Aug 3 2002 PC News

Technical, Business and Product News from the Modern Computer World... Updated Once Per Month

The majority of Microsoft's customers won't be signing up for a controversial licensing plan set to go into effect on Thursday, according to analysts' estimates.

...The reason for stiff customer resistance is simple: cost. The plan, called Licensing 6, effectively raises volume-licensing fees from 33 percent to 107 percent, according to market researcher Gartner. Microsoft also eliminated the most popular means of buying upgrades, which allowed companies to pay when they wanted new software, rather than spend money in advance for software upgrades.

..."This is the sort of thing that has lost Microsoft a lot of friends," said Directions on Microsoft analyst Paul DeGroot. "A lot of corporate customers feel this thing has one winner: Microsoft. What we've heard from a lot of corporate customers is that they've looked at Licensing 6 and frequently felt that all the advantage falls to Microsoft's side."

...Microsoft would not say how many customers signed on to an annuity-licensing plan, although a representative said the company had achieved its internal targets.

The most controversial piece of Licensing 6 is Software Assurance, through which businesses pay 29 percent annually of the full price for two or three years. This entitles them to upgrade to new software versions released during the contract period.

For the majority of businesses, which upgrade software every three to six years, Software Assurance works out to a hefty price increase, as there is no certainty that Microsoft will deliver a product during the contract period. Many businesses in this group have good reason not to sign up for the new licensing program, say analysts.

"If you're on a three-year, four-year or five-year upgrade cycle, you're better off without Software Assurance," DiDio said. "The break-even point Microsoft has identified is about 42 months. After that, it costs you just as much as or less to buy a whole new license."

...Analysts note that in a competitive market, Microsoft would find it difficult to push customers into adopting a plan with uncertain benefits and a huge price increase. But Microsoft owns a huge share of the operating-system market.

"It's not possible to quantify the benefits of Software Assurance, because you don't really know what you're buying," DeGroot said. "You don't know when the product is going to come out, so you can't say that, in early 2005, Longhorn--the next version of Windows--will be on our desktops. With Software Assurance, you simply cannot predict what you are going to get for that money."

In that sense, Licensing 6 could backfire on Microsoft, because companies have more incentive to make sure the company's software ships on time. So far, Microsoft's record for on-time releases isn't good, DeGroot said.

You're in trouble "if Microsoft doesn't meet the ship date, and as a consequence your Software Assurance expires," he continued. "The next time you buy this software, do you believe these guys? Are they credible? They've just taken a bunch of money, and they're not giving it back. But you got nothing for it. I think that's a terrible risk for Microsoft," said DeGroot.

..."Ironically, customers' attitude may change: Ship, ship, ship that sucker on time, and I don't care whether it works or not," he said. "I paid for you to hit that date."

...Other companies caught flatfooted by Licensing 6 should plan for future price increases. Gartner is recommending that its customers add 40 percent to their annual software budget with Microsoft to cushion against continued licensing changes.

...Unearned revenue, the majority of which comes from software licensing agreements, rose more than $2 billion during fiscal 2002 over the previous year, Microsoft reported.

Analysts describe the increase in unearned revenue from the company's third quarter to fourth quarter as "staggering."

...Even though only a third of its customers have agreed to the new program, "Microsoft should get a nice revenue bump as a result of people upgrading to Licensing 6.0," Yankee's DiDio said. "They needed to feed the revenue monster and feed the recurring revenue stream to make up for the shortfall for the upgrades they were getting from people buying new products. Without that 20 percent bump, where would Microsoft have been?"

Sunbelt's March survey found 38 percent of respondents were considering switching to other products, a slight increase from the 36 percent in the October survey.

"Lots of people say they are interested in Linux, but there are few actually doing it," said Sjouwerman. "Microsoft understands that Linux is a viable alternative, and there are people actually moving. But there aren't that many. Most people say, 'Listen, in two or three years if I really need an upgrade, I will think about it at the time.' So a lot of people simply have not taken any action."

..."Microsoft wins either way, whether you buy Software Assurance or not," DeGroot said. "Their revenues go up. You can pay more for your upgrade, but less than full price--or you can pay full price later on. The fact that two-thirds of their customers are not purchasing Software Assurance is not necessarily bad news for Microsoft."

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DELL’S PENCHANT FOR easily and inexpensively making and selling products has allowed it to weather periodic slumps in information technology spending for years, enjoy higher profit margins during boom times, and ultimately gain share at the expense of rivals such as Gateway and Hewlett-Packard. Some investors and analysts, however, believe that Dell, which announces earnings next month, can’t cut much more fat out of its operation. Manufacturing improvements at HP also will likely erode the company’s cost advantage.

...“I believe we still have lots of room to improve,” said Rosendo Parra, senior vice president of the Americas for Dell. “And it’s more than just tweaks.”

One potential frontier for Dell is tracking shipments to garner more services revenue. Everyday, 5 percent to 10 percent of the products Dell ships are for orders placed the same day. The problem? Dell doesn’t know which orders are getting same-day shipping—it’s largely luck for customers and a missed opportunity for Dell. “If we can track that 10 percent that ships the same day and sell that ability to just half of the customers that want it, it adds up,” Parra said. He said other ideas focused on cutting shipping costs and boosting efficiency percolate almost daily.

MEASURING EFFICIENCY
Dell uses a series of benchmarks to measure efficiency. These are a few key statistics:

The number of touches—or worker steps—in the manufacturing process has been cut in half in recent years. In its Nashville factory, employees figured out a way to put together a notebook by flipping it over two times compared with the customary six times. “That helps our throughput and improves units per man hour,” Parra said. “If you move that needle you save money.”

In terms of dollars, the numbers tell the tale. According to UBS Warburg, Dell has an expense ratio of 9.9 percent, well below its competitors. Gateway’s expense ratio hovers above 27 percent, and prior to their merger Hewlett-Packard and Compaq Computer had expense ratios at least in the high-teens. An expense ratio is based on a company’s operating expenses divided by its revenue. And Dell isn’t done. Executives at the company boast that “proprietary” efficiency gains will lower costs even more than falling component prices, and some analysts agree. UBS Warburg estimates Dell’s expense ratio will fall to 9.6 percent.

“Dell’s low-expense ratio should result in continued share gains as the company leverages its expense structure to drive a lower pricing model,” UBS Warburg analyst Don Young wrote in a research note. But competition looms from HP. For years, Compaq Computer tried to develop a build-to-order system that would rank with Dell’s. After several false starts, the company bought configuration centers from Inacom in 2000. Subsequently, Compaq saw direct sales increase and costs decline, according to the company. Analysts also note that Compaq enjoyed higher margins on these system...

NEW PRODUCTS, LESS EFFICIENCY?
...“It remains to be seen how Dell would do with other products,” Cohen said. “Right now Dell has only made one thing. As they expand it will become more difficult.” The question, though, is somewhat academic. Dell has enlisted contract manufacturers to make low-margin or low-volume products in the past. Contractors make the cheap SmartStep PCs and several of Dell’s ultra-thin notebooks, for example. Nearly every analyst has said Dell will use contractors in printers and handhelds. Dell has disbanded an internal handheld group.

Contract manufacturing can be just as efficient, said Adeel Najmi, director of supply-chain management solutions for i2 Technologies. Hiring contractors, though, typically results in split—and hence lower—profit margins. Parra said Dell evaluates each new market to see if it’s worth making in-house. And if Dell enters a new market such as blade servers, it will customize processes to make manufacturing more efficient.

Dell will contract out manufacturing if it makes sense, but Parra notes that the company considers its manufacturing and its supply chain to be its “crown jewels.” “We see our supply chain as our core competency,” he said. “Whenever a company outsources anything, it concedes it can’t do it better, and the outsourcers make a profit. We say ‘why can’t we do that and keep the profit?’”
It’s that drive to be efficient that is behind Dell’s success, Najmi said. Dell uses i2 software to run factory reports every two hours and monitor component supply and demand. “Efficiency largely depends on the mindset,” Najmi said. “Dell’s success isn’t technology—it’s how it uses the technology.”

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A group of programmers seeking to put Linux on Microsoft's Xbox video gaming console has created the software that will eventually replace the machine's built-in system software. The new software, called a Basic Input Output System (BIOS), is the latest step towards turning the $199 console into a Linux workstation.

The Xbox Linux Project, drawing on the skills of programmers in the UK, Germany and the United States, released a pre-alpha version of the new BIOS on Sunday. When complete, the BIOS will give programmers control over the Xbox's components and peripherals and allow the rest of the Linux operating system to boot.

The replacement BIOS is intended to act as a template for future development, initializing the hardware's peripherals and performs a process designed to give full and stable control of the machine.

Linux is a favorite of programmers because its open-source license allows the software to be freely modified and redistributed, as long as modifications are returned to the community. Its popularity led Sony to release a version of Linux for its PlayStation2 console, hoping to encourage open-source developers to learn the ins and outs of the hardware.

Microsoft has not been forthcoming with an official Xbox Linux, possibly because it makes the competing Windows operating system. The Xbox Linux Project is a volunteer effort, but bars the use of proprietary Microsoft tools or insider knowledge, in an effort to remain completely legal.

Xbox Linux recently received a anonymous grant of $200,000 awarded to developers for completing various parts of the project, culminating in the ability to boot Linux on the machine from a CD-ROM. Non-Microsoft software can currently only run on an Xbox with a modification chip.

The George W. Bush administration plans to convene a panel of government and private-sector labour and legal experts to develop guidelines for subjecting tens of thousands of corporate IT and other employees to background investigations.

..."Personnel with privileged access to critical infrastructure, particularly [IT-based] control systems, may serve as terrorist surrogates by providing information on vulnerabilities, operating characteristics and protective measures," the Bush report states.

Some IT professionals see the plan as both an infringement on civil liberties and a recipe for destroying innovation and economic prosperity.

Jonathan Blitt, president of ITT Industries Inc.'s network systems and services division in New York, said expanding background investigations would do more harm than good.

"I [have] great concern with any effort to expand the size of government intervention in commercial operations. The people you most want on your side are the people that may seem least desirable to a panel of so-called experts," Blitt said, referring to the community of programmers and ethical hackers who often live on what he referred to as the "fringe" of society.

"This pandering to the masses should stop, and professional reason should start. This plan could put shackles on an industry that is critical to the growth of our country."

Others see no problem with the requirement for background investigations. Eric Johansen, a systems analyst at ReliaStar Life Insurance Co. in Minneapolis, is one of those.

"Yes, there is added cost, but companies should be doing this anyway as part of standard hiring procedures," Johansen said. "A position like systems analyst [or] network administrator requires access to extremely sensitive data and control of many business-critical tasks. It would be ridiculous not to screen employees. Companies should not need President Bush's push in order for this to happen."

Indeed, background investigations are already conducted by many companies that have sensitive or critical positions that are vulnerable to terrorist infiltration, such as airport baggage screeners and air marshals, said Ed Badolato, president of Washington-based Contingency Management Services Inc. Investigations are necessary because they "provide a baseline for preventing known criminals and potential terrorists from working in vulnerable areas," said Badolato, who oversaw some of the government's most stringent and expensive background investigations when he served as deputy assistant secretary for energy emergencies at the Department of Energy...

Mac OS X 10.2 Jaguar: Did Apple follow Microsoft?
www.cnet.com By John Rizzo

Apple developers now have their paws on a final beta of Jaguar, the next major Mac OS X update. Apple made much ado about the point upgrade last week at Macworld Expo in New York, where we took a peek at the beta. The preliminary verdict? The company has taken a few pages from the Microsoft book--new features, bundled software galore, and a lofty upgrade price tag.

All-new Sherlock and Mail
Due to ship on August 24, Jaguar, now officially christened Mac OS X 10.2, improves ease of use with features such as a search field integrated into folder toolbars. Sherlock, Apple's longtime built-in search tool, now searches only the Net (not your hard drive), but it returns broader search results, including image and sound files, without opening a Web browser. The beefed-up Mail program identifies junk mail, and QuickTime 6.0 supports hot, new audio and video formats, including the MPEG-4 compression standard.

In addition to all this remodeling, OS X 10.2 will ship with a slew of all-new built-in apps, including an instant messenger, iTunes 3.0, an address book that can automatically send contact information to your cell phone, a handwriting-recognition technology called Inkwell that works with any application, a new scheduling program called iCal (available for download in September but compatible only with Jaguar), and improved support for Windows networking.

Unfortunately, Apple hasn't improved its OS X upgrade price. Jaguar will cost a whopping $129, and amazingly, there's no lower upgrade price for existing OS X users. Only those who buy a new Mac on or after July 17 (or a full version of Mac OS X 10.1) can buy an upgrade CD for $19.95--as long as their new computer doesn't already include the new version.

iChat with AIM, too
Apple's new IM tool, dubbed iChat, may be Jaguar's most compelling development. For one, the app boasts interoperability with AOL Instant Messenger, unlike Windows Messenger or MSN Messenger. iChat users will also be able to chat and trade files with pals who are members of Apple's new $100-per-year Mac.com portal, which replaces the free iTools services. Plus, iChat will integrate with Apple's upcoming contact manager, Address Book. Speaking of Address Book, that app will integrate with Mail and sync up with the iPod, Apple's handheld MP3 player.

Smoother networking
For business users, long-awaited networking features such as virtual private network (VPN) support and the ability to browse Windows networks may justify the $129 upgrade. Jaguar also includes a new networking tool called Rendezvous that automatically discovers computers, network printers, devices, and services on local Ethernet or AirPort IP networks.

Patent Claim on Portions of JPEG Rocks Electronics Industry
www.tomshardware.com

Forgent Networks, of Austin, Texas, a small videoconferencing company, has announced that it is pursuing patent claims on the portion of the JPEG technology that is used in the JPEG digital still-image compression standard, as previously defined by the independent body of Joint Photographic Experts Group (JPEG) in 1990. This JPEG data compression standard is used in personal computers, printers, scanners, digital cameras, and on the Internet. Data compression technologies are used in computing to shorten files so that they take less download time and require less storage capacity. JPEG is the most common and widely used format for posting photographs and images on the World Wide Web and in sending such photos and images via email.

Forgent acquired the patent, originally issued to Compression Labs in 1987, after a merger with Compression Labs in 1997, and has invested over $1 million to research and secure its patent claims. So far, Forgent Networks has collected royalty-licensing payments from Sony Corporation and a yet unnamed Japanese digital camera manufacturer for their use of the claimed patented technology. Forgent is currently proceeding with patent claims against another fifty companies, which could net Forgent from between $100 to $300 million if its claims are successful. The JPEG standards group has announced that it will seek to invalidate the patent claims of Forgent and others thus far, including Philips Corporation and Lucent Technologies, because they feel the JPEG standard does not apply to patent claims.