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| Seven Businesses Plan for FY'04 |
| Aug. 4, 2003 |
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Executives representing each of Microsoft's seven businesses reviewed the previous year's performance and explained their goals for fiscal year 2004 (which began July 1, 2003) at a recent conference for financial analysts. In contrast with past Financial Analyst Meetings, in which Microsoft has revealed new strategies and justified entering risky new businesses, this year's presentations focused on how the company will turn existing initiatives into slow but steady growth in the coming fiscal year. The presentations also showed Microsoft's maturation into a company in which divisions have discrete business goals and more autonomy in how they run their businesses. Long Road to Autonomy When first introduced in spring 2002, Microsoft's seven business units were useful mainly as a way for Microsoft and outsiders to track the financial performance of certain product lines, particularly new areas such as business productivity applications and gaming consoles. This has changed. Over the last 18 months, the company has made organizational shifts that place the product groups in each business unit under a single leader (with a few exceptions), and has given each business its own financial team that controls resource allocation and is responsible for profit and loss. According to interviews published in the Wall Street Journal, CEO Steve Ballmer has given the business leaders more discretion in making day-to-day decisions, such as determining marketing expenditures, making investments or striking strategic partnership agreements, and implementing cost-cutting measures, while still guiding the company's overall strategy and stepping in to resolve disputes between business leaders. (For a chart detailing the leaders and financial performance of each business, see "Seven Businesses: FY'04 Overview".) Client: Full Speed Toward Longhorn The Windows Client business, Microsoft's biggest revenue category and most profitable business line, will grow more slowly than in the previous year. Revenue growth is expected to be 6% in FY'04, compared with 13% in FY'03. Microsoft expects this slowdown because FY'03 figures were boosted by some unique occurrences, including a shift in licensing plans that caused many business customers to buy multiyear licenses at the end of FY'02 (unearned revenue from these licenses was recognized over the course of FY'03) and a shift among businesses from Windows 9x to higher-priced Windows XP Professional desktops. In spite of the slowdown, Platforms Group Vice President Jim Allchin sees the following opportunities for the Client business in FY'04:
But overall, FY'04 will be a heads-down year in the Client business, as most of the group concentrates on the next Windows client, code-named Longhorn, which is not expected to be released until the end of 2005. Allchin and other Microsoft executives highlighted the many advances expected in Longhorn, including better manageability, security, and integration. (See "Gates, Ballmer Bet on Longhorn".) Info Worker: Big Launch The business goals and strategy of the Information Worker Group remain almost unchanged from FY'03, and Microsoft expects slightly less revenue growth—around 10% compared with 12% for FY'03. Group Vice President Jeff Raikes noted an important transition under way in the Information Worker business. Instead of focusing primarily on client applications that allow workers to create and manipulate documents, this business is working on a combination of clients, servers, and services that help workers collaborate in teams and improve overall productivity. This transition is necessary because the market for document-centric applications is already saturated: that is, earlier versions of Office already have most of the document-centric features customers want, and low-cost competitors such as StarOffice offer a similar set of features. To continue growing, Microsoft must expand the definition of what business productivity applications can do and the types of workers who should be using them. To this end, the Information Worker business is focused squarely on the fall launch of Office 2003, which will offer better programmability and support for XML-based business forms, and on the two collaboration-oriented server products that will integrate with Office 2003: SharePoint Portal Server for building and managing collaborative workspaces, and Live Communications Server (formerly called Real-Time Communications Server) for corporate instant messaging and other types of communication. Raikes also reiterated the importance of OneNote, an electronic note-taking program, and InfoPath, a program for creating XML-based business forms. Servers: Product Updates As with its other major businesses, Microsoft expects growth in the Server Platforms business to slow slightly in FY'03. This slowdown is due primarily to the licensing shift which gave a one-time boost to revenues in FY'03. Nonetheless, growth of 12% (the high-end estimate) would make Server Platforms the fastest-growing major business at Microsoft in the coming fiscal year, highlighting the fact that Microsoft is depending heavily on its server platform and applications to drive near-term growth. This is also the area where Microsoft faces its greatest competitive threat from Linux and Java-based application servers. Senior Vice President Eric Rudder, who leads the Server Platforms business, believes that Microsoft's biggest opportunity in this space comes from automating labor-intensive IT tasks such as security management, performance monitoring, storage, configuration, and change management. Rudder specifically noted the following areas of concentration for FY'04:
Home and Entertainment: Xbox Not Home Hub Home and Entertainment was the only one of the seven business segments not to meet Microsoft's revenue expectations in FY'03, and revenues are expected to grow only 1% to 2% in FY'04. Nonetheless, Microsoft reiterated its long-term commitment to the console gaming business. To better explain this commitment, Senior Vice President Robbie Bach began his presentation by placing Xbox in the context of Microsoft's overall consumer strategy: the Windows PC is intended to be the center of the home, and Xbox is one of many devices that will benefit by connecting to the PC, along with Tablet PCs, mobile phones, and inexpensive devices such as the planned Smart Personal Objects Technology (SPOT) watches. Bach said the Xbox team would be focusing on the following goals in FY'04:
Bach also discussed the importance of getting network operators to deploy recently released Microsoft TV platforms—Interactive Program Guide (IPG) and Foundation Edition—and said the company was creating a new IP-based TV platform to market to operators in Europe and Asia. In addition, he said that Microsoft plans to launch new Macintosh applications based on the Feb. 2003 acquisition of Connectix (one Connectix product is an emulator that allows Windows programs to run on the Mac). MSN: Shrinkage Expected MSN is the only one of Microsoft's seven businesses in which revenues are expected to decrease in FY'04. The main cause is customers transitioning from MSN's dial-up service to broadband ISPs: although Microsoft has partnerships with some broadband providers, it earns less from these deals than from dial-up access. In addition, customers switching to broadband ISPs that are not Microsoft partners have so far not signed up to use the MSN client (a business model called "bring your own access") in large enough numbers to make up for their defection. Some shrinkage in the subscription business has been offset by strong advertising sales on the MSN Web sites, including revenues from sponsored search results. MSN Vice President Yusuf Mehdi noted the following priorities for FY'04:
Mehdi and other executives also previewed MSN 9, due out this fall, which will include better integration with Outlook 2003 for e-mail and calendaring, and a blocker that will stop pop-up advertisements but not pop-up windows that the user might want (such as a query asking if they'd like to customize a site for their geography). Business Solutions: Profit by FY'05 Senior Vice President Doug Burgum made a bold prediction, saying that his Business Solutions Division would be profitable by FY'05. The company believes this is possible because the software market for small and mid-size businesses (SMBs) is fragmented, enabling Microsoft to grow rapidly if it can expand its share. Burgum cited statistics from IDC showing that the top nine software vendors to SMBs have only 30% of that market. Ballmer also clarified recent news that Microsoft would sell Business Solutions products to enterprises, a move that could potentially alienate ISV partners such as SAP and Siebel. Ballmer insisted that Business Solutions product development is focused on meeting the needs of smaller businesses and that these products will probably not be suitable for use across large corporations. (See the sidebar "Steve Ballmer on Business Applications".) Nonetheless, the Microsoft sales force has been given incentives to refer corporate accounts to Business Solutions resellers, so collisions seem likely, particularly when selling to companies with between 500 and 5,000 desktops. At the same time, ISVs are crucial to the success of the Microsoft platform. Realizing this, Microsoft will do more to attract vertical ISVs—smaller ISVs that cater to specific markets, such as petroleum or medicine. One attractor is the Microsoft Business Framework, which will provide common functions that can be used by many different types of business applications—for example, a common but extensible way to define business entities (such as customers or vendors) and consistent ways to handle common business processes (such as taking an order or recording a transaction). This means that vertical ISVs will no longer have to write these core functions themselves and will be able to focus all resources on their specific area of expertise. Business Framework development has been moved into the Server Platforms group, meaning it will probably become part of Microsoft's core application development platform and will be supported in future versions of Visual Studio. This move will also help the Business Solutions group in its drive toward profitability, as Server Platforms (with three times as much revenue as Business Solutions) will more easily be able to absorb the costs of the 300 developers working on the Business Framework. The Business Framework will also provide a unified code base for all Business Solutions applications, which are highly fragmented as a result of multiple acquisitions. Chief Software Architect Bill Gates hinted this unified code base would emerge in the Longhorn time frame (late 2005 or so). Mobile and Embedded: New Devices Mobile and Embedded remains Microsoft's smallest business—even with FY'04 growth expected at 40%, it still will take in only US$200 million. (Microsoft's total expected revenue for FY'04 is more than US$34 billion.) Nonetheless, Microsoft sees an enormous opportunity in this category: Vice President Pieter Knook cited IDC and Morgan Stanley statistics that show 1.4 billion portable devices will be sold in 2006, including 494 million "smart" cell phones. If Microsoft can even win a small percentage of this market, it could lead to significant growth in this revenue category. For FY'04, Knook said the Mobile business would focus on the following priorities:
Company Maturing Perhaps the most notable aspect of the 2003 Financial Analyst Meeting was its relatively sober tone. Presentations in past years have focused on new investments that Microsoft was excited about and contained some futuristic product demonstrations. In contrast, the 2003 meeting focused on how Microsoft's innovations will continue to add value for businesses, particularly in mundane—but very important—areas such as manageability and quicker development time. Connors used a large part of his presentation to explain how conservative Microsoft is in managing its cash and investments. Several speakers noted that some of FY'03's revenue growth was driven by one-time occurrences and cautioned that FY'04 growth would be a bit slower. The relatively subdued tone, combined with greater autonomy for its seven businesses, suggests that Microsoft is overcoming its image as an aggressive start-up in which top managers must influence every decision, and is settling down into a slow-growing but extremely profitable blue-chip company. Although this maturation might make for less exciting media copy, it should be welcome news for investors, partners, and anybody else who depends on Microsoft's long-term success. |
