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Microsoft thinks small
(Agencies)
Updated: 2004-06-18 09:29
News that Microsoft Corp. discussed a merger with business software giant SAP
AG has focused new attention on Microsoft's limited success in a market it would
love to conquer.
Microsoft is rejiggering plans to cater to the more specialized needs of
small businesses, part of a wider effort to find new revenue streams to augment
its traditional cash cows. The hope is to score with accounting and other
software that Microsoft is not traditionally known for. The target customer:
companies with fewer than 1,000 employees.
Angie Kirkwood uses
Microsoft-owned Great Plains software to enter tour deposits and payments
at an Edmonds, Washington-based travel firm.
[AP] | The most recent changes -- including
putting the Microsoft Business Solutions unit under the direct control of chief
executive Steve Ballmer -- come as the company concedes it has not been able to
beat the competition as it hoped.
Microsoft made its first big push in the market several years ago, with the
$1.1 billion acquisition of Great Plains Software Inc., a longtime player in a
fragmented sector lacking a dominant leader. Microsoft believes the market
includes as many as 40 million companies worldwide.
Now the segment is more important because Microsoft's big moneymakers -- the
Windows operating system and Office software -- have grown so dominant that
their respective markets are getting saturated. Microsoft's stock price has
remained relatively flat in recent years.
Chris Alliegro, lead analyst with independent research firm Directions on
Microsoft, believes Microsoft sees small- and mid-sized business software as the
"potential next big revenue wave."
But despite Microsoft's potential power -- including around $60 billion in
cash to fund acqusitions or product research -- selling to small and mid-sized
companies hasn't come easily.
Niche businesses
The Business Solutions division, MBS, had the weakest results of Microsoft's
seven units in the most recent quarter, meeting expectations but continuing to
lose money -- $65 million on revenue of $153 million.
The unit was created out of acqusitions of Great Plains and Denmark's
Navision, combined with some of Microsoft's own small-business software. That's
left it with a wide array of products catering to specialized needs, such as
accounting and customer relationship management, for niche businesses like
mom-and-pop manufacturers or small firms needing broad multinational support.
As the company has tried to fold in its acquisitions and train its sales
force, some analysts say the unit has lacked strong direction.
"At the end of the day, I think they need a better strategy," said Rob
Enderle, principal analyst with the Enderle Group.
One such strategy could be to try to grab more overall business from other
big companies that sell business-related software, facing off with the likes of
Oracle Corp. and Germany's SAP.
In defending its hostile takeover bid for rival PeopleSoft Inc. in a federal
antitrust case in San Francisco, Oracle is arguing that it faces an impending
threat from Microsoft.
Mindful that Oracle's lawyers would be mentioning its merger talks with SAP,
Microsoft disclosed that it had made an overture to SAP. The talks didn't get
far, the company said, as Microsoft decided such a marriage would be too
difficult.
Lower expectations
Orlando Ayala, a Microsoft sales star recently named chief operating officer
of MBS, insists that businesses with 1,000 employees or less are a "sweet spot"
rife with untapped potential.
Still, he says he's concerned that companies like Oracle will try to muscle
into that turf, joining current competitors such as Intuit Inc. and
Salesforce.com. Also lurking is IBM Corp., which makes most of its money selling
hardware, software and technology services to big organizations but has made a
goal of getting more action from small and medium businesses.
Ayala says MBS's growth has been stymied by the distractions of reorganizing
the division. He says recent moves, which included some layoffs, are "not a
retrenchment" but rather a sign that "we are putting the pedal to the metal."
But the company has scaled back its expectations.
At one time, Microsoft had said it expected the unit to have annual revenue
of $10 billion, perhaps as early as 2010. Ayala now says the unit has the
potential to reach that goal but it would be hard to say when.
He does expect the unit to reach $1 billion in annual revenue in the next two
years -- and become profitable "in a very, very reasonable time frame."
Still, it could be years -- if ever -- before the unit gets anywhere near to
becoming a performer on the order of Windows, which earned $1.6 billion on
revenue of $2.9 billion for the most recent quarter.
The challenge is that selling software to cash-strapped small businesses is
complex. Such businesses often have individualized needs and little money to
spend on solutions, and often take a long time between buying new products,
trying to squeeze as much life as possible out of old systems.
Two things Microsoft has going for it are name recognition and cost.
Karen Scholl, chief financial officer for the small Edmonds, Washington-based
travel firm Rick Steves' Europe, signed on for Great Plains software to handle
the company's accounting needs right around the time Microsoft took it over.
She had been considering buying software from smaller competitors, only to
see them go belly up. Scholl said it was a comfort that Microsoft was behind
Great Plains.
Another advantage for Microsoft -- but possibly for competitors, too -- is
that the entire market segment seems poised for big changes, as evidenced by
Oracle's unwelcome bid for PeopleSoft, said Albert Pang, a research director
with market research firm IDC.
"The whole market is up for grabs right now," Pang said.
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