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In the first of a series of crucial product releases this year, Microsoft launched Office XP on Thursday. And while the launch, like previous Microsoft launches, is complete with events in major cities around the globe, the product doesn’t seem likely to take the world by storm. The flurry of marketing razzmatazz and Microsoft’s huge ad budget will likely result in only a moderate initial sales surge. Thanks to the intricacies of corporate licensing, however, XP sales during the next couple of years should sustain Office as one of the software giant’s two cash cows, the other being Windows. The product’s new features, though slick, are unlikely to create a rush of customers ready to fork out $239 for a retail upgrade. “It’s a ‘nice-to-have’ rather than a ‘must-have’,” said analyst Henry Blodget of Merrill Lynch, echoing a general verdict. The unenthusiastic reviews are not stopping Microsoft from trying to ratchet up the “excitement,” as the PR folks keep calling it. In New York City, Bill Gates kicked off a media blitz, appearing on stage with Jeff Bezos of Amazon and Marv Adams, CIO of Ford, and citing testimonials from Lexis-Nexis, Turner Broadcsting and UPS, among others. One prop: a “wall of paper” signifying the vast quantity of information typically hidden inside corporate databases — and the suggestion that users can get easy access to such hidden data through the new features of Office XP. Microsoft is looking to large companies to upgrade to this new version; small businesses tend not to switch until they upgrade their PC hardware. “The No. 1 target audience is people with Office 97 and earlier versions,” said Jeff Raikes, group VP for the business productivity division. Is there a killer feature? “There’s no single thing,” he said. “It’s the rich set of things users can do.” More than 100 local launches are happening across the U.S. and in major overseas centers. While Gates is in New York, CEO Steve Ballmer heads up a similar event in Chicago; Raikes has top billing in Washington, D.C.; Steven Sinofsky, senior VP in charge of Office, is headlining in London. Think of this fanning out of execs as a curtain raiser for bigger marketing campaigns ahead. The Windows XP operating system will launch in October and the Xbox game console will follow in November. Still, Office is hardly small potatoes. Worldwide, about 135 million people use the Office suite of “productivity” applications: Word for word processing; Outlook for e-mail; Excel for spreadsheets; and PowerPoint for presentation slides. According to Microsoft, as many as 100 million more illegal users have it on their desktops. In the last two quarters of 2000, Microsoft’s desktop applications revenue declined by 2 percent year-on-year. During the latest quarter, that trend was reversed with a 7 percent year-on-year increase to $2.4 billion, the bulk of that coming from Office licenses. But there may be a boundary on this cash machine and Microsoft hype is hitting a wall of its own making. The market is already saturated with previous versions of Office that work well. What’s the incentive to buy an upgrade? Speaking at the company’s annual CEO summit on May 23, Gates highlighted this very issue. “Intellectual property has an interesting problem, which is that it lasts forever,” he explained. “And so it’s not like Coca-Cola where you say, ‘OK, you liked your last Coke; now would you like another one,’ or razor blades that wear out.” That’s the problem. Office doesn’t wear out. Indeed, about 55 percent of users are still on Office 97, having found no compelling reason to upgrade to Office 2000. “Your own installed base is serious competition,” Gates continued last week, “You have to always do better.” Make no mistake, the product is getting better. The new version does many little things better. It has “smart tags” (drop-down menus when you hover over a word) and “task panes” (menus appearing in the margin), both of which offer easy and more intuitive ways to do things that generally only the more savvy users of Office know how to do; for example, how to paste text into a document from an external source and achieve correct formatting. Still, since the current version of Office is entirely adequate to most people’s uses for it, incremental improvements get progressively less compelling. It’s a case of diminishing returns that in the long run poses a serious threat to Microsoft’s growth. To sell this product to enterprises then, Microsoft is touting business-to-business enhancements. Ford’s Adams appears onstage with Gates because Ford is using the XML support built in to Office XP to notify its suppliers of its auto parts needs and have them respond. Similarly, Lexis-Nexis and UPS are creating their own customized “smart tags” so that subscribers or customers with Office XP can easily access relevant data. Gates also cites Turner Broadcasting, which is using a “special edition” feature of Office XP that runs on a Windows 2000 Server to enable teams within a company to easily set up ad hoc Web sites to share documents, calendars and other content. (More than 500 teams on Microsoft’s campus are already using this feature.) While these benefits will enlarge the user base, they will do so only slowly. These big corporations will take time to deploy their own custom solutions widely and only then will their clients find any advantage in adopting Office XP. Recognizing that this makes a recipe for slow sales, Microsoft recently moved to ensure a steady stream of upgrades across all its enterprise products. Imminent changes to the terms of its enterprise volume licensing agreements mean that companies that want continued support and good deals when it comes time to upgrade must do so through a continuing contract: in essence they have to buy into constant upgrades. The licensing changes take effect in October. That could spur early sales and make Office XP a bigger success than the under-achieving Office 2000. “We’re expecting a modest acceleration in year-on-year revenue growth for the desktop division,” said Merrill Lynch’s Blodget. “A moderately successful uptake is already built in to our financial projections.” Analyst Ken Smiley of Giga predicts that half of the current user base will upgrade to Office XP within three years. If that growth materializes, that’ll be enough to call XP a success and continue the cash flow. Office XP will run on the Windows 98 and later operating systems or on Windows NT 4 and later for business users. (If you’re still on Windows 95, Microsoft’s message is clear: get over it.) At the retail level, it’s priced at $239 for a standard upgrade from any earlier version. Office XP Pro, which includes the Access database, costs $329; and the Special Edition, which includes the new SharePoint collaboration service, costs $449. One annoying piece of marketing terminology: although the entire product is called Office XP — for ‘eXPerience’ — the individual apps within it are called Word 2002, Excel 2002, and so on. How come 2002? Well, who would think that an upgrade from Word 2000 to Word 2001 was a great leap forward? To a marketer, the latest productivity suite is a new experience and next year is just around the corner.

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