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The top 10 challenges for Microsoft in 2005

As another year comes to a close, it's time for researchers at Directions on Microsoft to issue their annual list of top challenges for Microsoft, a company whose every move is intensely scrutinized.

As another year comes to a close, it's time for researchers at Directions on Microsoft to issue their annual list of top challenges for Microsoft, a company whose every move is intensely scrutinized.

1. Where does Microsoft want to go today? The roadmaps for many major Microsoft products -- including Windows XP, Office, and Exchange -- don't provide the detail customers and partners need to make good decisions. Customers and partners need multi-year product roadmaps with specifics about what capabilities to expect in a product and when to expect it. Otherwise, they can't reliably schedule training, plan rollouts, or decide whether to sign up for multiyear software maintenance plans. Software developers also need roadmaps to plan their own products around Microsoft's. Investors need roadmaps to see where future growth will come from.

"Without credible product roadmaps, it's harder and riskier to invest in Microsoft and its products. In 2005, more Microsoft product groups should follow the lead of the Windows Server division and provide a clear public roadmap for major product releases through 2008." -- Rob Helm, director of research

2. Acquisitions that help Major recent acquisitions haven't done much so far to generate new revenue for Microsoft. The Great Plains and Navision acquisitions were supposed to form the core of a $10 billion business by 2010. However, the Microsoft Business Solutions (MBS) division that includes them is still not profitable and is on track to generate no more than $3 billion in revenue by 2010. In other acquisitions -- the Connectix virtualization software (now Microsoft Virtual Server) and the PlaceWare (now LiveMeeting) Web conference service -- Microsoft bought second-place companies that, while less expensive to acquire, are still stuck in second place. The acquisition of antivirus vendor GeCAD in 2003 has so far generated neither a product nor revenue.

"Results in 2005 should tell us whether MBS has the right strategy, channel and product lineup to attract the large numbers of new customers that Microsoft hoped to get from the acquisitions. The year will also be a chance for Microsoft to prove that it can digest a major acquisition in today's business climate." -- Chris Alliegro, lead analyst for business applications

3. Security, security, security Security has always been near the top of our top 10 list, but despite laudable efforts by Microsoft, such as a drop-everything-else code review, security is still a problem. In fact, the bad guys seem to be winning. Before anyone gets on the Internet the first time these days, they need a PC already protected by the latest service packs and security patches, an antivirus program, an antispyware program and training on how to avoid phishing exploits. Although Microsoft arguably bears little direct responsibility for these problems, the company has the most to lose if these security issues persist. Furthermore, Microsoft is in the best position of any vendor to address the problems. Some useful next moves? Make it possible to run Windows all day without requiring administrative privileges and work with other players on standards that will make it easier to authenticate the senders of e-mail.

"Security problems raise the cost of managing Windows clients, and make the perennial thin-client alternative more viable. This year, Microsoft has to deliver the improvements it promised for patching corporate PCs, and not let development of future product versions interfere with keeping current ones secure." -- Michael Cherry, lead analyst for Windows

4. Make the PC the home entertainment hub Microsoft hopes to spur sales of PCs to consumers by establishing the Windows PC as a home entertainment hub. In 2004, the company moved several important pieces into place: low-cost Media Center PCs for storing and organizing music and video, new software and hardware for distributing material throughout the home and playing it on the go, and a host of online music stores offering downloads that "just work" -- including Microsoft's own MSN Music Store. But Microsoft finds itself in the uncomfortable position of trailing competitors, particularly Apple, in achieving this vision.

"Apple's iPod and iTunes Music Store have established huge leads, and their success severely threatens Microsoft's overall digital media plans. In 2005, Microsoft and its digital media partners need to match or beat Apple on ease-of-use and style, or they risk letting Apple control this critical market." -- Matt Rosoff, lead analyst, consumer products and services

5. Maintenance: Value for the money Although many enterprises have software maintenance plans that entitle them to use the latest versions of Windows or Office, a large proportion of these customers stick with older versions that they consider to be "good enough." That makes it tough for Microsoft to convince companies to renew those maintenance plans. To keep the maintenance revenue coming in, Microsoft must convince customers that they can get more out of their software by deploying newer versions.

"In the minds of many customers, Windows, Office and other key products reached 'good enough' plateaus in 2000. In 2005, Microsoft has to show customers that the latest product versions represent real advances worth deploying and buying maintenance coverage for." -- Paul DeGroot, lead analyst, sales, support, licensing and partner strategies

6. Put a lid on open source Free and cheap open source software is a serious Microsoft competitor. On the server, the company must deliver the improved management and deployment tools it has promised for Windows Server 2003 to show its advantage in the critical area of systems management. On the desktop, the company must recognize that its monopoly is no longer safe. Between Firefox, now nibbling at Internet Explorer, (and commercial variants like StarOffice), and Linux itself, we're beginning to see a desktop alternative emerge. Microsoft will have to consider more creative pricing, and hold fast to Windows and Office schedules to avoid giving the Linux desktop time to catch up.

"Firefox is showing that it is possible for an open source product to take back market share from Microsoft. And a community project like Firefox is an anaerobic organism -- there's no air supply to cut off as there was with Netscape. In 2005 Microsoft needs to show that it can keep improving mature products like Internet Explorer and Office to maintain its lead over community desktop projects." -- Greg DeMichillie, lead analyst, development platforms and tools

7. Win over developers with Longhorn One of the principal strengths of Microsoft's Windows desktop business is the huge league of software developers who write applications for Windows PCs. But desktop software developers have been slow to move to the company's latest software development platform, the .NET Framework, even though it offers better reliability and security for desktop applications. The "Longhorn" release of Windows was supposed to deliver a new foundation for desktop development, but that project has been delayed and some of its critical components, such as a new file system, have an uncertain future. Microsoft will need a cohesive and convincing plan for bringing these new technologies to market, distribute them widely on desktops, and provide developers with incentives to use them, rather than alternatives such as Java and thin-client Web applications.

"At the 2005 Professional Developers Conference next fall, Microsoft needs to convince desktop software developers that Longhorn technologies can make their lives easier, and really pay off for the users of their software. This is the best chance the company has to show developers how far ahead it is of Linux and Java on the desktop, and convince developers that doing desktop applications on Longhorn technologies can really be cost-effective." -- Rob Helm, director of research

8. Turn the corner with Xbox 2 Microsoft tried to turn console gaming into a two-company race between it and Sony but it's close to running third. Nintendo hasn't dropped out as Microsoft once hoped and many potential Xbox thumbs are punching buttons on Nintendo's new portable console. Microsoft's gaming adventure has already racked up about $2 billion in losses over the years, but a new console, Xbox 2, could turn that around if it beats Sony's next console to market. But it had better work quickly to be profitable in 2007, as CFO John Connors hopes.

"Xbox 2 has to launch if Sony does in 2005, and Microsoft has to keep manufacturing costs down and convince developers to make the leap to the new platform, otherwise it is hard to see how this business will ever become profitable." -- Matt Rosoff, lead analyst, consumer products and services

9. When I'm 64 Microsoft's sales of its most profitable product, the Windows client, closely track sales of PCs and the hottest new PCs will soon be running 64-bit processors. Sales of 64-bit Windows versions on new hardware could make a measurable contribution to Microsoft's revenue growth, particularly since this OS could be priced at a premium. While most users don't need 64-bit processing today, users looking for maximum performance (gamers, researchers who run simulations or analyze large data sets) and those who want the computers they buy today to still be useful four or five years from now, could elect to upgrade to 64-bit sooner rather than later, giving Microsoft a nice bump in OS sales.

"The transition to 64-bit systems could accelerate the PC replacement cycle, the single biggest factor in revenues for Microsoft's most profitable business. In 2005, the company has to ship a 64-bit Windows that shows power users why they need to upgrade." -- Paul DeGroot, lead analyst, sales, support, licensing and partner strategies

10. Play well with others Although the Department of Justice antitrust lawsuit did not result in substantial fines for Microsoft, the company continues to be dogged by legal actions that have forced the company to settle for huge sums. The company's tempting size and high visibility means it has to move beyond the hard-charging underdog culture that it grew up with. Microsoft needs cautious, clearly written, and tightly enforced rules of engagement for employees working with customers, partners and competitors, particularly in cases involving any exchange of intellectual property or trade secrets. Otherwise, it will be planting the seeds of tomorrow's multibillion-dollar settlements.

"Lawsuits from competitors and former partners continue to affect not just the company's reputation, but its bottom line. In 2005 the company has to ensure employees don't just follow the letter of the law, but meet the higher standards that the company's size and visibility demand." -- Michael Cherry, lead analyst for Windows

Directions on Microsoft is an independent consulting firm based in Kirkland, Wash.

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