Microsoft's Windows 2000 Problem: A Growth Slowing Down

Strategic Insights -

Microsoft's biggest problem isn't the court case, but rather Windows 2000, according to Lawrence J. Ellison, Oracle's CEO. In a meeting with securities analysts, Ellison highlighted the challenges facing Microsoft in an increasingly web-centric world. Microsoft's disappointing quarter and lowered growth forecasts for the future contrast with Oracle and Sun Microsystems' robust growth ahead. Every e-commerce site processing transactions with Oracle's 8i database is a SQL Server software sale Microsoft didn't make, and every web page running on Sun's Solaris operating system is one not running on Windows 2000. Apple Computer exceeded estimates, too, selling over one million Macintosh computers, all of which are desktops not running Windows.

Key Takeaways:

  • Microsoft's fortunes are still tied to Windows 2000, an operating system and business model that focus on the desktop, despite the shift towards a web-centric world.
  • Oracle and Sun Microsystems, Microsoft's opponents, have blown past analysts' estimates for the same period and forecast robust growth ahead.
  • Every e-commerce site processing transactions with Oracle's 8i database is a lost SQL Server software sale for Microsoft.
  • Every web page running on Sun's Solaris operating system is one not running on Windows 2000.
  • Apple Computer's sales of over one million Macintosh computers are desktops not running Windows.
  • Analysts believe revenue growth has truly slowed, possibly forever.
  • Microsoft is a desktop software company, focusing on personal productivity software rather than enterprise software.
  • Business has become too saturated for Microsoft to continue growing its personal productivity applications at the same rate.
  • PC demand is healthy, but people are using PCs less for personal productivity work and more for web access.
  • Microsoft needs to shift its focus from personal productivity to enterprise products like SQL Server and Back Office.

Statistics:

  • Microsoft's revised earnings guidance flagged a slowing of revenue growth.
  • Analysts have forecast an increase in earnings growth of 12.4 percent for next year.
  • The price-to-earnings multiple for Microsoft should be about twice its earnings growth rate, suggesting a P/E multiple of 30.
  • With a consensus earnings estimate for 2001 of $1.90 a share, this produces a reasonable price of $57.
  • Microsoft's stock currently trades at $69.75.

Sources:

  • Lawrence J. Ellison's statements to securities analysts.
  • Andrew Brosseau's analysis with S. G. Cowen.
  • William Epifanio 2nd's analysis with J. P. Morgan.
  • Oracle Corporation's Oracle 8i database performance.
  • Sun Microsystems' Solaris operating system usage.