Microsoft Weighs New Play For Low-End Accounting

After several failed attempts, the software giant will once again make a foray into small business accounting with a project code-named Magellan, sources said.

Details are sketchy. A Microsoft spokeswoman confirmed the code name, and said the company continues to investigate the best ways to serve small businesses, but that it is too early to talk product plans.

But sources close to the company say a product is in the works that could come out as soon as the next calendar year. "This is Microsoft's attempt to go after Intuit's QuickBooks in the low end. Microsoft said it's coming down the pike and I think it's a very smart move," said a source who has been briefed.

This is not uncharted territory for Microsoft. In the small business accounting market and in personal finance and tax software, the company has been repeatedly drubbed by Intuit's QuickBooks, Quicken and TurboTax, respectively, observers said.

Microsoft launched Money against Quicken in 1991. Intuit unveiled QuickBooks accounting in 1992 and Microsoft followed with Microsoft Profit the next year but ended up selling it off. It also launched a hosted offering, bCentral Finance Manager in April 2001, only to discontinue it the following October.

On the personal tax front, Microsoft launched then nixed TaxSaver, which competed with Quicken's TurboTax. "They killed it after one year. They gave it away but still got only five percent market share," according to one financial analyst who followed both companies at the time.

In 1994, the company appeared to give up the ghost and cut a deal to buy Intuit for $1.5 billion in stock, but prolonged regulatory scrutiny scuttled that bid the following spring.

But the small business market, ranging from mom-and-pop shops to companies with a few hundred employees, is potentially too big and lucrative to give up. The U.S. Small Business Administration estimates there are some 23 million small businesses (companies with up to 500 employees) in this country. They employ more than 55 million workers.

Microsoft executives say small business is a key target market. Last year, Senior Vice President Doug Burgum said going down market to smaller customers was a more likely path to achieve the volume sales Microsoft wants than going up market into enterprises to compete with Siebel Systems and SAP. And company executives have pledged to spend $2 billion a year for the next five years on products for this arena.

The company's existing Great Plains and Navision finance packages are too pricey for this arena. And even Small Business Manager, a scaled-down version of Great Plains accounting, is at $995 per user too much for many of these customers, partners said.

Bob Scott, editor of Accounting Today, a New York-based industry newsletter, has chronicled many of these product launches. "I never count Microsoft out. They have the talent; they have the money. The question is does this effort fit in with their direction," he noted.

There are weaknesses to be exploited in QuickBooks, according to Scott and several Microsoft solution providers, many of whom use the product themselves. "What people love about QuickBooks is what accountants hate, which is that you can change the numbers," Scott says. "You can have an audit trail but you can also choose not to."

Frank Cullen, principle with Blackstone & Cullen, an Atlanta Microsoft business partner, agreed. "The reason everyone uses QuickBooks, and we use it, is ... it's so easy. It goes on one or two machines ... but four or five years out when Web services become really powerful, Microsoft will commoditize the lower-end accounting and make it a natural upgrade path to Solomon or Great Plains," he said.

It is difficult and expensive to migrate from QuickBooks to fuller-featured accounting packages as the company grows, he said.

Accounting rivals seem unfazed by what they've heard of Microsoft's plans even though Microsoft is notorious for taking three or more tries before developing the product that eventually dominates the category.

"That three times rule is only true when they start off with a product and continue to refine it. This is a complete restart," said Intuit's Steven Aldrich, general manager for QuickBooks.

Doug Meyer, president of Best Software's Small Business Division, maker of the popular Peachtree Accounting line is similarly blase.

"I'd like to know who at Microsoft is developing this. Is it part of the [Microsoft Business Solutions] group? Is it the Office team? Both have been in this market before," he said.

"The entry-level is already well served by Peachtree and Intuit," he said. He also shrugged off the prospect of Microsoft inaugurating a price war. "Simply Accounting gave away a million copies ... The thing about accounting software is if people don't pay for it, they probably won't use it," he said.

Peachtree prices range from $99 for Peachtree First up to $1,000 for a multi-user version of Peachtree Accounting. Intuit ranges from $199 for the basic edition of QuickBooks up to $3,500 for a ten-user Enterprise Edition. The most popular version, QuickBooks Pro, is $299 for new users.

--PAULA ROONEY contributed to this story.