WinInfo Daily UPDATE, January 17, 2003

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January 17, 2003—In this issue:

1. NEWS AND VIEWS

2. SHORT TAKES

3. ANNOUNCEMENTS

4. CONTACT US

1. NEWS AND VIEWS
(contributed by Paul Thurrott, [email protected])

Microsoft announced record revenues for the quarter ending December 31; the company raked in $8.54 billion, a 10 percent increase over the same quarter a year earlier. In addition, the company announced its first-ever annual dividend and approved a two-for-one split of Microsoft common stock. All in all, the quarter was another bravura financial performance by the software giant, which has consistently bucked economic trends while its competitors struggle to keep up.

Microsoft reported net income for the quarter of $2.55 billion, which includes a $282 million after-tax charge for investment impairments and a $126 million one-time tax benefit relating to a favorable tax court ruling. This number compares with a net income of $2.28 billion in the same quarter the previous year. Microsoft saw revenues from its server platforms grow 12 percent in the quarter, thanks to strong sales of Windows 2000 Server and Windows 2000 Advanced Server. With growth of more than 40 percent, Microsoft SQL Server 2000 was another bright spot.

"The company delivered solid results in every business despite a challenging global economic environment," said Microsoft chief technology officer (CTO) John Connors. "During the quarter we also launched a broad range of products and services, including MSN 8, Tablet PC, Windows XP Media Center Edition, Xbox Live, and Windows Powered Smartphone. While we are very optimistic about the future of the technology sector, we do not expect to see a significant upturn in global IT spending in the short term."

Microsoft also announced an annual dividend of 16 cents per share presplit, payable to shareholders on March 7, 2003, and a stock split, the company's ninth since going public in 1986. As a result of the split, on January 27, Microsoft shareholders will receive one additional common share for every share held.

"Declaring a dividend demonstrates the board's confidence in the company's long-term growth opportunities and financial strength," Connors said. "We are especially pleased to be able to return profits to our shareholders, while maintaining our significant investment in research and development and satisfying our long-term capital requirements." In the past, Microsoft executives fought the idea of paying a dividend, arguing that the company needed its on-hand cash to fund growth and pay for potentially expensive legal settlements. However, the company recently settled its most damaging legal case, a class-action lawsuit in California, at little actual cost.

2. SHORT TAKES
(An often-irreverent look at some of the week's other stories, contributed by Paul Thurrott, [email protected])

If Microsoft ships Microsoft Exchange Server 2003 (formerly code-named Titanium) and Microsoft Outlook 11 without pervasive end-to-end solutions for ending spam—preferably Bayesian spam filtering, the company is doing its customers a grave disservice. Spam is the number-one email problem, by far, and the software giant, which hasn't moved to end spam as of yet, needs to end this plague now. No excuse exists for leaving this capability to third parties: Spam is to email as security vulnerabilities are to Windows. If you want to protect your customers, Microsoft, get serious about spam.

I've posted previews of Microsoft Smart Personal Object Technology (SPOT) and Media2Go on the SuperSite for Windows; both previews are based on my hands-on experience with the technologies at last week's 2003 International Consumer Electronics Show (CES). Later today, I'll post my show report, along with an extensive photo gallery.
http://www.itprotoday.com

After months of complaining about why it couldn't possibly offer an annual dividend to its shareholders, Microsoft announced this week that it will, indeed, begin offering a relatively stingy dividend of 16 cents per share. The irony of this decision, however, is that the people who fought most vociferously against the dividend will end up reaping the biggest benefits. Chairman and Chief Software Architect Bill Gates will receive almost $100 million extra each year, thanks to his 621 million Microsoft shares. And CEO Steve Ballmer, with 235 million shares, will receive almost $38 million. So rest easy, folks, Bill and Steve are just fine.

The Sundance Institute announced today that Windows Media Video (WMV) 9 is an accepted format for screening movies at the 2003 Sundance Film Festival, a major coup for Microsoft, which has been trying to gain wide acceptance for its latest digital-media technologies. The festival, which is going on this week in Park City, Utah, will host four feature-length films in WMV 9 format: "Masked and Anonymous," starring Jeff Bridges, Penelope Cruz, Bob Dylan, John Goodman, Jessica Lange, and Luke Wilson; "The Maldonado Miracle," produced and directed by Salma Hayek and starring Peter Fonda; "A Foreign Affair," starring David Arquette; and "Milk and Honey," directed by Joe Maggio and starring Clint Jordan and Kirsten Russell. The WMV 9 films will be digitally projected for the highest-possible quality, and Microsoft will host a filmmaker's workshop at the show, highlighting WMV 9's cost and quality benefits. Moving Pictures Experts Group (MPEG)-who?

PC sales rose almost 5 percent in fourth quarter 2002—to 38.8 million units; total PC sales for 2002 rose 1.5 percent, although final figures aren't yet available. The United States had the biggest gains; PC shipments rose 6.6 percent in the quarter, compared with the same quarter a year earlier. With 16.2 percent of the market, Hewlett-Packard (HP) barely regained the biggest-PC-maker crown from Dell, which had 16.02 percent of the market, although Dell's sales are up 20 percent and HP's are down almost 10 percent. Each PC maker shipped more than 6 million computers in the fourth quarter alone, according to industry analysts at International Data Corporation (IDC). IBM (5.9 percent), Fujitsu (4.3 percent), and NEC (3.3 percent) rounded out the top five PC makers.

This week, Intel announced massive profits and slightly higher revenues than predicted, setting the stage for a week of mostly good financial news from the tech sector. Intel made $1.05 billion in the quarter ending December 31, compared with just $504 million in the same quarter a year earlier; the company had revenues of $7.16 billion, up from $6.98 billion. Intel continues to push ahead with ever-faster processors and more efficient chip making while expanding into markets such as wireless networking.

On the other side of the coin, Apple Computer posted an $8 million loss on flat PC sales during what has historically been the company's most lucrative quarter. Despite a 6.6 percent improvement in overall PC sales for the quarter, a high-profile Switch ad campaign, and the opening of dozens of retail locations, Apple was unable to turn the market-share tide, losing 2 cents a share during its first fiscal quarter of 2003, which ended December 31. A year earlier, the company reported earnings of 11 cents per share for the same quarter. Apple shipped just 743,000 Macintoshes in the quarter and noted that sales of its flat-panel iMac (down 40 percent), Power Mac (down 20 percent), and PowerBook (down 13 percent) systems were disappointing compared with similar products the previous year. However, Apple has a strong product line planned for 2003, and the first new models—12" and 17" PowerBooks—look quite impressive. And some products, such as the eMac, iPod, and various peripheral products, did well for the company in 2002. In related news, financial firm Morgan Stanley revealed that, despite public comments to the contrary, Apple disclosed in a recent Securities and Exchange Commission (SEC) filing that net interest income will "decline substantially" in fiscal year 2003. Is this a turnaround?

Speaking of financial problems, Sun Microsystems reported its largest net loss of all time, although acquisition-related charges of more than $2 billion were responsible for the loss. The company announced a net loss of $2.28 billion on revenues of $2.92 billion. Excluding one-time items, Sun would have made about $10 million. Previously, Sun had said that it would turn a profit by June, the end of its fiscal year. However, chief technology officer (CTO) Steve McGowan now says that predicting how the company will perform by that point in time is impossible. Maybe that Java-bundling thing will help Sun.

Back to some good news: IBM beat financial expectations once again, with earnings of more than $1 billion on almost $24 billion in revenues, up 7 percent from the same quarter a year before. IBM said that its strong performance had more to do with the well-being of the company than a rebound in the overall tech sector, which the company says is still struggling. IBM shares are now trading in the high $80s, a figure most tech companies can only dream of. IBM made $8 billion on PC and other hardware sales, $3.8 billion on software sales, and $11 billion in revenues from its IBM Global Services unit. If you're looking for the shining success story in the IT industry, folks, IBM is it.

US federal agents are investigating whether China is involved in the theft of trade secrets from two unnamed companies in Silicon Valley. In both cases, FBI agents stopped Chinese workers from boarding planes to China at San Francisco International Airport; the workers were holding stolen plans to computer-chip designs and software used to find oil and gas. Chinese embassy officials in Washington, DC, say the cases are isolated and that the China central government isn't involved, but the FBI is concerned that a recent increase in high-tech trade-secret theft involving Chinese workers isn't a coincidence. In the past, Chinese workers in Silicon Valley have victimized companies such as NEC, Sun, and Transmeta, the FBI says.

Wow, what a surprise. You can't even buy a cell phone based on Microsoft's Windows Powered Smartphone technology in the United States yet, but one of the phone makers that markets such a device in Europe, Orange, is investigating two potential security flaws in the system, which is based on Windows CE .NET (formerly code-named Talisker) and the Pocket PC. Currently, phones sold in the UK and France are affected, but you have to wonder: When millions of people are using these phones, will they simply become a major attacker target, as Windows now is?

Intel released its fastest-ever mobile microprocessor this week, a 2.4GHz Pentium 4 processor - M design that's now shipping in systems from Dell and Gateway. The company also released new versions of its Ultra Low Voltage Mobile Pentium III processors, and three new Mobile Celeron designs. In addition, the company unveiled a new chipset for laptops, the Intel 852GM, which features onboard USB 2.0 ports. When Apple's CEO Steve Jobs said last week that 2003 will be the year of the laptop, he wasn't kidding, although I suspect even Jobs will be shocked by how much faster PC laptops will be this year. In the spring, Intel will release a new low-power, high-speed mobile processor, code-named Banias, which the company will market as—ugh—Centrino.

Speaking of Intel and faster speeds, the company is accelerating the release schedule for its next-generation 64-bit Itanium (formerly code-named Merced) systems, which so far have done little to excite sales. Intel has apparently surprised even itself by how fast it can ramp up product improvements to the Itanium 2, so this summer, about 6 months ahead of schedule, the company will release its Madison update to the chip, with 6MB of Level 3 cache. Quickly following Madison is Deerfield, an energy-efficient Itanium 2 designed for rack-mounted and blade servers. In 2004, Intel will upgrade Madison to a version with 9MB of Level 3 cache, an all-new product not previously on Intel's roadmap. And in 2005, the company will release its Montecito generation of Itanium chips, which will feature two processor cores on one piece of silicon. As with the updated Madison chip, Intel originally scheduled the dual-core Montecito for a future generation of chips. But you know Intel: The company likes to advance the state of the art.

Desktop Linux maker Mandrake has filed for the French version of bankruptcy protection (insert joke here), the humorously named "declaration de cessation des paiements" (yes, seriously). Apparently, Mandrake's business plan—supplying a desktop OS no one wants—wasn't working out, despite pleas from the company's founders for enthusiasts to buy their products and support the company. But my big problem with Mandrake is that its Linux distribution is nothing more than a warmed-over version of Red Hat Linux. Although I understand this strategy is perfectly acceptable in the open-source world, the idea of taking someone else's work, throwing in a few bells and whistles, and reselling it is distasteful to me, sort of like all the copy-cat Web sites I see. If you're a Mandrake fan, please tell me why I'm missing the point.

One market you can't underestimate, however, is the video-game market, and video-game juggernaut Sony announced this week that it's shipped more than 50 million PlayStation 2 consoles; the company shipped 6.5 million units in the month between Thanksgiving and Christmas. Sony has outsold the previous record holder, the original PlayStation, in just 2 years. The original PlayStation took 7 years to reach the 50 million mark, so the PlayStation 2's success is all the more impressive. Meanwhile, Microsoft and Nintendo are basically looking for scraps. In fact, Sony sold as many PlayStation 2s in 1 month as Microsoft sold Xboxes in 6 months.

The US Supreme Court handed Mickey Mouse and the Wizard of Oz—or more specifically, their copyright owners—a major legal victory this week when it extended the copyright-protection law's timetable by 20 years. Had the courts not intervened, Mickey and the Wizard would have soon entered the public domain, meaning that Disney and AOL Time Warner, respectively, would have stopped collecting lucrative royalties on the properties. Although I think all of us can rally around the big media companies making more money (ahem), the ruling doesn't deal with a wider issue of so-called "fair use" rights, which is likely to be one of the big debates of the coming year. Incidentally, the United States has extended its copyright laws several times since they were enacted in 1790. Yeah, 1790.

Tablet PC maker Acer, which innovated the convertible laptop design, revealed this week that it will ship an industry-first 14" Tablet PC in the spring. Current Tablet PCs have 10.4" and 12" screens, but Acer says a 14" screen costs no more than a 12" version and that customers want bigger devices. I'd like to see better processors in Tablet PCs; all the current designs use low-powered Mobile Intel Pentium III processors. Maybe the upcoming Banias chip will make it into Acer's Tablet PC.

Say what you will about Apple's digital-media prowess, Microsoft won the current round of the battle with Windows Movie Maker 2, Windows Media 9 Series, and Windows XP. Next week, however, Apple will release new versions of its iPhoto, iMovie, and iDVD, and I'll examine them on the SuperSite for Windows, pitting Apple's latest against Microsoft's best. Who will win Digital Media Wars, Round II? Stay tuned.
http://www.itprotoday.com

3. ANNOUNCEMENTS
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4. CONTACT US
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