Microsoft CFO John Connors bit the bullet on December 14 and issued a profit warning for the company's second quarter of fiscal year 2001, which ends on December 31. Connors dropped estimated earnings from 49 to 46 cents per share, on earnings of $6.4 billion instead of the $6.77 billion estimated previously. That announcement, combined with a stock rating drop from Prudential Securities the day before and several warnings from analysts the previous week [see Dec. 11, 2000] did some serious damage to Microsoft's stock price, knocking it back more than six points a share. The entire Nasdaq market followed suit, using Microsoft's warning as a barometer of the market as a whole.
But while the entire computer industry is slowing down, most of Microsoft's problems are unique and shouldn't be used to judge the whole market. For starters, Microsoft is dependent on selling Windows 2000 - but the demand just isn't there. New PC sales are down, so fewer preloaded operating systems are being sold, and IT departments that sank their entire 2000 budgets into Y2K preparation don't want to spend that much again just to get new hardware that supports Windows 2000 when older NT installations are sufficient. With fewer businesses than expected upgrading to Windows 2000 and fewer families purchasing new PCs, Office sales have also slipped dramatically - and Office represents 46% of Microsoft's revenues. Advertising and promoting the MSN moneypit is also eating into the company's profits, with no foreseeable returns. Microsoft's future apparently lies with .NET, but so far the company has little to show for that effort, and the few products that have been delivered are being wholeheartedly rejected by consumers. Looks like a good time to short Microsoft stock...
ALSO SEE: InfoWorld, C|Net, The Register

The following Tuesday, December 19, Microsoft CEO Steve Ballmer sent a memo to his employees and held a videoconference with them, explaining changes that Microsoft will have to make in order to reduce spending and keep moving forward as a profitable company. The first step Ballmer brought out was a reduction in employee travel and entertainment budgets, which we assume means no more blowout company picnics or drunken product launch parties like the one for IE 4 several years ago. Ballmer also called for tighter reviews of major investments like the one into AT&T - an investment now worth only a third of the $5 billion Microsoft paid for it in 1998. Further cost reductions mean cutting some non-core products and eliminating unnecessary features from products that remain. The company will also try to reduce its construction projects for the time being, with no significant new buildings planned once the current ones are completed. After unveiling the new leaner and meaner Microsoft, Ballmer reassured his minion that no job cuts will be handed out in the foreseeable future and current salaries will hold steady, although the company does plan to eliminate some of its 5,600 unfilled positions.
ALSO SEE: C|Net, The Register, ZDNet

17 year Microsoft veteran Joachim Kempin will be stepping down from his job as senior vice president over OEM relations. His resignation becomes official on July 1, 2001 when Richard Roy, the general manager of Microsoft Germany, moves to the US and takes over Kempin's job. Kempin will reportedly stay with Microsoft to "oversee special projects" and advise CEO Steve Ballmer, but the company already has so many former executive 'advisors' that it will soon run out of creative job titles for them. The German-born executive is one of Microsoft's best managers, as he is directly responsible for several of the company's most effective anticompetitive tactics - particularly the use of varying licensing fees to force computer assemblers into abandoning competing products. Joachim Kempin also delivered damaging testimony in the antitrust trial about Microsoft's relationship with several high profile OEMs [see Mar. 01, 1999]. Microsoft gave no official explanation for the departure beyond saying that Mr. Kempin "wanted to do other stuff."
ALSO SEE: ZDNet, The Register

Several weeks ago Microsoft contacted the US Federal Trade Commission to protest America Online's merger with TimeWarner because of an exclusive broadband Internet access contract with Earthlink [see Dec. 11, 2000]. The FTC ignored Microsoft's complaint and approved the merger anyway, leaving a final decision up to the Federal Communications Commission, overseer of television, radio, telephone and Internet services. So now Microsoft is complaining to the FCC as well, but this time the argument centers around AOL's dominant instant messaging systems, AIM and ICQ. While the merger won't give the largest ISP control over any messaging services than it doesn't already have, Microsoft apparently feels this is another opportunity to beat that dead horse and have the government force AOL into opening up its proprietary messaging networks to competitors like Yahoo and (of course) MSN.
AOL defended itself by first pointing to the potential security risks of opening its networks to outsiders, since that could expose members' personal information and passwords. The company stood by its promise to have an integration plan completed by June 2001, although that plan would take nearly a year to implement (so they say anyway). AOL also pointed to Microsoft's plans for integrating its own messaging product with future releases of Windows and Internet Explorer, a move that will seriously damage the AOL services even without them being compatible (someone should tell the FCC about 'embrace and extend'). But we expect AOL is going to lose this battle eventually, so the company should go ahead and agree to open its messaging software now - in exchange for Microsoft bundling Netscape 6 with Windows 2001.
ALSO SEE: InfoWorld, C|Net

Business software publisher Great Plains Software will soon become part of Microsoft's empire, according to an announcement made on December 21st. Microsoft will purchase the company with 1.1 share of its own stock for every share of Great Plains stock, an exchange valued around $1.1 billion. Microsoft will completely absorb Great Plains and its somewhat popular line of distributed applications used for supply chain management, accounting, and other routine business chores. The Behemoth apparently plans to integrate the software into .NET and compete directly with similar offerings from Oracle and PeopleSoft. Since Great Plains is a public company, the buyout will have to be approved by the US government and a majority of Great Plains stockholders.
ALSO SEE: InfoWorld, C|Net, ZDNet

Now almost three months after receiving a $135 million cash infusion from Microsoft [see Oct. 09, 2000], Corel is apparently on the verge of selling its Linux products to another company or dropping them entirely. According to Interim Corel CEO Derek Burney, the Linux division won't be profitable unless it purchases more products or sells itself to an outside group - and with Corel's spending money in short supply, the obvious answer is to sell. Unofficial sources close to the company say the Linux Global Partners venture capital firm is prepared to pay some $5 million for an 80% stake in Corel's Linux unit, which would then become a standalone company.
But whoever ends up buying the products, Microsoft won't be able to touch them once they leave Corel's control. That could mean one of three things - Corel wants to keep .NET off Linux in spite of the Microsoft deal (not likely); Microsoft is still planning a Linux version of Office and wants to eliminate its competition (even less likely); or Microsoft forced Corel to kill the products in exchange for the investment (the probable answer). But of course, there's always a slim chance that this has nothing to do with Microsoft and Corel is just selling off everything it can to keep from going broke.
ALSO SEE: C|Net, The Register

Reacting to the bad news about profits and unexpectedly low sales of Windows 2000 [see story above], Microsoft has made moves to push corporate customers into adopting Windows 2000 instead of cheaper Windows 95, 98, and ME. On December 15, Microsoft alerted its larger customers and resale partners that after March 1, Windows ME will no longer be included in the company's three volume licensing programs that give discounts to groups buying large amounts of software. Additionally, Windows 95 and 98 will no longer be included in the volume licensing system after June 30, cutting off any remaining demand for those systems as well. That makes Windows 9X and ME more expensive than the desktop version of Windows 2000, a system Microsoft desperately needs to sell. Microsoft defended the policy change by saying it just reflects corporate demand for Win2K systems, but the move won't actually do anything for the price of Windows 2000 - just force more companies into buying it.
ALSO SEE: ZDNet, The Register

Caving in to demand, Microsoft has changed its position on MCSE certification tests for Windows NT 4. Previously, the company had announced that no more NT certifications would be awarded after December 31 of this year [see Sep. 27, 1999], a move that boosts demand for Windows 2000 by forcing technicians to become certified in it instead. But with so many companies still using NT (with no plans to change) there is still a high level of demand for NT certification. That demand has been met by several independent companies who started their own NT certification tests. Microsoft, always jealous of other companies taking over its turf, has now has announced NT 4 certification will continue through the end of February 2001, followed by the introduction of a new test designed around maintaining older NT installations and migrating to Windows 2000.
ALSO SEE: Sm@rt Partner, WinInfo

On Monday, December 18, Microsoft announced it had shipped an early beta of 'Whistler Embedded', an embeddable version of the next major Windows release, to 100 developers and industry partners. According to a press release the product will replace the embedded version of NT 4, a system that's really starting to show its age. Whistler Embedded is tentatively scheduled for release in the first quarter of 2002, some two to three month after the desktop and server versions ship. Windows CE will still be produced independently of Whistler Embedded since they fill a (slightly) different market niche, although both will be marketed with the 'Windows Powered' tagline.
ALSO SEE: C|Net, WinInfo

In the 9 months since Microsoft first unveiled details about its X-Box game console, every major game developer has signed up to develop titles for it - except Electronic Arts, the biggest of all. On December 13 EA finally jumped on board too, committing itself to develop 10 X-Box game titles within six months of the console's release. No word on what persuaded EA to sign with Microsoft, but rumors say about half of Microsoft's $500 million X-Box marketing budget went into 'marketing' the console to Electronic Arts. In related news, Microsoft upped the X-Box specifications to call for a 733MHZ Pentium III processor instead of the 600MHZ chip previously required, and the company announced that it will make DVD movie software an option on the game system.
ALSO SEE: ZDNet, WinInfo, C|Net

An independent documentary about conspiracies surrounding the 'death' of Bill Gates is scheduled for release at several film festivals in 2001. The film, titled MacArthur Park after its setting, fictionalizes an assassination of Gates in early 1999, followed by a coverup by the corrupt Los Angeles police department. MacArthur Park is a collaboration between GMD Studios and Haxan, the company responsible for 1999's smash hit Blair Witch Project. Unfortunately, it looks like we'll have to keep waiting for a documentary about the infamous 1998 Gates pie attack [see Mar. 09, 1998].
ALSO SEE: The Register, ZDNet, Official Movie Site

According to a report on the Fortune magazine Web site, Microsoft CEO Steve Ballmer and Oracle founder/CEO Larry Ellison, longtime competitors for the title of world's second richest man, met recently to discuss software compatibility issues. Oracle confirmed the meeting but declined to discuss details, while Microsoft refused to comment either way. (No word yet on which CEO swallowed his pride first.)
Finally closing the door on a series of legal cases that began in 1992, Microsoft has settled the last 'permatemp' lawsuit for $97 million in cash. The settlement will apparently be distributed to some 10,000 people who worked for Microsoft between 1986 and last June in 'temporary' jobs that lasted over a year [see Jan. 17, 2000].
Sources inside Microsoft's league of beta testers are saying the company sent out a near-release beta of Windows 2000 SP2 on December 11. The update, intended to fix more than 100 bugs in the OS, will be finalized sometime in the first few weeks of 2001 - probably in time to be released on Win2K's first anniversary in February.

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