I m Dan Farber, editor-in-chief of ZDNet and I m here todayto talk about what I m calling Microsoft s dilemma. I put a question mark therebecause to some people it may not look like a dilemma when you go over thenumbers and I pre-loaded this session and put up seven business units that Microsofthas and some numbers to go along with it so that we could talk about what s adilemma and what s not. Let me start with the big business, the client softwareWindows OS. It s a $12.2 billion business for its fiscal year which ended Juneof 2005 and an operating income of $9.45 billion.
Nothing wrong with that business. However, it does have adilemma. The desktop is not going away but all of the energy and interestingactivity seems to be going on more on the web. Now Microsoft has Vista comingout in 06 which should pump up the sales again but I think if you look outover time, the client OS is going to be much, much less important than it istoday.
Now moving on, servers and tools, very important businessinfrastructure. Infrastructure sells because it powers businesses so SQLServer, Exchange Server and all the development tools and obviously, it isimportant to have developers. They build the applications that keep Microsoftprinting money. I don t think the server business is in big trouble at all. Infact, I think it is going to continue to grow at a good rate because they justcame out with SQL Server 2005. That s a hot product. They are revivingExchange, they just came out with a new development tool with their visualstudio so that s on its way up but as long as you re in the so called Microsoftmono culture, it s going to work. But just as we re seeing, there is Linuxcoming in on the other end from here and obviously, on the database side whereyou have SQL Server, there is Oracle so it is not that simple of an equationbut it is definitely an area where Microsoft is going to have a lot of growth.
The big ticket item, look at this, $11 billion in revenue,almost $8 billion in operating income and that s a really good business andthat is Office. Now again, Office 12 is coming out next year with great newinterface features, much more integration with the web and this set of productswhich are the Microsoft business solutions which has not been a great business.As you can see, it lost money. It has been losing money every year but it seemsto be getting a little bit better but there is a ton of competition out here.You ve got Salesforce.com and SAP and everybody else and it s just not an areawhere Microsoft has a lot of strength. I think they ll do some acquisitions totry to really double down in this space over time because they really need toprint more revenue.
This is a company with $40 billion in revenue for its fiscal 05. It expects to do $44 billion next year. Now how do you keep that growthgoing? How do you keep shareholders happy especially when you have a stock thathas been pretty much flat? So they have to have growth and it is going to betough to get growth without acquisition here. This area is going to be hit alot by the software as a service as I was speaking about where people aresaying, Where s Office for the web where you don t need a huge download andwe have competitors like Openoffice.org and StarOffice and lots of littleplayers coming on with word processors that are web owned.
Moving on here s a growth business although embedded,Windows Mobile then Auto Play as well. It s losing money but again, it s goingto be a growth area because there is so much moving into mobile and having amobile operating system. They ve got a bunch of deals with the phone companies.They have a new Motorola phone coming out that s pretty cool so I think therewill be growth in that area.
Home entertainment, big area and they ve invested billionsand billions over the last few years. The big deal now is Xbox and we use adifferent color here, 360 which just came out. It s a really super hot product.This is a business where they have a product called Halo, a game, a $300million business so it s just printing money. Now they lost money here. Theylose money on every Xbox that they sell or Xbox 360, at least according to somepeople who unpacked it and found that they lose about $126 a unit, but they reinvesting a loss now so that they expect to be profitable in the next year or twoin this space. Are they in a dilemma in this space? A little bit, there are alot of competitors but they are certainly investing and this is a company with$37 billion in cash to invest so I don t think that they have a probleminvesting in this space either.
The area where it is really getting most interesting ishere. This is Microsoft Live, MSN, where they have their services orientation.They brought in Ray Ozzie who used to have a company called Groove and he wasat Lotus and IBM where he founded Lotus Notes. He s a real leader for thecompany now in turning it into a services organization where services drivesthrough everything. That s a hard transition for a company that has beenfocused for all these years on client server, the difference being that on theservices end everything kind of goes on the web infrastructure and lives on theweb and that s quite different from where you have the fat, rich clients likeyou have with Windows and Office.
So we re going to see Microsoft investing very heavily inthis space to compete with you know who, Google, Yahoo, etc. And already, theyhave something new. They have an ad center to compete with Ad Sense from Googleand Yahoo s offering. They re trying to get a deal with AOL so they can getthat business for their new ad center. They ve launched Live and also a liveoffice for small businesses so I think this is just the beginning ofMicrosoft s attempt to overcome this dilemma of being the legacy player in aworld we have lots of companies like a Google or Yahoo, where they grew up onthe web and they don t have to support all this legacy stuff going forward andcan just focus on what the future is going to be.
