Microsoft's Big Squeeze

Bill Gates and his new CTO sidekick, Ray Ozzie, have demonstrated software suggesting Microsoft can be competitive with the Internet upstarts who survive off Web ad revenue generated by hundreds of millions of eyeballs.

I'm sure some people now wonder if Windows Live will somehow be reminiscent of Microsoft's incredible Internet Explorer response to Netscape ten years ago. Is it possible that Microsoft's monopolistic domination of markets might once again crush an up and coming technology superstar, this time around Google playing the role of Netscape?

The dilemma for Microsoft is that their monopoly is not only under attack by the Googles and Yahoos of the world who view the Internet as a platform, but also simultaneously from the IBMs, Suns, Oracles, and Intels who are full of hope that advances in all aspects of the Internet, Linux, Open Source, Grid Computing, Services Oriented Architecture (SOA), and Autonomic Computing, will collectively give rise to a new virtual platform computing infrastructure that will greatly diminish the importance of Windows and Office.

Microsoft makes big profits by selling high-volume, high-margin, shrink-wrapped or pre-installed software. But, the PC market is now mature. There's very little likelihood that a huge new growth spurt will be coming along anytime soon. It's going to take a whole lot more than a new version of the Windows operating system (i.e., Vista) to stimulate massive new PC purchases. Similarly, few professional workers are looking for more, or even better, office automation software. I can't imagine what kinds of improvements could be made to word processing, spreadsheets, or presentation graphics that would generate a huge new demand for these classes of products.

Don Dodge, a member of Microsoft's Emerging Business Team, likes to differentiate among three different problem spaces where IT entrepreneurs like to focus their innovative energies:

1. Consumer problems
2. Enterprise problems
3. Developer problems

He also likes to repeatedly warn that the #1 trap entrepreneurs fall into is creating a solution looking for a problem. Don's latest blog posting, Microsoft - the biggest start-up in the world, smacks of someone who perhaps has been drinking way too much corporate Kool Aid.

Microsoft is under attack in the Consumer space. Generating revenue from advertising is a completely different business model than making money selling packaged software. I'd guess Microsoft has a lot to learn before it will be able to compete effectively in this space. Even worse, there's a distinct possibility that good enough and free office automation functionality delivered over the Internet might pose a very serious challenge to the MS Office cash cow.

Microsoft is also under attack in the Enterprise space. IBM's business initiative built on an open, integrated, heterogeneous IT infrastructure with self-managing, autonomic capabilities, available globally On Demand, sounds very appealing to businesses looking to embrace methodologies based on the onset of a technology-enabled business process revolution.

Microsoft still retains a very strong and loyal following among software developers, but C# has still failed to attract the universal appeal of Java, Open Source development tools like Eclipse are beginning to seriously challenge Microsoft's dominant Visual Studio development environment technology, and the huge cost discrepancy between outsourcing versus in-house development projects could significantly diminish the importance of winning the hearts and minds of software programmers.

As great as Vista and Office 12 may eventually be, Microsoft's Cathedral-like approach to new product development has resulted in very long delays in product availability. I also believe that many of the new capabilities will require significant paradigm shifts before gaining solid traction.

No one is going to start worrying about a company with over $40 billion of cash in the bank. But, Microsoft's unprecedented success with Windows and Office may well have been as much about their being lucky as it was about being good. Microsoft owes an incredible debt to IBM. First, for choosing Microsoft's DOS. Second, for royally screwing up OS/2. Third, for helping persuade Lotus and WordPerfect to make incredibly stupid marketing mistakes. Toss into the equation Netscape's inability to compete against Microsoft's free browser technology bundled into Windows, and you wind up with the 800 pound gorilla that has come to dominate the IT industry like no firm has dominated a market since the days of Rockefeller's Standard Oil Company.

Microsoft needs to articulate and execute a leadership position. After spending more than $20 billion in R&D over the past three years, they ought to be able to do this. This time around, they shouldn't depend on the imitation of other's innovations or on the ineptness of stupid competitors.