Tue, May 29, 2001 page21

• Sales of Office software may be slow

  ON HOLD Many businesses are not likely to suddenly upgrade to Microsoft's Office XP because companies seem to be satisfied with the software maker's previous product

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  Redhook Ale Brewery Inc isn't planning to rush out and buy Microsoft Corp's latest Office software package when it goes on sale Thursday.

  Instead, the Seattle beermaker will phase in the new programs slowly as it replaces some of its about 70 computers, said information systems manager Scott Giles.

  That will be the typical reaction to Office XP, the biggest software maker's updated suite of programs for word processing, e-mail and spreadsheets, analysts say. Businesses will consider upgrading to Office XP someday or get it when they buy new PCs, yet won't jump on the product as soon as it's released because older versions already have many of the key features they need.

  The software package won't be enough to jump-start slumping PC sales, analysts say. Most computers already run Office, and customers often wait until they purchase a new PC to buy updated software. Further, corporate budget cuts are making potential customers even more determined to squeeze maximum use out of the version of Office they already own.

  "Slowing PC sales are a bigger weight on the [Office] category than the release of the new product," said Brendan Barnicle, an analyst at Pacific Crest Securities, who rates Microsoft "buy."

  Microsoft gets more than a third of its annual revenue, expected to exceed US$25 billion for the year ending in June, from Office. The Redmond, Washington, company will mark the release with a keynote address by Chairman Bill Gates in New York.

  Microsoft will also hold events in Chicago, Washington, Houston and the UK. The company declined to give sales forecasts for the new software.

  PC industry hopes for a software-led recovery hinge not on Office XP, analysts said, but on Microsoft's next big thing: the expected Oct. 25 release of the newest Windows operating system, the software that runs all the programs on a PC. The new version is called Windows XP.

  Office XP adds features that make it easier for employees to collaborate on projects and make revisions on shared files. It also has voice-recognition software, though Microsoft has said the dictation piece isn't accurate enough to improve the productivity of speedy typists.

  The new software also has a feature called smart tags, a menu of options that pops up when a user types certain words or takes certain actions. For example, if a user types a company name, a menu offers access to financial data on that company.

  Office XP will be available for one month of the June quarter, though it won't account for more than more 10 percent of total Office sales, said Melissa Eisenstat, an analyst at CIBC World Markets Inc. She expects US$2.5 billion in sales for Microsoft's desktop-applications category, which is made up mostly of Office.

  Eisenstat, who rates Microsoft shares "buy," expects sales of Office XP to increase in the December quarter as customers look to upgrade to both the new Office and the new Windows system.

  Although Office XP adoption will build gradually, Giga Information Group Inc analyst Ken Smiley estimates more than 50 percent of organizations using Office will begin upgrading in the first year XP is available. Most will buy XP not for its features, but because their current version is too old, Smiley said.

  Microsoft's last upgrade, Office 2000, didn't meet with the immediate success Office 97 had, Smiley said. About 40 percent of Office users now run 2000, with more than half using Office 97, and 5 to 10 percent still running Office 95.

  Most Office 2000 deployments have occurred in the past year, he said, and those customers are unlikely to upgrade to XP in the next two years, because companies tend to buy every other version.

  In addition, the percentage of current customers that buy the new program could be 10 percent to 15 percent lower than Smiley projects if companies keep cutting software and PC purchases because of the slowing economy, he said.

  Microsoft also is starting a new licensing plan that will require some customers to pay as much as 30 percent more for Office XP than they did for older versions if they don't upgrade by Oct. 1, Smiley said. The higher cost may deter buying, he said.

  For many home and business users, Office XP's new features aren't compelling enough to convince them to upgrade, especially as companies cut spending.

  "If someone is a heavy-duty Office user, they will find some good features," said Scott McAdams, chief executive of Seattle-based McAdams Wright Ragen. "But someone who is just dinking around in Office, as most of us do, it's not enough to upgrade."

  Still, investors said the product is an encouraging sign about Microsoft's future prospects.

  "It shows that Microsoft is still being innovative," said Maceo Sloan, a fund manager and chief executive of NCM Capital Management Group.

  InfoSpace Inc, a Seattle-based provider of Internet services to wireless companies and Web sites, said it's interested in new Office features such as the ability to set up Web-based discussion groups and surveys. Yet, as it tries to cut costs, the company probably will wait to upgrade from Office 2000, which runs most of its 1,300 to 1,500 PCs, said spokesman Steve Stratz.

  "We have no need to upgrade immediately, but there's some pretty cool stuff in there," he said.
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