Microsoft's reputation is one of a moneymaker, but the fact is that four of its seven business units are in the red.

To the tune of $1.6 billion in fiscal year 2003, Microsoft bled money from its Business Solutions, Mobile and Embedded Devices, MSN, and Home and Entertainment divisions.

Part 1: High-flying glory days past, Microsoft builds for future

Of course, piling up a loss of that size isn't such a big deal when you consider Microsoft's other three units turned a combined profit of $17.8 billion. And things actually are looking up compared with 2002, when the four losers were $1.8 billion in the red.

Despite the losses, Microsoft's competitors recognize these business units as slumbering giants. They are not only coddled by a cash reserve of $51 billion but with a thirst to become Microsoft's new growth business now that traditional cash cows - client operating systems and the Office suite - have matured.

Business Solutions

The rewards, risks and challenges are epitomized in Microsoft's $10 billion dream for its Business Solutions group, which produces ERP, CRM and other applications to automate business functions for small and midsize businesses (SMB), which Microsoft defines as those with 1,000 or less employees.

In the past two years, Microsoft built the group based on its largest acquisitions ever, laying out $2.5 billion to acquire ERP vendors Great Plains and Navision.

In the past year, the division publicized an 84% gain in revenue - mostly because of the close of the Navision deal - but was quiet about its 44% spike in losses.

Undaunted, CEO Steve Ballmer is pegging the division's yearly revenue potential based on selling applications, and supporting infrastructure and services at $10 billion by 2011. The goal is to draw users to the business applications and in turn sell them client operating systems, the Office suite and infrastructure servers to support the rollout.

To understand the magnitude of its ambition, $10 billion is just short of the revenue generated in 2003 by Microsoft's top-grossing Windows Client division, which produces software that sits on 94% of corporate desktops worldwide. The $10 billion would make Business Solutions bigger than current-day Oracle or SAP, longtime business application players that will compete with Microsoft, and untold others to capture a slice of more than 45 million SMBs.

The road ahead

But Microsoft has been down this road before. In 1985, it championed productivity application suites, pulled the rug out from under competitors such as WordPerfect and Lotus 1-2-3, and built its Office empire.

"It's hard to say if they can reach $10 billion. It certainly is an ambitious goal," says Kelly Spang Ferguson, an analyst with Current Analysis. "But I don't see any indication they are not following the familiar playbook of acquiring companies, developing products and building the channel."

Also familiar is the product tie-in under the marketing jargon "integrated innovation."

Microsoft CRM works with Office's Outlook, and the company is working to marry its "knowledge worker" collaboration products with business-productivity applications.

Also on tap is Project Green, an initiative to replace Great Plains, Navision and Microsoft CRM with applications built on a single code base that depends on Microsoft's dizzying lineup of Longhorn branded clients, servers and development tools slated to start shipping in 2006.

However, the effort won't be without challenges. Microsoft will face stiff competition from large vendors moving down into SMB, such as SAP and PeopleSoft, and from smaller vendors already there, such as NetSuite and Intuit. It will have to overcome an abysmal track record with such historic business software dogs as its Small Business Manager.

"This is one case where execution will be key," says Katherine Jones, research director with the Aberdeen Group. "The competition is mighty and all over the place."

It includes IBM, which invested $500 million earlier this year in its SMB-targeted Express middleware and is bent on keeping Microsoft from dominating the market for infrastructure to support SMB applications.

Microsoft and its resellers will have to learn new selling tactics that highlight solving business issues as opposed to pure price/performance metrics. Microsoft also will have to assure resellers and independent software vendors (ISV) that it won't crush them in its rush.

So far, eyebrows are raised.

"They are trying to get us to develop on their technology, but what is disconcerting is that they are speaking out of both sides of their mouth. What they really want is to get to our customer base and sweep them out from under us," says Van Symons, president of Clear Technologies, an ISV in Coppell, Texas. Symons works primarily with IBM because its middleware provides alternatives to Windows and because the vendor won't compete on the application side.

Another major hurdle will be convincing ISVs, resellers and end users to buy into Great Plains, Navision and CRM products that will give way to Project Green in the next two to three years and be put out to pasture within the next decade.