Microsofts New Challenge

Now that Office XP has been released to manufacturing, the challenges are just beginning for Microsoft Corp. and its flagship desktop productivity suite.

In addition to persuading Office users to upgrade—no small task, considering that about 70 percent of the 120 million installed Office users still run either Office 97 or Office 95—the Office team must come to terms with a potential threat from within: a project code-named Netdocs.

Netdocs, part of Microsofts .Net initiative, is a single, integrated application with e-mail, instant messaging, personal information management, document authoring and digital- media management. The technology could form the basis for the future of Office, depending on how it develops and how Office XP fares.

Microsoft officials in Redmond, Wash., refer to Netdocs as "a set of technologies" rather than a product, but sources close to the company said Microsoft has a sizable team of engineers working on turning Netdocs into a stand-alone product—albeit in a hosted environment. The current alpha version could well develop into three versions directed at the consumer, small and midsize businesses, and enterprise markets, sources said.

But before Netdocs becomes a reality, Microsofts most immediate challenge is to get Office XP to market as quickly as possible, given the slowing economy.

Microsoft shipped XP to manufacturing a scant six months after the first beta was announced. Microsoft also bypassed the tradition of issuing multiple release candidates of the product before sending final code to manufacturers.

But Microsoft officials denied the testing process was rushed, saying it was one of the most extensive beta programs an Office product has ever had. "Apart from the 10,000 external Beta 2 testers, we have had some 20,000 internal users running the code for the past six weeks. There has been absolutely no rush to market," said Tom Bailey, Office XP lead product manager.

But while Office contributed more than 50 percent of Microsofts income in the second fiscal quarter, sales have been slipping, with revenue falling 2 percent compared with the same year-ago period, officials said. Compounding the situation is that analysts expect corporate technology spending growth to slip to single-digit figures this year.

"Our job is to show our customers whats compelling with the new product and what the return on that investment is," said Office Senior Vice President Steven Sinofsky. "We know how important it is to get end users excited about the product, so we will show it off in a way that makes much more sense for all users."

Microsoft is going to have an uphill battle persuading users who have already moved to Office 2000 to pay for yet another upgrade. Pricing for Office XP is not available, but new, single-user versions of Office 2000 cost $799. A Web developer in Houston who requested anonymity said he has not yet seen anything to persuade him to upgrade. "Office 2000 is very robust and stable, and I plan to stick with it for quite some time," he said.

The companys largest customers are likely to get the product before the end of next month, and it should reach OEM partners and the retail channel by June, Bailey said. Microsoft also needs to persuade corporate users to upgrade sooner rather than later, since corporate IT traditionally holds off on desktop upgrades until a new PC or operating system upgrade is in hand.

Lockheed Martin Corp., with hundreds of servers and some 165,000 desktops, is one such company.

"We are looking forward to the functionality and elements that Microsofts .Net architecture will bring to its products," said Massimo Villinger, chief technology officer for Lockheed Martin Enterprise Information Systems, in Orlando, Fla., adding that the company tends to replace its PCs every three years, at which time users get the latest operating system and suites preinstalled. "How compelling the new products are and how they fit into .Net will determine our approach to them."

Microsofts Sinofsky downplayed the Netdocs threat. "Were not standing still, and we showed off some [Netdocs] technology at Forum 2000, which is the direction in which were heading. Were investing in the ways that individuals create documents and manage information and e-mail and are trying to find new ways of doing that," he said.

Whether Netdocs finds its way into future versions of Office or emerges as a competing stand-alone product, the strategy is not unusual for Microsoft, which for years has had a Windows 9x team and a Windows NT team working separately.

Sources close to Microsoft say Netdocs will most likely be available only as a hosted service over the Internet, rather than as a shrink-wrapped application or software preloaded on PCs. This fits neatly into the companys .Net road map, which involves the delivery of applications and pieces of applications as services that can be rented over the Internet. Microsoft intends to offer a subscription version of Office XP; pricing for this has not been set.

Bailey said the current plan is that Netdocs will become available through a variety of Microsoft product releases over the next few years. "Netdocs ... is likely to be a consumer-focused service that is unlikely to overlap with what Office does. It should be a complementary ... technology," he said.