WinInfo Daily Update, January 30, 2006: EU Warned Microsoft

EU Warned Microsoft That Source Code Release Wouldn't Suffice

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==== In the News ====

- EU Warned Microsoft That Source Code Release Wouldn't Suffice
- Microsoft Earnings: More of the Same

by Paul Thurrott, [email protected]

EU Warned Microsoft That Source Code Release Wouldn't Suffice

"The Wall Street Journal" has obtained a confidential document that European Union (EU) antitrust regulators sent to Microsoft last month, warning the software giant that a release of its Windows source code would not meet the EU's requirements. Last week, you might recall, Microsoft announced with great fanfare that it would release portions of its Windows source code in a bid to finally meet its EU antitrust requirements. Microsoft general counsel called the move "a bold stroke" when it was announced.

You might recall that EU antitrust commissioner, Neelie Kroes, said she was "surprised" that Microsoft made the source code offer last week. Given the revelation of this document, her comments can be put in perspective: She's surprised because the EU specifically told the company that a source code release would not meet its requirements.

Most of the confidential document cited by "The Wall Street Journal" concerns the EU's efforts to determine whether Microsoft had complied with the requirements of its antitrust ruling. Microsoft had previously turned over 12,000 pages of technical information describing software protocols that developers could use to interact with Windows Server products. But the EU says that its technical experts spent more than 42 hours working on very simple applications that interact with those protocols, and they couldn't get anything to work. The experts called Microsoft's documentation "totally unusable" and complained that it lacked an index, illustrations, or even section headings. Developers at IBM, Novell, Oracle, and Sun Microsystems also complained that the documentation was unusable, the report notes.

Microsoft now faces the possibility of fines of $2.4 million a day, retroactive to December 15, 2005, if it can't meet the EU requirements. Those requirements were made clear in its March 2005 ruling, the EU says.

Microsoft Earnings: More of the Same

When Microsoft issued its latest quarterly earnings last week, analysts were eager to see how sales of the Xbox 360 affected the software giant's results. The answer: Not much. Indeed, a quick look at Microsoft's earnings statement for the quarter ending December 31, 2005, reveals that the company's cash cows--Microsoft Windows, Microsoft Office, and its server offerings--continue to be responsible for most of the company's earnings. Meanwhile, its newer and highly visible initiatives, MSN and Xbox, continue to hemorrhage cash.

Microsoft posted net income of $4.66 billion in second quarter earnings for fiscal 2006, a 2 percent decline from the same quarter a year ago. The company blamed the slight downturn on expenses related to its high-profile Xbox 360 and SQL Server 2005 launch events. Revenues, however, reached a record level: $11.84 billion for the quarter.

The software giant was quick to credit some familiar businesses for its earnings. "The growth in our core businesses was healthy during the quarter driven by strength in Server and Tools and the success of our Windows Client products in a robust PC market," Microsoft CFO Chris Liddell reported. "The quarter also marked the beginning of an important product cycle for Microsoft with the launches of Xbox 360 \[and\] SQL Server 2005 ... which were extremely successful and well received by our customers."

It's unclear how successful Xbox 360 is. Though the highly desired product was arguably the number one item on holiday 2005 wish lists, few consumers could actually find Xbox 360 consoles. As I reported last week, in an earnings conference call, Microsoft reported that it had sold just 1.5 million Xbox 360 consoles in North America by the end of 2005, far fewer than the 3 million units the company had originally projected. Microsoft blames parts shortages for its woes and reports that it has added a third Xbox 360 manufacturer to meet demand. Meanwhile, the entertainment and devices division, which is responsible for the Xbox, lost $293 million during the most recent quarter.

However, Microsoft's traditional businesses are still reaping huge profits. Indeed, the business units responsible for Windows, Office, and the server products generated more than $5.8 billion in operating income. Microsoft's net income was lower than that figure because many other divisions lost money.

So is this situation a problem? The markets for its Windows client and Office solutions are mature at best, and both products' biggest competitors are earlier versions of the same software. The only way for Microsoft to grow these markets is to ensure that existing users keep upgrading and to find new markets for its software. The company has been looking into emerging markets in third world countries and places such as the Far East, where software piracy still runs rampant. It's unclear whether upcoming launches of Windows Vista and Office 12--both due in late 2006--will boost sales in what are increasingly saturated markets.

Of course, a company with Microsoft's financial resources and continued financial successes can afford to peddle unsuccessful products for years at a time. If any of its new initiatives--such as living room-based computing and entertainment platforms, Web search, video games, digital media, or mobile computing--take off, the software giant might discover its next cash cow. For now, however, it's business as usual. And business is good.

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