"Our plan is to create a new software service platform that will ignite opportunities for thousands of partners and customers around the world," Ballmer said the day he was named CEO.

Microsoft is also adjusting its software licensing model to generate more revenue from subscription licenses that ensure steady cash flow and minimize the marketing effort required to push new upgrades, "a huge drain from a marketing and development standpoint," says Kurt Schlegel, a senior research analyst at Meta Group. Microsoft is trying to increase sales of Enterprise Agreement licenses, in which companies pay $150 to $250 per user annually for a three-year commitment to the most recent Office, Windows, and BackOffice client-access licenses. In some cases, Microsoft will include server licenses in large contracts, Schlegel says.

"Wall Street likes it because it can predict revenue better," Schlegel says. "And as large companies get better at change and configuration management, it's not this huge project to roll out new software."

Microsoft is counting on the release of Windows 2000 to boost slower revenue growth recorded in the company's second quarter ended Dec. 31. Sales for the quarter increased 18% to $6.11 billion compared with a year ago; during the previous quarter ended Sept. 30, Microsoft's sales grew 28.4%. CFO John Connors says Microsoft's channel revenue continues to shift from packaged products to licensing agreements. Sales of Office 2000 and SQL Server 7 exceeded expectations, and revenue in the productivity applications and developer tools group rose 28% to $2.8 billion.

But demand for Windows NT Server and Workstation products slowed as companies put the brakes on IT spending because of year-end Y2K lockdowns, and IT organizations held off purchasing NT 4 in anticipation of Windows 2000. Revenue from the Windows platforms group was up just 6% to $2.44 billion. Though Connors expects year-over-year server-side Windows revenue growth of 50% during the current quarter, he cautions that Windows 2000 upgrades "will not happen overnight."

There are other upgrade opportunities on the horizon. New versions of SQL Server and Exchange Server are due later this year, and Connors says the company should see a spike in Office sales as companies undertake "one-touch" desktop upgrades, installing the productivity suite and Windows 2000 Professional in a single pass.

Less certain are revenue streams from hosted apps. "Microsoft's theory is that usage of its Internet-based services will become widespread, and will make up in volume what it would lose in unit-price sales," says Summit Strategies analyst Warren Wilson. "But it's not guaranteed."

Photo by Cindy Charles

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