Is Microsoft under threat?

On the face of it, yip. Microsoft has its challenges.

 

The media hype machine has been in full flight over the last couple of weeks due to two major announcements. Yahoo bought Zimbra and Capgemini gave Google apps a large endorsement by stating it would offer up that suite to its outsourcing customers. Then you’ve got the flack from the EU and the growth of ODF and freemium type services like Facebook and Youtube who offer among other things email.

In the vein of “Nothing makes news like picking on the big guy” here’s a few more links on the subject by Knowledge Wharton, and Times online. 

On top of that they’ve just launched vista. It took $6 billion and 5 years to build, and in launching this it shows a growing gulf between (one part of) Microsoft’s development cycles and the new world reality which is much more now, much more iterative. It also hasn’t exactly been that warmly received by customers I’ve spoken to who are now not only having to contemplate the expense and hassle of the Vista upgrade, they’re also having to upgrade their hardware to support this behemoth.

Then you got the growing SaaS movement, of which Microsoft is a participant. This model clearly challenges the incumbent ISV’s business model. Added to that is the way many SaaS companies are going to market, saying SaaS is the end of Software and that companies like MS are the bad guys.  This Economist article discussed in detail the impact of SaaS on Microsoft and how they we embracing it.

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The most striking thing to me about the article, however was this graph. Look at the gap between the revenue and net income. What this says in simple terms (and correct me if I’m wrong) is that Microsoft is becoming increasingly unprofitable over time. Net income as a percentage of revenue (net profit margin) drops from about 40% in 2000 to about 29% in 2006.

Like I said, on the face of it yes, Microsoft has its challenges. Good.

Nothing galvanises a company more than a good challenge, and personally I think the world is a better place for having MS. I can remember the days when if you changed computers word processor files didn’t interoperate. When you needed to be able to make sense of DOS to actually do anything with the damn things. MS changed all that, some might say in the wrong (proprietary) way, but in general for the betterment of the user experience, and for a reasonable chunk of change.

So, does all this mean the end good times? No I don’t think so for a lot of reasons.

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Firstly Moore’s adoption curve shows that the mass market aren’t going to jump to new services soon (whether they be SaaS, opensource whatever). In fact, what it does show is that only 13% of the market are going to be innovative enough to embrace the technology any time soon (that leaves 87% who aren’t!!). I think people in the blogsphere often forget that there are a bunch of people out there who know very little about technology and hence, are no where close to adopting new technology.

Secondly market penetration / scale. This article by IT Director has some great graphs in it that clearly illustrate just how much dominance MS has. This has two benefits to Microsoft. The first is that there are a bunch of companies out there who have chosen MS as their technology for various reasons, spend a wodge of cash and (by basic human nature) aren’t like to fess up and say “we made a bad decision, buying MS was a mistake”. Businesses are innately conservative, and to that end MS is a solid bet.

Secondly scale. Scale is a really important dynamic an any industry.

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Scale gives you 3 basic things. Access to a market segment that your competitors cannot profitable service (the greyed out area). In a classic dynamic competitors would operate in the left side of this graph above the red line (literally), in a very red ocean. In any market where scale plays out, you normally have one scaled player with 65% of the market, a clear challenger with 20%, and then the rest fighting over the scraps. Scale also allows you to have cost (and therefore profit) advantages. Your unit price is cheaper, you make more. Finally scale makes you the most attractive to the partner community. Everyone wants to play with the dominant player in the market. This in turn has a couple of advantages. If you can, you get exclusivity (or as close to that as possible). You also get the most differentiation (you have the most options after all). By having exclusivity / differentiation you are the most attractive…lo and behold you then keep your scale…. All this is Telco 101. And as I’ve said previously, the best example of SaaS in the world today…is legacy Voice services (IMHO).

MS also has some other advantages. The revenue / net income graph is a little misleading because what it doesn’t show is the different segments, divisions and offerings MS has developed. They have a massive breadth of offering. So when I hear about companies targeting MS my first thought is “which bit”… It’s a pretty large elephant. It’s incredibly important to understand that MS has scale across a large number of offerings, OS, office, server, database, gaming, communications etc. And each of these sub-sectors are at different stages of their maturity and competitive threat. Like I said, attacking MS through Exchange doesn’t mean you are really taking on MS, just the messaging division.

I agree that SaaS plays like the Yahoo / Zimbra are something for MS to take notice off, and adjust too. But as I’ve said before, the web as a platform, SaaS nirvana won’t happen until someone aggregates the services together, until this happens it won’t be a really big threat to MS. And from what I hear, It’s MS themselves who are having a go at doing this aggregation (along with Google of course)

Another reason why the whole of MS isn’t under threat in my opinion is that MS, like all companies (and as its shown numerous times before) has the opportunity to get into even more markets. The ICA is a classic example. Here’s the dynamic. Right now, MS gets nothing of the estimated $1.2 trillion in Telco revenue. So any gain is good for MS. Because MS has no incumbency, no vested interest in maintaining Telco margins, they could rock into the Telco space with …gee I don’t know a soft-phone on every desktop (see the IT Director bit for how many that might be), completely tank the market (or margins), gain 1% of the market and still be a massive winner (I think that’s a cool 10 Billion dollars).

The ICA is a good example of why I think MS will survive a long time. As I mentioned above,MS has shown that it can innovate and keep up over its lifetime. Gaming, the internet, databases, Management platforms, consumer portals, communications. All examples where MS was late (typical incumbent behaviour) but through its sheer market power has been able to win out. And this gets me to what I think MS’s real threat is. The people within the company. The Scobleizer puts it really well

But what is Microsoft doing to stay relevant? It’s like Microsoft has decided to go and spend the inheritance and not do any more work to stay on the bleeding edge…This week I learned another Microsoft employee is leaving to start his own company….These kinds of people keep leaving Microsoft because they see it isn’t living up to its potential and is frustrating to work inside of. It’s more fun to go join a small startup”

Its like that age old saying. Grandfather the entrepreneur, father the playboy, son the pauper. If MS doesn’t keep the culture, drive and vision that made it what it is, if it doesn’t get and keep the right people to do it, then it will be in trouble. The major threat to MS is internal. Sure competitors will come up with new offerings, disruption will occur, regulation and market dynamics and the other vagaries of any business climate will continue to impact them. But hyping up a bit of competition doesn’t constitute a major calamity is in the offering. So in my opinion, MS is here to stay for a while longer.

A Long post, sorry

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