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Windows 2000: slow start
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February 16, 2000: 3:15 p.m. ET
Companies seen being cautious in adopting new operating system
By Staff Writer David Kleinbard
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NEW YORK (CNNfn) - When Microsoft releases its long-awaited Windows 2000 operating system Thursday, its first business-oriented operating system in four years, corporate software buyers are likely to react with a wait-and-see attitude.
Many information technology executives, who tend to be risk-averse, want to wait several months before upgrading their systems to Windows 2000 so they can discover potential bugs in the new operating system and compatibility problems with their existing applications.
This hesitancy to adopt Windows 2000 is typical for the introduction of a new operating system, analysts said. IT executives have learned that their survival depends more on avoiding a disaster that creates havoc with their employer's computer systems than on being the first person on the block to adopt new software or hardware.
"Windows 2000 is ready for many enterprises, but many enterprises aren't ready for Windows 2000," said Michael Gartenberg, a vice president at the information technology research firm GartnerGroup.
"We don't believe that the market will adopt Windows 2000 rapidly," said David Cearley, a senior vice president at the information technology research firm MetaGroup in Stamford, Conn. "We are advising our clients to wait until June or July before implementing it so that Microsoft can get at least one service pack on the market and additional drivers become available." A service pack is a software release that fixes bugs and updates a previously released product.
"I think the rate of adoption is going to be slow," said Simon Yates, an analyst at Forrester Research in Cambridge, Mass. "Windows 2000 contains about 30 million lines of code and has about 65,000 known bugs, according to an internal Microsoft memo. Big production and marketing budgets don't guarantee a blockbuster at the box office. I think a lot of people are going to wait for the video."
When Dell Computer (DELL: Research, Estimates) released its quarterly earnings last week, CEO Michael Dell told analysts that companies are rapidly adopting the Linux operating system, which competes with Windows. He also said that he "doesn't see a massive rush to install Windows 2000 immediately." Linux is an "open source" operating system that can be downloaded free from the Internet. Many "dot.com" companies run their servers using Linux because it's inexpensive to install and very stable.
GartnerGroup forecasts that by year-end 2000, between 15 percent and 20 percent of the 1999 commercial installed base of Windows desktops and laptops will be upgraded or refreshed with Windows 2000 Professional. That will rise to between 40 percent and 45 percent by the end of 2001. By the end of this year, between 3 percent and 6 percent of the 1999 commercial installed base of Windows NT Server will be upgraded or refreshed with Windows 2000, rising to between 45 percent and 50 percent by the end of 2001, the report says.
GartnerGroup also predicts that many companies will exceed their budgets for upgrading to Windows 2000. Through 2002, 80 percent of all Windows 2000 Professional installations by companies with more than 500 desktops will exceed their budgets for time or money by at least 25 percent, primarily because of lack of proper planning, one of the firm's reports said.
MetaGroup's Cearley forecasts that companies will start to upgrade their desktops to Windows 2000 in the middle part of this year. That trend will accelerate at the end of this year and peak about one year from now, he said. Companies will be slower to adopt the version of Windows 2000 released for servers, rather than desktops, he said. Installations for the server version of Windows 2000 will not peak until late 2001, MetaGroup predicts.
"We think that Windows 2000 is the right architecture, but it is a complex product that likely will have some level of bugs and refinement that will have to occur after it is initially deployed," Cearley said.
Potential compatibility problems
And then there is the issue of Windows 2000's compatibility with companies' existing software applications. GartnerGroup reports issued over the past three months forecast that over the next two years 50 percent of medium-sized and large companies will encounter compatibility problems between Windows 2000 and business applications or network infrastructure. That number will drop to 25 percent by 2003, the firm forecasts.
"We have been talking about compatibility issues with Windows 2000 for 18 months, but we believe that companies can overcome those problems if they plan accordingly," GartnerGroup's Gartenberg said. "Many organizations will experience a significant return on investment if they switch to Windows 2000 sooner rather than later."
Big stakes for Microsoft
For Microsoft (MSFT: Research, Estimates) the stakes surrounding Windows 2000 are huge. Microsoft plans to launch an entire new generation of products based on the Windows 2000 platform. Securities analysts estimate that the software publisher derives about 40 percent of its revenue from Windows products. In its earnings report for the quarter ended Dec. 31, 1999, Microsoft disclosed that sales of Windows operating systems were sluggish because of "soft corporate demand for PCs and software combined with the expected slowness of demand for Windows NT Server and Windows NT Workstation in anticipation of the launch of Windows 2000."
Microsoft didn't disclose how much it spent to research and develop Windows 2000. But the company did disclose that its Windows 2000 team includes more than 4,000 people, including testers, developers and partners. Microsoft said it spent about $160 million solely on improving Windows 2000's reliability.
Unlike Windows 95 and Windows 98, Windows 2000 is aimed at corporate users rather than consumers. It is designed to supplant Windows NT and to compete against Novell's (NOVL: Research, Estimates) NetWare, versions of UNIX from Hewlett-Packard (HWP: Research, Estimates) and Sun Microsystems (SUNW: Research, Estimates), and Linux. Historically, Windows NT has dominated the low end of the server and workstation markets. The high-end workstation market, however, is firmly controlled by UNIX. Sun Microsystems' version of UNIX, called Solaris, is very popular with e-commerce companies dotting the Internet landscape.
Entering the high-end server market
Microsoft is counting on Windows 2000 to help the company penetrate the higher end of the market. To that end, its Datacenter Server version of Windows 2000, which will be released four months from now, can run on machines with up to 32 central processors.
"The work that Microsoft has done to enhance scalability and reliability with the Datacenter edition of Windows 2000 will place the company in more direct competition with Sun and other UNIX players," said MetaGroup's Cearley. "We are cautiously optimistic that it will provide better scalability and stability than earlier versions of Windows, but the jury is still out on whether it can beat UNIX environments."
The main problem with Windows NT is that it often crashes when more servers are added to a network, said Forrester's Yates. Companies running "mission critical" systems that need to be operational 99.99 percent of the time have chosen to use Linux or UNIX because they have a much better ability to handle additional network traffic without imploding, he said.
If Microsoft does succeed in convincing corporate users that Windows 2000 is as stable as UNIX and Linux, then companies may run both their high-end servers and their desktops in a Windows environment, eliminating what IT professionals call "cross-platform issues."
In addition to offering greater reliability and speed than earlier versions of Windows, Windows 2000 is designed to give companies the ability to run an entire computer network from a single point of control. For example, one server will be able to distribute software to individual desktops and "lock down" users' desktops so that they can't change existing settings and configurations without authorization. Windows 2000 also will give system administrators a giant index of the connections and activity on their networks, a function many companies now accomplish with a product from Novell called NDS.
"If you take all the functionality that you get in Windows 2000 and try to re-create that on another platform, you would have to buy several different products, from several different companies, costing more money, and they most likely haven't even been tested to work together in an integrated fashion," said Craig Beilinson, lead product manager of Microsoft's Windows division. "With Windows 2000, you get all the functionality of a desktop operating system or a server operating system, along with an integrated Web server, transaction server and message queue server, and it's all in one inexpensive package, designed to work seamlessly together."
"Companies that have large population of notebook users and are experiencing pain with Windows 95 or 98 crashing are prime candidates for the adoption of Windows 2000, as are companies with a very chaotic environment that want to establish greater degree of lock down and control around the client," said MetaGroup's Cearley.
Delays give competition a break
Microsoft previously delayed its release of Windows 2000, which gave the company more time to test and improve the software, but also gave competitors time to strengthen their market position. However, most analysts said Linux is not a major threat to Microsoft for traditional desktops and servers.
"One of the best ways to gain a new appreciation of Windows 98 is to install Linux on the client side and try running it," Cearley said. "Linux is mostly gaining mindshare and emotional share, not commercial market share."
Microsoft is not the only company banking on Windows 2000. Computer hardware companies and makers of DRAM upgrade chips are hoping the migration to Windows 2000 will drive companies to upgrade or replace their existing hardware.
"This is a huge and very important leap forward in terms of what customers want from their PCs and the related products that go around them," Dell Computer CEO Michael Dell said at the three-day launch event for Windows 2000 in San Francisco.
For now, most securities analysts continue to be bullish about Microsoft's stock. Their earnings models assume that Windows 2000 deployments will be spread out over a 12- to 18-month period and that initial acceptance of the new operating system will be slow.
"We believe that Windows 2000 will ultimately be a widely adopted corporate computing platform over the next two years, and we remain bullish on Microsoft's prospects," said Melissa Eisenstat, an analyst at CIBC World Markets in New York. 
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