correspondent for the IDG News Service in San Francisco.

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