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EDITIONS
Thursday, 28 June, 2001, 18:10 GMT 19:10 UK
Microsoft's business challenges
United States Court of Appeals for the District of Columbia Judges, at the US Federal Court House in Washington, DC.
United States Court of Appeals - the judges will be hearing the appeal in the Microsoft anti-trust case.
As Microsoft awaited the Court of Appeal decision, the software giant was also trying to cope with a slowdown in computer sales, the global economy and thus its revenue growth.

The difficult trading conditions come in a year when the software giant launches three major new products, Office XP in May, Windows XP in October and the X-box games console in November.

Its Office applications have traditionally been one of the company's biggest earners and Microsoft will be hoping to raise cash for the hefty marketing spend on its other new products.

Microsoft's market share may be the envy of the business world, but it has left the company in search of new sources of revenue.

The company posted an income of $6.46bn for the quarter ended 31 March 2001, far stronger than most analysts' expectations. It did however warn that it could be affected by the US economic slowdown.

Microsoft continued to expand its dominance in desktop systems and also increased its sales of server software last year, according to preliminary figures from the IT consultancy IDC.

"But where do you go from 90% of the market?" asked IDC analyst Dan Kusnetzky.

One option is games consoles.

Microsoft hopes to reap profits in the lucrative games console business, where it is poised to go head-to-head with Sony in the battle to take a share of the $20bn a year market.

But gaining market share will come at a price. Merrill Lynch analyst Henry Blodget believes that during the next five years it will cost the company $2bn to bring the X-Box to the market - before the project breaks even.

Market saturation

Chris LeTocq with the IT consultancy Gartner said: "[Microsoft] has to broaden its market and expand its revenue opportunities."

This comes at a time when sales of PCs are slowing, and more people are using non-PC devices to access network applications, Mr Kusnetzky said.

Microsoft Xbox - new games console, players may connect voice activated headsets.
Microsoft looks to develop more alternative non-PC devices like its Xbox game console.
And at this point, many of those devices do not run Microsoft software, he added.

The company faces stiff competition from established embedded systems manufacturers, handheld makers Palm, the Symbian operating system for personal digital assistants, and even the upstart operating system Linux, he said.

"The challenge is that as we move into a web-oriented world, there is no specific tie between web applications and Microsoft," Ms Kusnetzky said, but added, "Microsoft is trying to make that happen."

Microsoft's dot.net strategy

The company's dot.net strategy is an integral part of its efforts. In Mr LeTocq's words, the Seattle firm hopes to "write the internet as they wish it would have been written, as a Microsoft platform".

But dot.net is also key to the company's efforts to not only broaden its reach beyond the PC but also to grow its revenue.

With Office XP, Microsoft will try to leverage its desktop presence and its dominant position in office suite software to move users to accept a new revenue model - paying a subscription fee for software use, instead of a one-off payment for indefinite usage.

As yet, it is unclear how keen users will be to accept this payment model.

And Microsoft's dot.net strategy could cause renewed anti-trust scrutiny.

End to end

Microsoft has always worked to create end-to-end software solutions, and Mr Kusnetzky believes that Microsoft will continue to drive users to all Microsoft solutions.

As part of its dot.net strategy, it is rolling out development tools, an operating system strategy and desktop applications that lead computer users from one Microsoft application to the next.

"Because in tying them all together, it is preferable to use Microsoft software because they all work together," Mr Kusnetzky said, adding, "Microsoft uses creative incompatibilities to drive people to an all Microsoft solution."

"Whether this is illegal, the court will decide, but it is clear that Microsoft makes its software [work] better with its own software than with others," he said.

"I think that Microsoft knows about this and uses it to drive the market," he added.


The settlement

Appeal court ruling

Appeal hearing

Analysis
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