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Microsoft Has Lost Its Way Part 2

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Microsoft has abandoned the fundamental principles that made it the most successful software company of the last decade and ensured its software would be the most widely used everywhere. But in just three years, since 2006, startups and Apple have set a new course for technology and how societies use it.

For Microsoft, this change is scarier than movie “Quarantine.” Without a course correction, Microsoft in the 2010s will be very much like IBM was in the 1990s. That’s no place Microsoft should want to be.

I originally wrote a single post, but felt compelled to break it in two, because of the more than 2,000-word length. The first part focused on Microsoft’s past, while this one addresses the present and future. If you want to link to either, rather than both, I strongly encourage it to be this post, part two.

A Deep Fog Settles Over Microsoft From the Cloud
As I explained in part one, Microsoft rose to dominance for many reasons, with one of the most important being control over key technology standards and file formats. But in a surprisingly short span of time, Microsoft has lost control of standards and formats. The company has reached a critical juncture that executives seem unable to comprehend.

Part of Microsoft’s problem is historical. Executives spend too much time focused on competitors. That’s how the Internet crept up on the company in the early 1990s; cofounder Bill Gates and most key managers were obsessed with AOL and CompuServe. They were looking the wrong way.

Microsoft’s Google obsession has made the company blind to its rapidly eroding control over technology standards and the importance of the next-generation computing platform—the mobile handset. While Microsoft frittered away corporate energies chasing Google, startups and Apple released cloud and mobile computing products that are outside the software giant’s control.

A Website responds to Internet Explorer

A Website responds to Internet Explorer

These new products and services are transforming society, and rapidly shifting computing relevance from the standards and vertical applications stack (Office-Windows-Windows Server) controlled by Microsoft. The new Internet threat to Microsoft is at least as great today as the one in 1995.

There is no single one mistake made by Microsoft, but a series of cascading failures. The list is simply too long for this already overlong, two-part analysis. Some influences, such as the March 2004 adverse antitrust ruling from the European Union were largely outside of Microsoft’s control. Others, like the release of Firefox, showed how much Microsoft’s standards approach hurt the usability of products (Internet Explorer). Then there are terrible missteps of opportunity, such as Microsoft skipping a chance to buy YouTube; Google got it. I would be remiss to ignore incompetent product management (Windows Mobile and Windows Vista).

Look around you at the startups bringing societal changing products to market—and I contend the cultural impact is at least as dramatic as brought by the PC. For example, most social media startups, whose products and services are taken for granted today, started in the last three years. Facebook, Twitter and YouTube opened to the public in 2006. Most other popular or growing popular social media tools launched within the last three years: Disqus, FriendFeed, tumbr, Twine, Qik and USTREAM, among many others.

There is a new applications stack extending from the mobile device (and for now the PC, too) to the cloud. Facebook claims over 200 million active users, up from about 150 million six months ago. US Facebook users spent 13.9 billion minutes on the site in April, up 700 percent year over year, according to Nielsen Online. Last month, Twitter had 18.2 million unique visitors, for 1,488 percent year-over-year growth, according to Nielsen Online. In May, 95,357 unique viewers watched more than 6 million video streams at YouTube, according to Nielsen Online. Second-ranked Hulu: 382,322.

Netscape's cofounder is an investor in Qik

Netscape’s cofounder is an investor in Qik

I know, people have been babbling about cloud computing for years. Big deal, who cares? The difference is that the Wayback Machine stops three years ago. That’s about as far back as you need go to identify popular applications and services that today are hot or getting warm fast. The majority are less than 18-24 months old, and a surprising number came to be last year.

Something else happened since 2006. Microsoft released the poorly received Windows Vista. Most PC users ended up staying with aging Windows XP, which needed to get new features from somewhere. Startups delivered them from the cloud. Meanwhile, Apple marketing and Vista malaise helped boost Mac sales, further empowering cloud computing and social media startups.

Then there is iPhone, which Apple released in June 2007. The third-generation model went on sale last week. Apple is rapidly turning iPhone and the App Store into a mobile computing platform—outside of Microsoft’s control. Same can be said of the social media startups. Sure they may use proprietary technologies, just like Microsoft, but the services can be consumed in a Web browser, and the release of APIs makes them extensible to other products or services. No Microsoft technology required.

Internet Explorer should be the gateway to these cloud services, but its usage share is declining. Month to date, Internet Explorer usage share is 65.5 percent, down from 79.12 percent for all of June 2007, according to Net Applications. Stiffer competition is one reason. For example, within the last three years, Apple and Google released Windows browsers, Safari and Chrome, respectively. Are you starting to see the pattern here? Three years.

Microsoft browser competitors are talking standards, too, but about how their products fully conform to adopted or emerging Web standards, like HTML 5. Now there are good Web browsers on mobile handsets. Data connected cell phones—and more recently smartphones—are bringing these cloud applications to people wherever they are. No PC required. Sign of the times: Yesterday, HP introduced the Photosmart Premium with TouchSmart Web, which requires no PC.

Head In the Sand Is Sure Way for a Kick In the Butt
What’s Microsoft response? Well, it’s not good—or good enough. There’s still the Google obsession, with Microsoft CEO Steve Ballmer last week saying the company was ready to spend $5.5 billion to $11 billion on search over five years.

Microsoft also is hunkering down for hard times. The global recession has pretty much shot all to hell fiscal 2009, which ends a week from today. Microsoft has had two rounds of layoffs and has curbed most incubation projects (run by guerrilla groups acting more like internal startups).

Microsoft killed Money earlier this month

Microsoft killed Money earlier this month

In the consumer marketplace, where social media and cloud computing products and services rapidly gain attention and adoption, Microsoft’s strategy is to pull back in a tough economy. Since 2006—again, what is it about that year—Microsoft has cut most of its major consumer desktop applications, shifting some capabilities to Windows Live services.

Microsoft is lost in the fog—eh, cloud—and turned around by global recession. In October 2007, over at Microsoft Watch, I blogged about Microsoft’s state of reinvention. Microsoft is now in state of crisis, as it grapples with the econolypse.

Recent cutbacks and internal refocusing point to Microsoft making its core business market the top investment priority. It’s a shortsighted strategy that will lead to long-term problems. The products, services and standards that will eventually take hold in the business market are winning over consumers now. Microsoft doesn’t control the standards or file formats behind them.

Among businesses, Microsoft controls an application stack that no competitor has shaken, let alone topple. Microsoft’s control of technologies, standards and formats gives it a stronghold on enterprise computing. Two-fold problem:

  • Microsoft has abandoned most consumer products and focused its cloud strategy (e.g., Azure and Online Services) on businesses.
  • Microsoft seeks to preserve its existing applications stack, while failing to engage the newer one around the mobile device and cloud.

Stated differently, Microsoft is too focused on seeking to preserve existing revenue streams when creating newer ones should be the priority. Microsoft’s self-preservation approach compels its developers to bind new technologies to Office or Windows, when they should be set free to embrace standards and help establish others.

Microsoft’s Interoperability Principles contribute to its weakened support of standards it controls. The company is all high and mighty about supporting adopted or open standards, but there are problems:

  • Some standards are still bound to Microsoft’s application stack, which deters some developers.
  • Where Microsoft is truly open, it has few products, if any, to compete with cloud startups.

Perhaps Microsoft could, or would, be more adaptable if not for the econolypse, which has compelled executives to push harder the aforementioned preserve-the-application-stack strategy. IBM followed a similar path in the 1980s, seeking to preserve its application stack around the mainframe. While Big Blue released a PC, the company made protecting its legacy business priority. IBM and its mainframe business didn’t go away, but their relevance diminished before a new applications stack. Microsoft faces similar challenge before the new applications stack. That path will make Microsoft the IBM of 2010s, unless there is a dramatic course correction; if’s not already too late.

Google isn’t the enemy Microsoft needs to worry about now. It’s the mobile-to-cloud application stack that Apple and various cloud and social media startups are advancing. If iPhone/App Store succeeds, Apple will control the standards that define the next-generation computing platform—around mobile devices. Other parties, Google among them, have vested interest in preserving the early Web 3.0 status quo: Open standards or others with published APIs that Microsoft doesn’t control.

As an end user I welcome the standards changes that have helped some really exciting startups bring life changing and society transforming technologies to market. The econolypse may have slowed the number of new startup investments, but not the pace of innovation around what I call the Internet democracy. However, as an adviser, I must warn Microsoft away from a course that will lead the once scrappy startup to becoming what it replaced: IBM.

Photo Credit: Walt Stoneburner

7 Comments

  1. I’m not convinced that Microsoft has missed out on some aspects of the Internet. For example, had it bought YouTube (for billions), it would have so far lost many billions more on what would undoubtedly be described by reporters as “its loss-making online video division”. I doubt that Microsoft would get the relatively easy ride on YouTube’s failure to monetize its massive traffic that Google has had. Ditto Facebook, which remains set to move into profit “real soon now” – as it has for pretty-much its entire existence.

    The fact is that no one has yet worked out a way to turn free user traffic into serious business – except selling ads on the back of search. Does Google, for example, have a single profitable product other than search? There’s no wonder that Microsoft seems to regard search as enough of a priority that it’s prepared to spend serious money chasing it.

    But you’re absolutely on the mark with the idea that the Apple model of platform control for mobile is Microsoft’s biggest threat. Note that it may not be Apple that takes advantage of this model and becomes the dominant player – I wouldn’t count out Nokia, which has a head start on everyone else in terms of market share – but at the moment, Microsoft looks the least-likely company to be a winner in the mobile space.

    There’s one area, though, where Microsoft does have experience in exactly this kind of integration between hardware, software, and online – and that’s Xbox. The Xbox integrated experience simply beats the pants off its competitors, which is something that it pains me to say as I’m a massive fan of the hardware of the PS3. If Microsoft can tap into the experience, knowledge and chutzpah of the Xbox team for its mobile strategy, it might still have a chance of being a serious player for the next 30 years.

  2. As an addendum, it’s still worth reading J Allard’s 1994 memo Windows: The next killer app on the Internet. I think this was the first use of the embrace and extend approach, but what’s always forgotten by writers is that after Embrace and Extend, J wrote about a third step: Innovate. Unfortunately, it looks like Microsoft forgot that word too.

  3. billybob says on June 24, 2009

    Microsoft’s biggest threat is not another company, it is open standards and competition. They have lived in a world without serious competition for years now and they are making fat profits from it.

    If those fat profits collapse then they will be left as a big company with big overheads. Just look at the netbook market, it is making the business of selling operating systems much less profitable. They do not even have the Office upsell because these machines will never run Office properly.

    XBox may be popular but it takes constant investment to be a player in the game console market and I am not sure Microsoft have the stamina. Even if you wipe out the 8 billion to make the console, the XBox division only makes hundreds of millions per year. This sounds good but Microsoft is a company designed to run on tens of billions of profit.

    Without monopoly-sized profits, I think Microsoft will quickly collapse into a much smaller company. Maybe the business of making operating systems and office applications is not going to be profitable at all when there is open and free software competing against it?

    Microsoft Soapbox was their YouTube, they still spent billions on it but it wasn’t even as popular as YouTube so will never have the ability to add adverts to the videos. Google love data, they feed it into their search machines so they can learn. My guess is that they are using this massive amount of data to train their AI to search videos, they have already done it for text (including translation) and images. If you look at it like that, then YouTube is a very cheap and good investment. Think of it as R&D for now.

    Mobile is a red herring. The point is that you can use the web on ANY device, it does not matter if it is classed as a phone or a netbook. The iPhone could never have been popular without the open web based on standards. Imagine the iPhone running IE 5.5 for Mobile ARM Edition. The web would not have been an enjoyable experience. Microsoft would have intentionally crippled it so that their IE 6.0 for PocketPC would make the web look better. Remember that the first iPhone did not have applications, it’s biggest selling point was that it had ‘the real web’.

    I think that open source software has played the biggest part, without open source, there would be no OSX or iPhone. Without KDE, there would be no Safari or Chrome.

  4. Terry says on June 24, 2009

    Excellent summary, Joe. A few niggles:

    “Part of Microsoft’s problem is historical. Executives spend too much time focused on competitors.” And on themselves. Way too much effort expended on internal processes (meetings, review, ladder climbing) that has no tangible customer benefit.

    Also, I’m not sure “Recent cutbacks and internal refocusing point to Microsoft making its core business market the top investment priority” is necessarily a bad thing. If it means retreating to a more secure revenue base and retooling the company around more profitable, sustainable, understood businesses, that may be a good thing for the company.

    It’s not going to happen, but it would be the right strategy IMHO.

    Microsoft needs to relearn how to focus on customer needs, customer satisfaction, and efficient, focused, profitable execution toward those goals. It needs to shed a lot of the technology-for-its-own-sake attitude and not-invented-here bias. Less fiefdom building, more customer rapport building.

    Business customers are the company’s core audience, and rebuilding the company’s “core competencies” with that known, trusted audience would be a good start toward re-engaging with consumers with a better set of social (and technical) skills down the road.

    I’m not holding my breath, however. The list of tech companies that successfully retooled for a changing business landscape is frightfully short (and starts with Apple).

  5. You are completely correct about Microsoft looking the other way and ignoring a feisty rival in Apple. The IPhone application development is a solid platform and is the buzz all over. If I were at Microsoft, I would worry more about the unnoticed Windows Mobile than I would think about search.

    There is another problem with Microsoft — their attitude. Ballmer should spend billions on search, but when he speaks — he should focus on the features and let Wall Street journos dig out what money they are putting where.

    But if you switch your mind away from USA market, the scene is different in places like India. Microsoft has only one enemy to be dealt with — piracy in OS and apps market. Both Office 07 and Windows 7 (till now) are fine products in isolation and if they get the pricing right — they are safe here.

    For the formats on the mobile devices, mobility goes hand in hand with openness — so there is little chance of formats giving a significant advantage. I have read at many places about how Microsoft is great at coming back on competitors after lagging behind. Though the earlier dominance by a single player phenomenon might have already ended on the mobile front with WebOS, Android, Symbian and IPhone set to split up the market.

  6. The biggest example of Microsoft losing its way?

    Microsoft’s first CEO correctly and eloquently informed the world that software patents are not necessary for innovation, and that they indeed stifle innovation.

    Microsoft’s current CEO has done a complete about-face on this issue, realizing that Microsoft is doomed to extinction unless it can use the force of the software patent system to cripple or kill the competition that they can no longer compete with head-to-head.

  7. Mobile Developer says on July 1, 2009

    I don’t think Microsoft has lost anything quite frankly. Have you reviewed their licensing business model and their profitability within the windows mobile BU? A quick review will make you appreciate them a little more and make you understand they know what they are doing. It is not about who has a silky smooth UI that rolls like the morning dew… this is a business folks and they are masters at managing their business. Let’s just see how it all matures over time.

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