Microsoft Capital Up-date


Microsoft Capital does not accept any broker business nor has a “private

label” program, according to a Microsoft spokesman.


Microsoft Capital was set up specifically for OEM and Microsoft



Microsoft Enters Leasing Fray


Rumor  Has It : May use CapitalStream for Processing Applications


By Christopher Menkin


Bouyed by the success of HP Financial, Microsoft Capital promises low interest loans

and leases, incluing offering up to $150,000 at 0% interest for 24 months on certain purchases. Another program - originally a $25,000 credit line for computer builders - was expanded to $150,000.


Due to the dollar amount of its software, Microsoft has not entertaining financing

until recently, seeing a better rate of return on their "cash" and increased sales

to their parent corporation.


In September, Micosoft began promoting a vendor financing plan, aimed at small businesses with a interest-free for 90 days to purchase Microsoft software, as well as related computer hardware, technical services and non- Microsoft software.


The promotion targeted customers of Microsoft's Business Solutions division, which sells the recently acquired Great Plains and Navision products. The minimum loan is $10,000 and there's no maximum.


"If the customer is creditworthy we will do the deal. We've gotten applications over $1 million, but the average is about $100,000," says Jeff Edwards, director of product management at the Business Solutions division.


Many leasing companies and Banks are often hesitant to finance software purchases or technical services because, training or other "soft costs."  Often the limit is ten percent of the sale.  There are leasing companies who do software leasing but at a premium rate and others who do 100% software but require top credit and a vendor profile to insure maintenance and service.


By balancing the margins Microsoft makes on its software with the cost of the financing offer, Edwards says Microsoft can manage its risks and cover the cost of its capital even with zero-interest offers. "It's a major new strategy for us," he says.


Microsoft has recently introduced other financing programs. This week it began extending credit lines up to $150,000 to small U.S. companies that build and sell computers with Microsoft software. It is a similar program to HP Financial ( which merged with Compaq Financial when the parents merged. ) The program, introduced in April 2001 as Microsoft prepared for the launch of Windows XP, lets computer builders borrow money to purchase Microsoft software, which they would install on computers sold to customers.



The entrance into the equipment/software leasing market appears will definitely boost software sales at a time when PC shipments are weak and spending on new technology remains depressed, analysts say. They also come at a time when Microsoft has made a concerted push into the small- business market, where financing deals are more common.


These tailored programs account for a fraction of Microsoft's current business. "It's not like they are going to finance PCs for the world," says Rick Sherlund, software analyst at Goldman Sachs. He recommends purchase of Microsoft shares and doesn't own the stock. "This is an effort to facilitate the purchase of Microsoft software for the small- and mid-sized company market."


The push into the financing business is also an effort by the software giant to find a use for its more than $50 billion in cash and equivalents, something investors and analysts have called upon the company to do.


Despite potential bad debt risks, a financing program is a profitable way for Microsoft to deploy some of its cash, analysts say. More importantly, vendor financing could help Microsoft compete with the likes of International Business Machines Corp., which has used financing extensively to sell a broad range of products and services, as well as Hewett-Packard, Dell, and Gateway,

to name a few.


"Financing has proved an important tool for IBM," wrote George Gilbert, software analyst at Credit Suisse First Boston, in an August research report. Gilbert rates Microsoft stock at outperform and doesn't own the shares. "With financing (Microsoft) could offer end-to-end solutions through its partners and pioneer a new channel for small and medium enterprises."


Microsoft is entering the financing business at a time when others are exiting it or have had to take large charges for bad debt expenses. Xerox, a big provider of equipment financing, is outsourcing its financing program to lighten its debt load and reduce risk.  Tyco International divested itself of the CIT Group and  even

the giant GE has come under scrutiny because of their complex financing arms.


While Microsoft has an enviable balance sheet, it is assuming risks by lending out its money. It has taken steps to mitigate potential liabilities. It has hired a handful of former bankers to run Microsoft Capital under the direction of Chief Financial Officer John Connors, one analyst said. Microsoft will focus on financing software purchases and avoid unrelated markets. It has partnered with Household International Inc. (HI), a large provider of consumer loans and credit cards, to screen applicants, make credit decisions and handle customer billing. It is rumor

an announcement with CapitalStream, located in its home state and with a proven track record, will be made shortly.  Recently this company was rated very highly

by Deloitte and Touche in Washington State Technology Fast 50 winners.


Vendor financing is not entirely unknown in the software business - many companies let customers stretch out payments or lease products. For example, Oracle Corp. sold 14% of its software licenses through its financing division last quarter. But Oracle and most other vendors typically sell their loans to banks, finance and leasing companies.. Microsoft is putting its own money on the line.

Many are saying, “Look out, GE, you finally have competition.”


Analysts aren't overly concerned about the downside to Microsoft Capital.. In addition to more than $50 billion in its treasury, Microsoft generates about $1 billion in free cash flow every month, notes Goldman's Sherlund. "I would not suspect they would have to dip into their existing cash balance" to fund these programs, he says.


The New York Times recently reported that more than any other time in its 27-year history, the personal computer industry has found itself in a quandary, having to concoct new reasons to persuade the world's 500 million PC owners to replace their existing machines. And the problem goes beyond the computer makers themselves: no new computer generally means no new copy of Microsoft Windows sold, no upgrades to word processing or spreadsheet programs.


Computer and chip manufacturers have long used advances in speed as a central point to sell new computers. To be sure, such marketing will still appeal to people who edit video or process complex photographic images, for example, or make calculations with large masses of data, or play video games on the PC. They still see big benefits when they upgrade to faster chips for their processor-intensive tasks.


But even some of them are having second thoughts. Norman H. Nie, a political scientist at Stanford who has long thought of himself as a PC power user, was the co-inventor of a widely used and computer-power-hungry software program known as the Statistical Package for the Social Sciences. For more than three decades the software has taxed the power of first mainframes, then minicomputers and finally PC's.


Dr. Nie has always acquired new, more powerful computers as they became available. But he was stunned not long ago to discover that his faster new computer did not improve the speed of his software. He predicted that for many people, the upgrade cycle might be ending.


"We're beginning to see a time where — except for the third world — the replacement cycle for computers looks like Detroit," where the desire for a new car every year yielded to a slower turnover, he said.


That new attitude is shown clearly in a recent national opinion survey by Odyssey Ventures, a San Francisco market research firm. Among households with PC's, the intention to buy a new computer in the next six months has fallen to just 11 percent from 21 percent in early 2000 and the lowest level in five years. And half of PC owners now have home computers that are at least two years old — more than at any time since 1994, when Odyssey began keeping track. The pace of upgrades is crucial because, according to the Gartner market research organization, they account for 80 to 85 percent of new computer sales.


"We've come to a plateau," said Nicholas Donatiello Jr., the chief executive of Odyssey, "What we're seeing is there are other digital needs in the home, and people may be spending money around the TV rather than the PC."


The computer industry's boosters insist that growth has leveled off before and that slumps have been only temporary. Each time the PC business has appeared to run out of steam in the past it has been revived by an burst of software creativity — from the spreadsheet to video games to the Internet — that has attracted millions of first-time buyers followed by successive waves of up graders.


There is no doubt Microsoft Capital will make its  major mark in the leasing industry, perhaps almost as significant as when it introduced its internet browser.

At the time, Netscape had 85% of the market share.  Today the opposite is true.


 Leasing News was unable to confirm that the company is taking "private label" leases or accepting lease brokerage business at this time.

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