Microsoft has an image problem. Just ask anyone doing business with the company. Software developers, hardware manufacturers, and even some customers will secretly share they’re scared to death of Microsoft. Many reasons account for this fear. Some partners worry Microsoft will one day turn on them and gobble up their market. Others don’t want to rock the boat for fear of missing out on the coveted Windows logo for their products.
Some customers fear Microsoft’s bringing in Washington-based Business Software Alliance to do a software audit. Each piece of non-licensed software can cost a company $150,000. Even if every bit and byte is legal, the burden of proof is on the accused. Did you keep every receipt?
Microsoft’s antitrust woes in Europe and the United States have only contributed to the image of a giant bully squashing every little competitor with a huge fist called the Windows monopoly. But this view of Microsoft as bully is overly simplistic. People forget, for example, that in 1995 Netscape had over 80 percent market share in the browser market. Microsoft may have played rough and leveraged its Windows assets in the process, but Netscape was more than just an upstart competitor. The same can be said of many other companies bested by Microsoft.
There is no question that Microsoft wields tremendous power in the marketplace, but you might not guess that from looking at how historically executives have guided the company’s behavior. If anything, I would argue management is baffled that other companies or some customers are afraid of Microsoft. That was certainly apparent from the U.S. antitrust trial. Microsoft executives appeared stunned to learn the company had so many enemies—some of them presumed, loyal partners.
Part of the problem is that Microsoft’s corporate culture is one of competition. Even within the company, product groups compete with each other on projects. Do you remember Windows 99? The product existed. I’ve seen it. But Microsoft released a different OS, Windows Me, instead. Like many projects scrapped by Microsoft, internal competition—where another project won the game, so to speak—contributed to the demise of Windows 99. Microsoft’s spirited, and extremely aggressive, competitive culture worked for a smaller, scrappy company. But as Microsoft grew larger and began to exert more influence on every aspect of society, that competitive spirit instilled fear among the company’s many partners, competitors, and customers.
Microsoft’s other problem major is a little harder to quantify. I call it the “gimme syndrome”. In some ways Microsoft is so competitive because the company, like a five- or six-year-old child, doesn’t want to be left out of anything. If brother Bobby has a new X-Men toy, then Billy has to have one too. Market after market, Microsoft has acted like a sullen child neglected by the parents. But instead of wimpering, this child, to its credit, acted and took what it wanted. And forever after, the child was always looking over its shoulder waiting for someone to do the same thing—to take its toys. So the child eliminated the other kids most capable of doing to it what it had done to others. You don’t think so? Then you don’t understand Microsoft.
But Microsoft’s problem is more complicated than tricking or taking toys from other kids. The company also got the goods from the grownups, too. That has to be scary for a child. In the early 1980s, Microsoft was the scrappy startup that took on a giant monopoly and toppled it. When Bill Gates licensed DOS to IBM, no one at the mainframe giant suspected that the personal computer running Microsoft software would one day topple the monopoly. Mr. Gates and Paul Allen were those kids in a garage capable of changing history. You want to know why Mr. Gates seems so paranoid, so desperate to turn over rocks looking for competitors that might be another Microsoft? One reason is Microsoft’s bringing down the IBM monopoly by opening up a new computer market.
And through all this Microsoft remains the “gimme, gimme” kid that always looks out for its own interests first. Consistently this is Microsoft’s behavior and one that might contribute most to the perception of the company as a bully. I hear Microsoft talk about what it does for customers. But if you look at the company’s behavior, you’ll see a cunning child working for its own interests. More on that later.
The WordPerfect Quandary
But whooping IBM isn’t the only reason Gates & Co. is paranoid. Market after market, tough competitor Microsoft came out of nowhere to snatch the crown from the company with huge share, respect, and clout. In most cases, Microsoft succeeded in part, not by excellence, but by exploiting mistakes made by market leaders.
WordPerfect is one of the best examples of a product with huge market share that made mistakes Microsoft exploited. Back in the early 1990s, WordPerfect easily commanded more than 80 percent share in the word processing market. But the product ran into trouble making the switch from DOS to Windows. Many WordPerfect users liked version 5.1 for DOS and simply weren’t interested in upgrading. (There must be lots of WordPerfect 5.1 users out there still. In mid-April 2003, Corel shipped WordPerfect Office 11, which comes with a special mode that simulates working in version 5.1.)
Meanwhile, Microsoft started selling the Office bundle of applications—Word, Excel and PowerPoint—for about the same price as standalone word processing software. WordPerfect 6 was the response—and the product was buggy, buggy, buggy. In January 1994, a dealer buddy built my first home computer, which came with WordPerfect 6. Constant crashes compelled me to spend $130 on the Word 6 competitive upgrade. I had always used WordPerfect, but version 6 was the last one I used as a fulltime word processor. WordPerfect 6.1, which included programs that competed with Office, was a good effort. But then owner Novell couldn’t seem to get the product right or existing users to make the upgrade. Novell continued to stumble with WordPerfect, while Microsoft took advantage of the shift to Windows 95. The company quickly banged out Office 95.
Corel picked up WordPerfect in early 1996 for about 10 percent of what Novell paid for the company. Corel quickly released WordPerfect 7, but took several versions to shake out the bugs. Aggressive tactics on the part of Microsoft, WordPerfect 5.1 users unwilling to upgrade, and continued problems with version 7 and later 8 helped Microsoft Office continue to gain market share. It’s too bad, too, because WordPerfect 10 and 11 are both great products.
Other competitors and products creamed by Microsoft following crucial strategic mistakes: IBM OS/2, Lotus 123, and RealPlayer (Yeah, Real is the next Netscape; I’ll get to Netscape later), among many others.
If you look at Microsoft’s behavior, the company fears ending up like WordPerfect. Office and Windows have over 90-percent share in their respective markets, with older versions of the products posing the most competition. On April 24, 2003, Microsoft officially launched Windows Server 2003. But, according to market researcher Gartner, as many as 70 percent of Windows Server systems still run seven-year-old NT 4. Gartner predicts that no more than one-third of those installations will upgrade to Windows Server 2003 by the end of 2004. The situation with Office isn’t much better. Projections put the current Office install base at more than 60 percent running version 2000 or earlier. In fact, according to Gartner, Office 2000 gained market share in 2002—during the second year of Office XP’s release.
Microsoft attempted to tackle this problem of upgrades two ways: The first by making products better. But to do that, the company merely added bloat and features onto already bulky products. That move, by the way, is contrary to customer uses of the products and their buying preferences. Ask anyone who’s fumbled to tune a VCR. Straightforward and easy to use is better than tons of features. You think DVDs are popular because the video and audio quality is so great? Sure, but that’s only one of two major reasons. DVDs are easy to play and navigate. People that never bothered to learn how to use their VCR’s features are buying DVD players and discs by the truckload. Likewise, most people don’t use most of the features in Office, either because they don’t need them or they’re too difficult to use.
Even as Microsoft adds features, many come with a lock and key for using the company’s products. Interlocking features, dependencies on other products, and proprietary file formats are standard Microsoft technological tactics. If you buy a Sony DVD player, nothing in that product compels you to also buy a Sony television, sound system, or computer. Nor are you locked into only using Sony products. But Office 2003 or Windows Server 2003 come with lots of hooks designed to reel the customer in and keep him or her there. Your first choice to use a Microsoft product may be your only choice. After that, Microsoft makes all the decisions for you.
Oh, you don’t agree? OK, let’s start with Office 2003. Unless Microsoft makes some radical changes, four of the six versions will come with the same file format lock and key as earlier versions. Saving documents in Office’s default formats is a pretty good way to lock data into Microsoft’s products. Competitors Corel and Sun are championing the use of open-standard Extensible Markup Language, or XML, to save files in a way that any desktop productivity program could open. Documents would be portable in the same way common images files, like .gif or .jpg, are today. But Microsoft doesn’t support this interoperability and has limited user-defined XML schemas to the top two versions of Office 2003.
I could go on all day about Windows Server 2003’s many locks and keys. But for brevity’s sake, I’ll save that for a separate topic sometime in the future.
Such strategies are good if you want to make sure you’re the kid with all the toys. But they’re self-interested, and they are not really about benefiting customers. Frankly, I would respect Microsoft more if company executives were upfront that product changes really are about benefiting Microsoft more than customers.
The second strategy Microsoft has employed to avoid the WordPerfect scenario is a bit more onerous. In May 2001, the company revised its software volume licensing plan, basically removing businesses’ choice on when to upgrade. Under the older plan, businesses could buy what are known as version upgrades anytime during the licensing contract. Cost would depend on when the purchase was made over a two- or three-year period, but no more than about 72-percent of the full cost of the software. Customers liked the plan because they chose when to purchase an upgrade.
Microsoft eliminated version upgrades and instituted something called “Software Assurance”, where businesses would pay up front for their upgrades before receiving them under two- or three-year contracts. But this “buy before you try” program riled many Microsoft customers. The plan also raised rates, anywhere from 33 percent to 107 percent, according to Gartner. In a March 2003 study of 1,000 technology managers, Yankee Group found that 72-percent of Microsoft customers refused to sign up for Licensing 6 (It should be noted that 42-percent of the dissenters signed up under the older Licensing 5 plan). In the study, 60-percent of customers signing onto the program reported a price increase for Microsoft software, according to Yankee Group.
You’ve got to love Microsoft spin. Company representatives insisted the licensing changes would benefit customers, by reducing costs and simplifying licensing management. “It’s all about the customers”, one Microsoft representative told me. “We’re giving customers what they asked for”. So I asked, “Which customers told you they wanted to lose the right to choose when they buy upgrades? Which customers asked to pay up front for software that isn’t available yet and during an economic crisis when budgets are tight? Which customers asked for a so-called simpler plan that jacks up their licensing fees?”
Still, in a narrow sense some customers did receive benefits; those upgrading software every two years or less would see as much as a 20-percent decrease in licensing fees. Granted, that’s a minority of customers. But the first benefit would be to Microsoft, which was struggling to get companies to upgrade as frequently as every four years, when every two years was better for smoothing out revenue.
Other recent licensing changes that supposedly benefit customers also really help Microsoft first. In December, the company relaxed terms for client access licenses, or CALs, that connect to Windows Server 2003. Rather than charge for each client accessing a server, Microsoft added a second option for people. That conceivably would save companies money if they have people accessing the server with multiple devices, like a desktop PC, laptop, and handheld. But the real benefit is to Microsoft. The plan doesn’t apply to other versions of the server software, just the newest version. It would appear this so-called customer benefit is really about encouraging all those holdouts running Windows NT Server 4 to upgrade.
Microsoft has some gimmick going with CALs, and I’m surprised so many companies are so gullible as to fall for it. If you buy most Microsoft server products, you don’t just pay for the software but also for every PC (OK, people, too, with Windows Server 2003) that connects to the server. You already paid for Windows XP on the desktops and maybe Windows Server 2000 on the server, but you have to pay an extra fee, or CAL, for each client accessing the server. If you add Exchange Server to the server, you pay another CAL to access with Outlook, even though you paid for Outlook when you bought Office. Linux and Mac OS X have much cheaper and more manageable licensing schemes. For example, Mac OS X Server costs about $1,000 for unlimited client access. There is one fee that covers all client access.
Mauling Son of Mosaic
Microsoft’s experience walloping market leaders gives the company good reason to be looking under rocks for the next great Microsoft. The company is the most dangerous a competitor when Mr. Gates misses that new toy and fails to see how it could make all his other toys obsolete. Case in point: The Internet. The development of the World Wide Web in 1991 and evolution of the mosaic browser two years later caught most Microsoft executives off guard. I remember in 1995, when Netscape already was going gangbusters with its browser, how Microsoft was obsessed with launching MSN to take on AOL.
Netscape kicked off the great dot-com boom, which Microsoft nearly fatally missed. According to the U.S. Justice Department telling of events, Microsoft marshaled out tremendous paranoia the Netscape browser might replace Windows. I doubt that would have happened. But the browser could have replaced the Windows user interface, turning the OS into more of a utility with less value. Apparently Microsoft feared this, because the company integrated the Internet Explorer browser into the Windows 98 interface. U.S. trustbusters made the mistake of assuming Microsoft wanted to crush Netscape and dominate the browser market. In reality, Gates & Co. merely wanted to protect the value of Windows and profitability of the Windows franchise.
It’s so easy to blame Microsoft’s eventual victory over Netscape on its Windows monopoly. That’s certainly how U.S. trustbusters portrayed the company during five years of court proceedings. Microsoft played rough during the so-called browser wars and did some things that got the company into a heap load of trouble with trustbusters. On the other hand, Netscape started with a huge market share lead over Microsoft and made many stupid mistakes that benefited the software giant.
Sun Microsystems’ situation is similar to Netscape’s. Trustbusters—and now Sun in a separate lawsuit against Microsoft—argued the software giant’s actions during the so-called browser wars thwarted adoption of Java, which is claimed to have been a potential replacement for Windows. The courts didn’t exactly buy this argument, and neither do I.
In mid 1998—during the height of the so-called browser wars—I sat in the office of Sun CEO Scott McNealy and told him that he was like the boy who cried. “You’re out there making all these promises about Java, but you don’t deliver on them”, I told him. “If Microsoft marketed Java, there wouldn’t be a website on the planet using the software that didn’t carry a Java logo”. He didn’t take the hint. At the time, Internet Explorer logos were on websites everywhere. Sun likes to blame its Java problems on the Windows monopoly. But Sun failed to be as lithe and responsive as it needed to be to successfully compete against Microsoft.
In the years since the browser wars, Microsoft has taken a more aggressive, proactive, and paranoid approach to stomping out potential threats. Web services posed a huge threat to Microsoft’s Windows and Office monopolies starting around 2000. Microsoft got a handle on Web services by driving technology standards that favored the company’s products or by co-opting open standards like XML in a proprietary fashion. Case in point: The aforementioned Office 2003 support for XML.
But like the Internet, Microsoft has missed a potentially market-shifting change in technology, one which could shred the company’s whole product foundation. I predict the weblog, or blog for short, will turn out to be as revolutionary a development as the creation the World Wide Web. The content delivery mechanism of the blog is genius in its simplicity.
Most blogging software uses open-standard XML to store and serve up data—and that information is easily shared. No complicated databases are required to manage content, which is easily delivered to a simple or sophisticated interface. In fact, the whole blog concept is the antithesis to Microsoft’s whole technology business. If open-standard XML begins to proliferate because of the large number of blogs through which regular folks share their thoughts, Microsoft will face big problems.
Microsoft is investing big bucks selling companies collaboration, database, and desktop productivity software. More evolved content models based on the blog concept could replace for a fraction of the cost what Microsoft is attempting to sell businesses as big-ticket items. And there’s no lock and key tying valuable data to Microsoft file formats or technology.
At the same time this threat rises, Microsoft is changing. In some ways, the company is more aggressive than ever but at the same time more customer-oriented. Some of that change reflects the personality of CEO Steve Ballmer, who took over day-to-day Microsoft operations from Mr. Gates in early 2000.
The changes also reflect new corporate organization into seven divisions: Client, Information Worker, MSN, Home & Entertainment, CE/Mobility, Server Platforms and Business Solutions. The Client group includes desktop and embedded operating systems; Information Worker is made up of Office and other standalone applications; MSN refers to the online network and access services; Home & Entertainment includes the Xbox game console, consumer hardware and software, PC online games and the TV platform; CE/Mobility refers to mobile devices, including Pocket PC and Smartphone; Server Platforms is made up of server operating systems, developer tools and premiere support and consulting; and Business Solutions includes Great Plains, bCentral and Navision.
The new groups are in many ways independent businesses loosely tied to the larger organization. These new groups are developing separate business strategies centered around their divisional leader that is in some ways independent of the larger Microsoft “gimme, gimme” and “paranoid” cultures. As such, some of the groups are digressing from Microsoft’s longstanding culture of paranoia.
For example, the server group appears to be much more customer oriented than what I’ve typically seen from Microsoft. I predict this group will focus on wooing customers by offering better software rather than luring them in with lock-and-key technology. The Information Worker division rapidly is expanding beyond Microsoft’s typical collection of desktop productivity software into new areas. In fact, I would consider the group’s tactics more aggressive than what I’ve typically seen from Microsoft.
While the seven groups grow more independent from a management perspective, they are growing more dependent from a technology perspective. Microsoft is increasingly tying features together from different products; that’s a significant strategic shift. Microsoft touts the strategy as a more integrated approach that benefits customers, the reasoning being products work better together.
But the first benefit goes to Microsoft, because customers have to buy more products or upgrade existing ones more frequently to get all that Microsoft promises. For example, Windows Server 2003 is required to use Office SharePoint Portal Server 2003, Windows Rights Management Services, and Exchange Server 2003, among other products. Companies interested in Windows Server 2003 also will have to upgrade, among other products, Exchange Server 2000. Many SharePoint Portal Server 2003 features require Office 2003. The list of cross-ties goes on and on.
To make all this integration work, Microsoft must focus more on internal cooperation rather than the longstanding practice of competition between product groups. How far this change will go and what impact it will have on Microsoft’s overall corporate culture is uncertain. It’s too early to tell.
More pivotal, may be the decision to increase integration between different types of products. Microsoft will say increased integration is for customers’ benefit. But I’m betting they won’t buy it, and I literally mean won’t buy it. Too many customers are tired of being treated by Microsoft as competitors. Everyday, I hear from more customers no longer willing to accept promises of benefits that too often really seem to do only Microsoft any good. Microsoft’s image problem and childish, self-interested corporate culture may yet catch up with the company. Then woe be it to the kid with all the toys.