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Looks like Omega isn't the only one with jet lag...
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Time Isn't on Microsoft's Side
10/1/98 4:22 PM ET
SAN FRANCISCO -- Microsoft (MSFT:Nasdaq) may have played vaporware for the
last time.
Delays from the Redmond, Washington, software giant are something companies
have gotten used to and have put up with many times in the past, but things
now may be changing.
When Microsoft delayed its second test version of Windows NT 5.0 in July,
some industry watchers warned of consequences. David Readerman, Microsoft
analyst with NationsBanc Montgomery Securities, wrote in his report: "We
expect this NT 5.0 slippage will negatively impact large enterprise, higher
performance NT-application sales ... in favor of UNIX alternatives."
Readerman kept a buy rating on Microsoft then but lowered his fiscal year
1999 earnings estimates of NT sales from $3.6 billion to $2.9 billion.
Nationsbanc Montgomery Securities has no underwriting relationship with
Microsoft.
Most industry watchers are betting that the final NT 5.0 version will not be
delivered until late 1999 or even sometime in the year 2000.
The arrival of NT 5.0 is key to Microsoft's future growth because it is the
company's chance to attract larger corporate clients, who generally have
relied on mainframe computers or UNIX-based operating systems. Windows NT
5.0 is promised to be more powerful and scalable (capable of being changed
in size and configuration) than the current version, Windows NT 4.0.
Furthermore, NT 5.0 is also said to offer a whole bag of goodies such as
Internet capabilities and an active directory, allowing computer users and
other software programs to find other users, databases and resources in
large computer networks.
But as Microsoft delays NT 5.0 to "fine-tune" some 40 million lines of code,
others are stepping up to meet customer needs. Take Novell (NOVL:Nasdaq),
which had a near-death experience after losing market share to Microsoft.
Novell, which specializes in software that powers networks of desktop and
central-server computers, is already exploiting the window of opportunity
left open by Microsoft. It shipped ahead of schedule NetWare 5, an upgrade
of its flagship operating system that focuses on the Internet and provides a
scalable directory. Novell says the market is interpreting the Windows NT
5.0 delay as a signal to renew its commitment to Novell.
Any delay is bound to be good for Sun Microsystems (SUNW:Nasdaq), the market
leader in UNIX-based operating systems. Sun used to own the midrange and
high-end server and workstation market. But the combination of cheap
workstations based on Intel (INTC:Nasdaq) chips and Windows NT software has
dented Sun's domain.
"Sun continues to gain ground in the UNIX market, while the Wintel
[Windows/Intel] threat drifts further into the future," says Kurt King, an
analyst at Nationsbanc Montgomery Securities who rates Sun a buy.
Nationsbanc Montgomery Securities has no underwriting relationship with Sun.
John Oltsik, an analyst with Forrester Research, goes further, saying "We're
recommending that people not put NT 5.0 into production until 2001, in terms
of infrastructure. With about 20 million new lines of code, we think
Microsoft will have a lot of patchwork to do. The move from NT 4.0 to 5.0
will be a difficult transition."
Nationsbanc's King agrees. "We continue to find little interest in migrating
enterprise UNIX applications to the Wintel platform within the next two or
three years, particularly given the need to deal with Y2K issues in the
interim."
In the meantime UNIX continues to outperform NT. A Morgan Stanley Dean
Witter study shows that UNIX servers are actually outperforming Wintel
servers. Morgan Stanley analyst Thomas Kraemer says, "UNIX servers are
actually pulling away." Morgan Stanley Dean Witter has no banking
relationship with Sun but has participated in public offerings for Microsoft.
As businesses move toward the Web, they are looking to UNIX servers for
their reliability. For example, clothing retailer J. Crew replaced 30 NT
servers with 5 Sun Solaris systems in July to power its e-commerce Web site.
"If your Web server can only handle 1,000 hits and your site got 1,500, you
just lost 500 customers," Kraemer says.
Jonathan Perera, Microsoft lead product manager for Windows NT servers, puts
on a brave front. He argues that NT scalability is comparable to UNIX but
that NT provides a higher level of performance for the price. When NT 5.0 is
released next year, Perera says Microsoft will be able to capitalize on its
huge NT 4.0-installed base.
Hambrecht & Quist analyst Chris Galvin believes Windows NT will remain the
favorite over the coming years and continue to chip away at all other
platforms. Hambrecht & Quist has no banking relationship with Microsoft.
"We are still early in seeing the success of Windows NT," he says. "The
trend of Microsoft gaining ground and increasing its market share with a
more expensive operating environment seems to be what should be expected
over the next few years."
Should you bet against Microsoft? "You have to remember, the best technology
doesn't always win, and Microsoft is big." says one fund manager who owns
small positions in both Microsoft and Sun.
But this could be one delay too many. Morgan Stanley's Kraemer bets that
"when Wintel finally does deliver scalability, we think the odds are good
that many partygoers will have moved [to UNIX]."
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