End Game for Microsoft?
October 29, 2007
Microsoft’s 1st fiscal quarter earnings were blow out. Its profit soared 23 percent to $4.29 billion, or 45 cents per share, from $3.48 billion, or 35 cents per share, during the same period last year, as brisk sales of the new ‘Halo 3′ video game, Windows and Office helped it breeze past Wall Street’s expectations. Because of this the stock hit 6 years high. The result, driven by products including Windows Vista and Office 2007, was viewed as evidence that the 32-year-old company still has growth potential. Underneath all this good news, I think, survival of Microsoft itself is at stake.
Let’s start by looking at Microsoft’s Business Strategy. Its core asset is its Operating System (initially DOS and then all the UI built on top of it). Using its core asset Microsoft has built a software empire. The ‘network affect’ created by its near monopoly market share (90%) of its Operating System (OS) has enabled an ecosystem of software solution providers around it. These value added software application have created the franchise of its OS more valuable. Microsoft itself builds and sells several add-on applications on top of its operating system. Microsoft Office is the most important of all the applications that’s built on top of its OS and has become the ‘cash cow’.
Microsoft’s strong ‘economic moat’ has been constantly attacked over the past 8-10 years. But it has aggressively managed to defend itself. Now, several disruptive offensive forces are making Microsoft’s moat vulnerable. First of all, SaaS or On-Demand software delivery model is going to be a formidable challenge to all the software applications written specifically for Microsoft OS. For example, Google Doc is a tempting alternative to Microsoft Office for the individuals and small organizations. There are several other open source on-demand applications that are getting ready for the prime time to challenge Office software. With Microsoft Office software being challenged with a new delivery model, it will no longer remain the cash cow. The advances in distributed computing and software security will keep pushing the boundary on SaaS delivery model. SaaS, with it pay-as-you-use payment model along with mobility access are some of the positive factors that will make even the large organizations investigate its usefulness in their organization. This is forcing software solution providers to break away from sole Microsoft OS franchise. Soon, most applications will also be offering with the On-Demand delivery model.
The other disruptive force is Virtualization. There is a huge demand to ‘maximize’ server utilization, and this is making Virtualization the highest priority for many company’s CIO. This trend will entice the application vendors to write their own kernels designed to run in virtual environment and knock off Microsoft OS from the server. With more technological innovation, virtualization will make Microsoft OS less relevant.
The third disruptive force is Demographics. The ‘iPod’ generation worldwide is more comfortable with Apple product and considers PC as “Dad’s” computer. The anecdotal evidence point out that majority of students entering university now own Apple computer. In few years the ‘iPod’ generation that will be joining the work force will be not ‘savvy’ enough to use PCs. The large organization’s IT department will be forced to provide infrastructure to support Apple Computer to attract new work force.
Virtualization, Demographic changes and On Demand Delivery model will work in tandem to make Microsoft’s core asset irrelevant. Its not that Microsoft does not understand the threats but it’s too big and too slow to change and challenge these above mentioned disruptive forces. Does that mean that Microsoft will vanish into thin air some day soon? Not really, but change is urgently needed at Redmond.
Currently, Microsoft organization looks a lot like IBM of 1970s. IBM had almost monopoly on the mainframe business and its ‘cash cow’ was add-on hardware services after installation. With the rapid emergence of PCs (lead by Microsoft), IBM tried several ways to fend off that disruptive force (first with denial, then by building their own OS). When every thing failed they went through massive restructuring. IBM evolved from a Mainframe Hardware Vendor into a Software Solution Provider. IBM of today is vastly different from IBM of 1970s. I contend that Microsoft will go through some painful metamorphosis similar to that of IBM. It will be forced to reinvent itself into a new company. Steve Ballmer is too much of an insider to effectively bring about successful change management. They need an outsider with new set of eyes and ears. I personally believe Ray Ozzie will be elevated to a more powerful role to guide Microsoft through these changes. They may even hire a few executives from outside to bring in some much needed changes. Microsoft will still be relevant in 2020 but what will be its core competency then, will be interesting to monitor. The days are numbered for the Microsoft in its current incarnation.
Jeremy Fain
alexandrelucas
Kari Silvennoinen
Steve Danino
Lucien Huang
raphael encaoua
Leonard Sellem
Fidji SIMO
Matthias Schwenk
Remy MIRALLES
ceciiil
Emmanuel Perez-Duarte
Raj Sheelvant
October 29, 2007 at 17:50
I’ve already read that 3 years ago.
You’ll note that 50% of people above 55 years old have Mac. official figures.
I don’t want the same computer than grand’Ma.
October 29, 2007 at 18:45
End Game for Microsoft?
Did you see the post at techiteasy.org
October 29, 2007 at 19:12
Raj,
Although I believe you’re comments are overall interesting, I believe Microsoft top execs have already tackled a number of issues you’re mentioning.
In a way, my call Microsoft cannot turn, whatsoever, into an IBM for a number of reasons:
- The .NET framework and Microsoft in general lead the crowd (alongside with Google probably) when it comes to distributed computing. Taking advantage of multicore processurs and sending threads to a set of identified servers in a cluster is one of Craig Mundie’s top priorities for the near future.
- it has fully embraced SaaS (wait for the release of CRM Live in early 2008, the SalesForce killer);
- IBM turned into a service company while Microsoft has capped the revenues of its service division MCS at 5% of its global revenues;
- Microsoft is second-to-EMC’s VMWare when it comes to virtualization, and virtualization is integrated in standard versions of its flagship server product Windows Server 2008.
I respect your opinion and I enjoy seeing Microsoft criticized, because Microsoftees are in general never more performance-driven than when they are a little late in a specific area (like SaaS or online advertising).
In today’s software landscape, the competition is tough (Google, Apple, Salesforce, Oracle, etc.), but I bet Microsoft has what it takes to not only survive but find and generate the right partners to at the end of the day win, on the web, on servers, and on the client.
Time will tell who’s right and who’s wrong. I chose my side and bought a some more MSFT stocks today.
October 29, 2007 at 23:57
Microsoft is such a complex operation that it’s very hard to generalise what’s wrong or right with it. But let’s look at the essentials:
Windows. Even though many agree that Vista needs a Service Pack, there is no reason to think that Windows will not continue to reign on the desktop-realm. It still has super support for work-environments and games—one of it’s top-demographics, and you can still get $300 PCs to run the very basic version. Windows’ cheaper and perhaps more ethical competitor, Linux, is far from ready to support the realm of applications that Windows does. And its more expensive competitor, OS X, is clearly not aimed at a mass-market demographic, taking into account that the mass-market is now actually China and India. In 5-20 years that may change, we’ll see.
That alone, makes the IBM-comparison a moot point. IBM had strong competition for hardware, for OS’s the competition is niche.
As for SaaS. Office already has a pretty loyal user-base. Even though I’m a Mac-head, there’s no way, I’m not going to use Excel. And all SaaS really is is a business-model, one that is based on rent instead of purchase. If that becomes a trend, all MSFT has to do is shift to monthly or pay-as-you-go payments, and it’s back in the game.
About .Net and Silverlight and all that code. I don’t like code, because it’s usually not user-centric. It’s developer-centric. Microsoft is in many ways developer-centric, it is aggressive, and it is competitive, and for all those reasons a company that people love to hate. I love to hate Facebook, because it lets many developers treat me and my friends like shit.
But as the example of Facebook shows, focussing on developers is a powerful growth-strategy, it keeps people coming back. And because it that, while people may continue to hate Microsoft and Facebook, it will still win hands down over platforms that don’t focus on developers.
I could also write about hardware and advertising, but I think the point is made. A nice post Raj, but I don’t think it’s endgame for Microsoft yet.
October 30, 2007 at 00:04
@Julien : hey Youngster, have you ever thought out of the box ? Ever thought that Macs are made for the rest of us ? Means, the majority of people on this planet who just want a computer that works. Not a bullshit piece of crap which helps an entire ecosystem to stay alive.
True anecdote : at HP, majority of IT Support technicians do Linux and/or Mac OS at home.
_Marc, 46-yo, using a Mac since 1984.
October 30, 2007 at 08:34
Marc,
I had a Mac back in 1993.
That was fun. I was praying and begging for applications, who never came up.
Then i switched.
October 30, 2007 at 09:22
how old are you guys? 5?
October 30, 2007 at 19:15
Ok, my goal for this blog was not to start the holy war between Microsoft and Apple. I have been observing Microsoft (and own stocks) for a long time now.
Some clarification, Even though I think the competitive threat is now elevated, Microsoft will weather the storm but it will emerge as a different company (disagreement by Jeremy and Vincent duly noted).
Change for Microsoft is good because it has the potential, scale and the resource to reinvent itself. I also recognize that Microsoft is trying to reinvent itself for some time now, but effective change management can be brought by the ‘outsider’ or ‘percieved outsider’.
October 30, 2007 at 23:11
Is there something like a “holy war”? Maybe. But then this war is not between Microsoft and Apple.
Instead this rising war is about leadership on the platform of the future for endusers.
And there we see Google on one side with all their software packages and a new social utility tool to come out in november. On the other side we do have Facebook together with Microsoft. Further players (with less relevance might be IBM with their new Lotus Notes version and perhaps Adobo, too).
So is there something to worry about Microsoft? I don’t think so.
Did I forget someone? Apple? They have the iPhone but no Social Community so far. If really those integrated platforms will become important and dominant, Apple might face a problem…
October 30, 2007 at 23:44
The one I’m most in line with is Matthias: it’s all about the platform.
November 1, 2007 at 19:13
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November 6, 2007 at 17:28
Some more Microsoft-insights from Barron’s Tech Trader here.