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Each of those survived the Microsoft onslaught, but their encounter with Bill Gates left each of them scarred. Novell had to recast its business toward managing network directories after Microsoft invaded its network administration territory with NT. Netscape eventually sold out to America Online (AOL) after Microsoft chomped away at its market share in the browser market. And Corel reinvented itself as a Linux company long after Microsoft's suite of office software buried Corel's. Intuit (INTU) shareholders who understand such things should have been thrilled by Microsoft's announcement on Mar. 23 that it is exiting the tax software market. Microsoft characterized the move as a "repositioning" rather than a retreat, but don't believe it. It launched its 2000 version of Microsoft TaxSaver with the intention of wresting a chunk of market share from Intuit's popular Turbo Tax program, which owns 70% of the market. H&R Block has been the perennial No. 2 in this market, with its Kiplinger TaxCut. But Microsoft was only able to gain a 4% share of retail tax software sales. As it abandons the field, Microsoft has struck a deal that lets its customers use Block's TaxCut instead of TaxSaver. "Microsoft's departure from the tax preparation software market validates Intuit's leadership position in terms of brand, distribution, and technology," says Robertson Stephens analyst Scott Appleby, who rates Intuit a strong buy. HUGE CASH ADVANTAGE. That's pretty amazing, considering the advantages that Microsoft has in competing with Intuit. One is size: Microsoft has the second-largest market capitalization in the world ($557 billion), while Intuit is valued by the stock market at only $10.4 billion. Microsoft also has an enormous pile of money ($17.8 billion), thanks to its trio of cash cows --Windows 2000, Windows 98, and Office. Intuit has cash reserves of a relatively modest $1.8 billion. Finally, and most important, Microsoft owns the computer operating system on which most tax preparation software must run. Imagine the competitive advantages Ford might have if it owned every gas station in sight. Yet Microsoft failed to tame Intuit. Why? For the same reason that Microsoft wanted to get in on this market so badly: the stickiness of tax software. After you've used Turbo Tax once (which one out of five filers did in 1999), it's hard to switch to a different brand the next year. Competitors can talk all they want about how easy it is to download a Turbo Tax file into their program. But the average customer doesn't seem interested. Turbo Tax works, so there's no reason to switch. NO "PASS-THROUGH PORTAL." That's also why Intuit has an edge on the Net. Its Web offerings so far don't come close to matching the success of its CD-based software. But it has the advantage of already having a relationship with millions of Americans. As the concept of financial supermarkets on the Web becomes more practical, Intuit's quicken.com Web site is a natural choice for many of these people. "The market they are attacking on the Internet is huge," says Bryan Keane of Prudential Volpe. "And they're not building a pass-through portal. It's a portal where you stop to do things that are very important to you." When Microsoft entered the tax preparation market, it decided to compete primarily on price. To meet the threat, Intuit dropped its prices nearly 40%. Now that Microsoft isn't in the picture anymore, Intuit may be more able increase prices without worrying about losing market share to Microsoft, though it may still have to keep fending off Block's Tax Cut with rebates and coupons, as it has been doing year after year. And any Intuit price hikes should add to next year's revenue (Turbo Tax accounts for about 30% of the company's sales). Intuit's stock hasn't yet reacted strongly to the Microsoft news. It had gained only 1% by the market's close on Mar. 29 (after giving up 7% in a Nasdaq rout the same day). That gives it a price-to-earnings multiple for 2000 of 77.9. That's expensive, but still lower than it could be when the market starts to separate the profitable Internet companies from Web losers. Jaffe covers the markets for Business Week Online |
