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Fri, Mar 02, 2001 EST
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Microsoft Moving in New Directions
As Technology Market Changes

By Allison Linn   Associated Press
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SEATTLE — 2000 wasn't the best year for Microsoft Corp.

The Redmond software company received a federal court order to break up, saw its stock price cut in half, ran into a softening personal computer market and had to reduce its revenue expectations for 2001.

So as it prepares for oral arguments Monday to appeal the court's break-up order, Microsoft is trying to expand beyond its desktop-bound past and provide consumers and businesses with what executives call the "end-to-end experience."

Microsoft wants its products to do all things for all people: create Intranet sites and manage networks for corporations, enable families to buy products online, e-mail pictures to relatives and play video games.

A strategy of linking and bundling products — trying to be a one-stop source for virtually all software — helped get Microsoft into trouble with the Department of Justice, prompting the lawsuit that ended with its being found guilty of monopolistic behavior.

Microsoft is moving beyond software to cozy up to consumers. It is working on a host of new products, including the Xbox game console, the company's first major hardware release that is planned for release later this year.

The house that Bill Gates built is also betting its future on a broad Internet-based operating system now in early development.

Microsoft also must continue to prove itself on the desktop and corporate networking market, with products including the business-oriented Windows 2000 operating system and the soon-to-be-released consumer-friendly "XP" versions of Windows and Office.

Can the company pull it all off?

"I don't think they have any choice," said Scott McAdams, president of McAdams Wright Ragen in Seattle.

As computing evolves and the Internet becomes ubiquitous, everyone is battling for products from video game consoles to handheld devices to digital television. Each market poses a threat to Microsoft.

"If they stay out of one of the new platforms, and then that starts evolving, then boom, you've let the fox into the henhouse," McAdams said. "All of the new platforms are opportunities to leverage the Windows franchise."

Many at Microsoft are comparing the company's current position to where it was when it released Windows 95, which turned out to be a runaway hit.

Only now, the Internet has emerged as a playing-field leveler — people don't need Microsoft software to work on the Web. Microsoft clearly would like to see that change.

"About two years ago, we changed our vision from 'a computer on every desktop' to 'anytime, anywhere,"' said Steven Guggenheimer, the company's senior director of consumer strategy.

The computing giant is to make .NET an industry standard. Essentially an operating system for the Internet, the product will aim to let people keep track of everything they do, from shopping to business planning, through a system not necessarily tied to a specific personal computer.

Though still in its initial phase, the company is hoping .NET will help bridge a gap between home and work, giving people access to the data they need to work and play no matter where they are.

"I don't think of myself as a business person or a consumer. I just want to get my stuff done," explained Microsoft executive Sanjay Parthasarathy.

But the company faces stiff competition in that realm from companies including Oracle Corp., IBM Corp. and Sun Microsystems Inc., along with smaller upstarts and — in the Web server market — from the Linux operating system.

While McAdams says Microsoft doesn't always produce the best product, he does think the company has an edge because it owns some 90 percent of the desktop operating system market. And, McAdams says, Microsoft has formidable cash reserves — in the order of around $27 billion.

"If they want to be in a space, they will sit there and throw money at it for five years," McAdams said.

While chief executive Steve Ballmer insists the company's recent executive changes don't signal a move away from its traditional business focus, Ballmer stressed in a recent memo to employees the need for "overcoming the perception that we primarily produce software for the desktop."

Microsoft also must battle to bring back investors, a daunting task at a time of bearishness on technology stocks. In a research note Thursday, Merrill Lynch analyst Henry Blodget downgraded Microsoft's stock, citing weak technology demand.

Blodget says the company will face considerable challenges as computing moves beyond the desktop.

"Microsoft has done an absolutely excellent job on riding a major technology wave, the personal computer, and that wave is now maturing," Blodget said.

Jean W. Orr, senior vice president of research for BlueStone Capital Securities, has given the stock, which has already rebounded somewhat from its end-of-2000 low, a "strong buy" rating.

"I think this is a difficult line that Microsoft is trying to navigate right now," she said. "I personally think they're doing a good job."

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