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A kinder and gentler Microsoft?
The software giant has made nice with competitors but analysts think it's the same old Microsoft.
October 12, 2005: 12:46 PM EDT
By Paul R. La Monica, CNN/Money senior writer
Going nowhere: Shares of Microsoft have been stuck in neutral for the past four years.
Going nowhere: Shares of Microsoft have been stuck in neutral for the past four years.

NEW YORK (CNN/Money) - It seems that Microsoft has gotten kind of, uh, soft, lately.

Gone are the days when the Redmond, Wash.-based software giant was out to take no prisoners and brutally crush its competitors. Now, it seems like Microsoft (Research) is all about cooperation and making friends within the tech community.

Microsoft announced Wednesday that it was making its instant messaging program compatible with that of Yahoo!'s, just a day after it agreed to pay $761 million to settle an antitrust case brought by rival media player company RealNetworks (Research).

The pact with RealNetworks is the latest in a string of settlements with companies and governments that had filed antitrust cases against Microsoft.

Microsoft in recent years has also kissed and made up with the federal government, a number of states, IBM (Research), Sun Microsystems (Research), Gateway (Research), Novell (Research) and AOL, which, like CNN/Money, is owned by Time Warner (Research).

Microsoft has also recently allowed rival Palm (Research) to launch a new smart phone that will run on Microsoft's mobile software and the company is even rumored to be in talks with AOL about some sort of alliance or joint venture.

The AOL chatter is particularly worth noting since some analysts believe that online search firm Google has emerged as perhaps Microsoft's most formidable competitor ever.

So is this spirit of détente a sign that Microsoft realizes it can make better products by forming new allies? Or are Bill Gates and Steve Ballmer just simply following the sage advice of Don Vito Corleone?

Keep your friends close, but your enemies closer.

Emulating Big Blue...

Several analysts said that rivals, and investors, shouldn't be fooled. Beneath all the talk about partnerships and collaboration lies the same old Microsoft, a company that is looking to find ways to reignite its moribund earnings growth and extend its dominance in the software market.

"It's nice to think that Microsoft is learning to play well with other software players but there is a fundamental economic reason to get these deals done," said Sam Saunders, an analyst with Fulcrum Global Partners.

Added Alan Davis, an analyst with McAdams Wright Ragen in Seattle: "The skeptic would say this is not by choice."

Saunders said that Microsoft has a vested interest in getting all of its legal issues out of the way. That's because he thinks Microsoft is looking to go on the offensive in order to enforce its own patents.

"If you are going to go out and sue someone for using your technology then you have to make sure they are not going to sue you," he said.

In addition, Microsoft announced a new program called Microsoft Intellectual Property (IP) Ventures in May and the goal of this program is to license some of Microsoft's in-house technology to other companies.

Saunders said that royalties and licensing fees could be a huge avenue of growth for Microsoft in the future and pointed to the success that IBM has had in making money from its proprietary technology. Big Blue generated nearly $1.2 billion in intellectual property income in 2004, according to its annual report.

...and trying to fend off Google

There's also the threat from Google (Research), which along with Yahoo! (Research), is outshining Microsoft's MSN in the online search arena. Last week, Google announced a partnership with Sun Microsystems.

Although the terms of this partnership were vague, some analysts have said a deal with Sun could help Google eventually become a more direct competitor to Microsoft in the company's cash cow businesses: its Windows operating system software and Office suite of tools, such as Word and Excel. These two businesses accounted for 60 percent of the company's total sales in the second quarter.

"Microsoft still has a great franchise on the desktop so Google is not going to take that business away overnight," said Davis. "But longer term, Google is the biggest threat since they have the most talent, an innovative business model and the most vision."

Richard Williams, an analyst with Garban Institutional Equities, said that if Microsoft truly wants to effectively battle Google online then it will need to earn the trust of customers. He thinks that burying the hatchet with old rivals is one way to earn it.

In addition, the IM deal with Yahoo! and speculation about a partnership with AOL also will help Microsoft, he said. In other words, if you can't beat them, join them, or at least cooperate with them.

"These settlements and collaborations are clearing the table. It is a preamble to a larger strategic move," said Williams. "Microsoft is trying to keep MSN relevant."

Still, at the end of the day, all of Microsoft's machinations have done little for the company's lagging stock price, which has fallen 8 percent this year and been stuck in a tight range for 3-1/2 years.

Davis said he thinks the stock is close to bottoming out but does not expect substantial gains for the stock going forward.

Simply put, Microsoft is such a large company now that no matter what it does, it will be hard for it to match earnings growth rates that Yahoo! and Google are posting.

"It's more difficult for Microsoft to grow. That's running against them," said Davis.

As such, analysts expect Microsoft's earnings to increase about 12 percent a year, on average, for the next few years, compared to projected long-term growth rates of 30 percent for Yahoo! and Google.

Analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking relationships with them.

The reporter of this story owns shares of Time Warner through his company's 401(k) plan.

For more about the partnership between Google and Sun, click here.

For a look at more software stocks, click here.  Top of page

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