Microsoft (Nasdaq: MSFT) has long counseled Wall Street that the adoption of Windows 2000, which is aimed at corporate computer users and small businesses, would be slower than consumer products such as Windows 95 or 98. Still, indicators that many corporate buyers are reluctant to commit to an upgrade helped send Microsoft's shares down by nearly 6% Friday. Microsoft fell to $99.9375, down $6.0625, in 4 p.m. Nasdaq Stock Market trading.
Microsoft officials said nothing had changed in their forecasts for the product and, indeed, the lowered expectations make it easier for the company to exceed them. "We don't expect the 'midnight madness' thing of Windows 95 to happen," said Keith White, director of marketing for Microsoft's Windows division. Still, he added, "large corporations and dot-coms are clamoring for new technology."
Nonetheless, Microsoft is flying into multiple headwinds as it readies its largest-ever marketing campaign to introduce a new product. Competitor Novell Inc. claims it has identified a previously undiscovered security problem in the new product.
Free Linux a threat
In addition, the free Linux operating system has been surging in popularity, posing a low-end threat to Microsoft. The research firm International Data Corp. recently found Linux to be the second-most-popular server-operating system in 1999, with 25% of unit sales. Windows NT held 38% of the market but, significantly, hadn't gained market share over 1998.
In a conference call Thursday, Michael Dell, chief executive officer of Dell Computer Corp., said he saw increased demand for Linux and predicted that corporate adoption of Windows 2000 will likely be slow. His remarks echoed findings of a report distributed Friday by Gartner Group Inc., an influential technology-consulting firm, that advised corporate buyers to tread carefully in introducing the new technology for network servers.
The server-software market is particularly important for Microsoft's plans to broaden its reach in corporate computing and on the Web. Gartner Group, Stamford Conn., forecast that only between 3% and 6% of users of the previous version of Microsoft's server software, Windows NT, will upgrade to Windows 2000 by the end of the year, though that figure should jump to nearly 50% by the end of next year. Other surveys, however, found more than 30% of information-technology managers expect to install Windows 2000 this year.
Michael Gartenberg, a Gartner vice president, said companies should wait until Microsoft releases the first "service pack" to correct flaws in Windows 2000 before undertaking large-scale deployments.
Active directory flaw
Capitalizing on such concerns, rival Novell (Nasdaq: NOVL) on Friday said it found a flaw in an important key feature of Windows 2000, known as Active Directory, which Novell said could allow unauthorized employees to gain access to sensitive data such as payroll or personnel files. Sunday, Microsoft officials said they found a critical error in the procedures Novell used to identify the supposed flaw and have concluded no security hole exists. "There has never been a major release of an enterprise piece of software that goes in without a glitch," said Melissa Eisenstat, an analyst with CIBC World Markets Corp. in New York. "That people would have trouble getting Windows 2000 to work, that's not news."
Microsoft says it has put Windows 2000 through the most rigorous testing of any product it has released, and has spent $160 million in a program to increase its reliability. But the company concedes that bugs are inherent to all large software projects. White said: "We didn't ship this with any show-stopper bugs, which means bugs that cause lost data or crashes. This product is rock solid."
Despite the challenges, Windows 2000 should become a huge revenue generator. David Readerman, an analyst with Thomas Weisel Partners, a San Francisco merchant bank, said the server versions of Windows 2000 would contribute more than $3.5 billion in revenue in 2000, on top of more than $5 billion in desktop-operating system revenue. That would represent more than one-third of Microsoft's projected $25 billion in revenue for the calendar year, he said.
But Readerman said much of the revenue simply replaces revenue from earlier versions of Windows, with any growth coming mostly from increases in personal-computer shipments. But the product is vital to drive growth in other parts of the company, he said.