Mass Office upgrades 'unlikely'

Previous upgrades of the cash-cow package -- which will now bear the name Office System -- have focused on adding, or in some cases removing, slick new tools. But the Office applications that Microsoft chairman Bill Gates will tout at a launch event in New York on Tuesday will have most of their improvements under the hood.

Chief among the enhancements is a far-ranging set of functions that are based on XML (Extensible Markup Language), the fast-growing standard for enabling disparate computing systems to swap data. XML support will let Office users tap Web services from within Word, automatically route data from an Excel spreadsheet to various corporate databases and feed data in InfoPath forms into CRM (customer relationship management) systems.

The XML functions will also create a whole new set of concerns for information technology administrators, said Michael Silver, an analyst for research company Gartner. The more hooks Office has into other applications, the more testing IT departments have to do to ensure that Office won't break those systems.

"The more Microsoft does to Office to get people to integrate it with other business systems, the longer they make the upgrade cycle," Silver said. "People who see real value to XML may try to move quickly in some areas. But it's going to take quite a while for people to do the testing and prepare for rollouts."

Microsoft said several customers, including Hewlett-Packard and Lockheed Martin, have begun to test Office System.

Even with the less complex upgrades of years past, however, most businesses typically waited 12 to 18 months before installing new versions of Office throughout their companies, Silver said. Many companies played it safe and held out for the arrival of the first "service pack," or collection of bug fixes Microsoft periodically releases. With Office 2003, the delay is more likely to be a matter of years, as with a new release of the Windows operating system.

"The first service pack is kind of a bogus landmark (in this case) -- most businesses aren't going to be anywhere near ready by the time that comes out," Silver said.

Many new Office features depend on up-to-date server software, in a deliberate attempt by Microsoft to spur adoption of its Windows Server 2003 operating system and other server software. That's the reasoning behind Microsoft's decision to brand the software "Office System," according to company executives.

"Office System is very important to Microsoft," said Jeff Raikes, Microsoft's vice president in charge of Office and other applications. "One of our challenges is that people tend to think that Office equals the box -- the applications themselves. What I need to do is expand their vision."

But expanding Office's reach to back-end servers also means that installing the software is now a multipronged coordination challenge, said Paul DeGroot, an analyst with market researcher Directions on Microsoft.

"This isn't something that stops once you install the client," DeGroot said. "It's a multidimensional type of install that is going to be a longer sales cycle. It's a server (operating system) migration issue almost right from the beginning."

Raikes said he recognises that by broadening Office, the company has also created a more difficult sales process. "In some respects, it's a marketing challenge... the breadth and depth of what someone can do with Office System," he said.

A moneymaker gets a makeover
Making the new Office as appealing as possible to buyers is vitally important to Microsoft. Office and several other client-based software programs sold by the company make up roughly a third of the giant's overall revenue and 60 percent of its operating profit, according to financial analysts.

Kurt DelBene, a Microsoft vice president in the Office division, said he anticipates a spectrum of Office adoption patterns. Many businesses will upgrade right away to get access to purely client-side improvements, he said, such as improved email handling functions in the new version of Outlook. Adoption of server-related functions may take longer.

"I think we're finding some cases where the client will lead and some cases where the server will lead," DelBene said. "You can still roll out the client even before you get the server solution in place. I think features like Outlook will draw people to the client side, and they'll spend a little more time to address the full solution."

Even if upgrade activity is stronger than expected, it's unlikely to produce the revenue jumps that have followed previous Office revamps.

Microsoft has worked hard to push customers into Software Assurance and other licensing plans that lock them into periodic upgrades. The upshot is that the customers most likely to jump on Office System are the ones that have already paid for it -- those that haven't will have another reason to play wait-and-see.

Although there has been concern that cheaper Office alternatives -- such as StarOffice from Sun Microsystems and its open-source sibling, OpenOffice -- would eat into Microsoft's overwhelming share of the desktop software market, analysts said that has yet to happen.

There have been high-profile moves away from Microsoft's client software, most notably the decision by the city of Munich, Germany, to migrate 14,000 PCs from Windows to Linux. But the vast majority of businesses and governments continue to use Windows and Office. Microsoft's bundling deals with PC makers, along with licensing incentives to corporate buyers and the high cost that's associated with switching to new software, are likely to keep it that way, at least for a few years.

Though Office revenue was essentially flat in Microsoft's fiscal year 2001 versus a year earlier, sales rebounded following the introduction of the controversial Software Assurance licensing program in 2002. Wall Street analysts expect Office sales to grow to more than $10bn (£5.97bn) in fiscal year 2004, compared with $9.23bn in 2003.

Bundling agreements with PC makers are still the primary driver of Office revenue. Roughly 75 percent of Microsoft's Office software revenue comes through volume licensing deals, while the remaining 25 percent is generated through retail sales and PC bundling deals, according to Wachovia Securities.

Still, Office System adoption is likely to be slow and measured.

"You end up with a buying spectrum that's a lot more polarised," DeGroot said. "My guess is you'll see very modest impact on Microsoft revenue from Office System."

CNET News.com's Mike Ricciuti contributed to this report.