Microsoft (MSFT), which dominates the market for consumer software, is making deeper inroads in larger businesses. Familiar Microsoft programs such as Word, Excel, Exchange and PowerPoint appear ubiquitous on the corporate world's computers. But the guts of the corporate IT universe and many applications that make large enterprises run are often built on software from rivals.
Redmond's sales to businesses are growing at a much faster pace, up 14% year-over-year during the third fiscal quarter, which ended Mar. 31. Year-over-year results were flat during the second quarter.
Results for the smaller and medium-size business division are similar -- flat during the second quarter, up 15% during the third. "Enterprise spending [is] beginning to kick in," Goldman Sachs software analyst Sarah Friar said in a report.
Stronger Pipeline for New Products
Some of the growth reflects a stronger economy, which allowed cost-conscious companies to satisfy pent-up demand. Yet much of the gains also reflect Microsoft's stronger pipeline for new products.
The most familiar of these new products is Office 10, the latest version of the productivity suite that includes applications such Word, Excel, PowerPoint and Exchange. This is a major upgrade with a host of new features, such as enhanced Web versions of the software and more advanced social networking capabilities.
You can even access a full version of Word through Facebook, which is an effective use of the business partnership. Microsoft invested $240 million in Facebook in 2007. The online versions of Office software, known as Office Web Apps, are a clear response to Google Docs, the free productivity programs that are available over the Web from Google (GOOG).
Cloud Computing Competition
It's just one of several critical new products from Microsoft, which has been on the defensive in recent years as Google confronts it in the business market and Apple (AAPL) clobbers it in entertainment and mobility.
So far, so good. The launch of the Windows 7 operating system in recent months has been well-received. Windows Server 2008, released two years ago, has done well, too.
More recently, Microsoft has been moving ahead in cloud computing. The Azure Cloud Platform is an operating system that resides on Microsoft data centers instead of on the networks of its customers. Developers can create applications for the Azure cloud, which will be in fierce competition with cloud computing offerings from Google, Amazon and others.
The Apple iPhone may be getting all the attention, but Microsoft is still plugging away in mobility, with Phone 7. The new mobile operating system is due later this year. It will feature 3D effects and "hubs" that combine online content with content on the phone.
Gaining Market Share
Together, the new products "provide a platform for renewed innovation vigor beyond anything we have seen from Microsoft for multiple years," Goldman Sachs' Friar said. She expects a burst of revenue growth as the economy and IT spending improve. Sales fell 5% during calendar year 2009, but Friar expects 11% growth this year and 12% in 2011.
Microsoft may also be poised to take a bit more market share. Gartner says the 5% drop in IT spending in 2009 was the worst in industry history. It expects only 3.3% growth for 2010. It looks like Microsoft can top that, thanks in part to its growth in the enterprise market.
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