The Challenges Ahead for Microsoft to Sustain its Growth


(T) I do not share the views of many analysts in Wall Street that, even after a terrible Q4 earnings report, are still optimistic about the future of Microsoft. Their optimism about Microsoft is mostly based on the early successes of Microsoft new search engine Bing and the high expectations of its next operating system Window 7. However, I would argue with them that the numbers in the recent Microsoft earnings are starting to “finally” prove that Microsoft is not well positioned for the future and that its $58 Billion revenues might continue to decline even after the economy expands again. Of course, Microsoft is so much entrenched into the IT infrastructure that customers are still very much dependent on Microsoft’s products but…

Microsoft’s Q3 earnings report this year was the first one where sales year-over-year were down. Not only in this Microsoft’s Q4 earnings report, revenues expectations were missed by $1.27 billion or 17%, but more importantly, this last quarter was the first one where sales of the Windows operating system were declining. And, this year was the first time for Microsoft to lay off some of its staff.

Microsoft extremely powerful business model has been based on expanding its product lines around its PC operating system monopoly and competing on any new market with emerging competitors through extreme low price entry. When competitors were pushed out of business and at that time generally Microsoft products have gained feature parity with leading competitive products, Microsoft raised its pricing. That strategy made Microsoft winning against any competitor such as Borland, Novell, Netscape and many others in the PC business.

But, now that computing is moving to mobile devices and cloud computing where applications are provided and priced on demand and are not dependent on PCs, that strategy will not work anymore.

Microsoft Last Competitive Advantages – Office and Exchange

At the server, Linux has weakened all Unix flavors even Solaris leading Sun to be acquired lately by Oracle. The reason why Linux has never taken off at the desktop is that users have to use Microsoft Office and in particular Microsoft Outlook. All corporations have built a significant infrastructure of Exchange servers in order to support Outlook e-mails and paid for that to Microsoft significant licensing fees. Although Google Apps and Open Office are still far away from taking significant market shares to Microsoft Office – and Google Gmail and Yahoo Mails are still far away from taking significant market shares from Microsoft Outlook and replacing Exchange – at the end of the day – IT is a cost center for businesses and in order for businesses to lower their costs, they will have to move to Web-based applications and Web-based e-mails. Microsoft has offered since November 2008 hosted versions of Exchange, SharePoint, Office Communications and Office Live Meeting and an online version of Office 2010 is expected. But the economics are playing against Microsoft. And when offered as a hosted service, Microsoft’s competitive advantages are lowered since it is easier for customers to switch from Microsoft to another vendor.

Windows Operating System Sales are Declining

The only reason why on my Mac, I do have a Parallels virtual machine with Windows XP is to be able to run Microsoft Outlook.  When Apple’s new MAC OS Snow Leopard will support Exchange or if I can use Office Mac 2010 with Outlook as announced this week by Microsoft, I will not have the need of using anymore a Windows machine. Or simply put if, for business communications, I do not need any more Microsoft Outlook, I do not have the need as well of using a Windows machine.

And the more businesses will move to Web-based office applications suite and e-mails, the more sales of the Windows operating system will be declining. Users will be free to move from Windows to Linux, Mac OSGoogle’s Chrome or Android or other operating systems that could finally hit the market. According to Forrester  Research, 86% of corporations are still using Windows XP. Only 12% of businesses have migrated to Vista. So yes definitely, Microsoft can only do better with Windows 7.

Microsoft is not Leading in Mobile and Cloud Computing

As written many times in this Blog, the new world of computing is Mobility. The Mobile Internet is mostly driven by the new generation of mobile devices, faster wireless networks, and all the Web services, that we are using every day without paying attention, enabled by cloud computing.

The iPhone, the BlackBerry, and the Android are the new generation of notebooks, where the phone is one of many features. Mobile devices are today more powerful than desktop PCs were 8 or 10 years ago. And, Microsoft with Windows Mobile is not in any meaningful way a threatening competitor to the iPhone.

The emerging applications for mobile devices are Web Services for consumers or Software as a Service (SaaS) for enterprises that will have to be provided from the “cloud” as a utility service. Microsoft is certainly trying to adapt its existing product lines to mobility such as Office Mobile and cloud computing such as the expected online Office 2010. But as always Microsoft is not leading but reacting. And, it has not created new products for mobile and cloud computing that can be a new source of revenues.

Microsoft Online Advertising with Yahoo

Although Microsoft has tried many times to come up with a successful online advertising strategy, it has failed so far to take significant market share from Google. It is still unclear if its latest partnership with Yahoo and its new search engine Bing will finally be an inflection point for its online advertising revenues.

The Trend to Open Source is not a Good Fit for Microsoft Business Model

There are obviously pro and cons to Open Source. The pro – open source is free – the con – it needs to be maintained. Sometimes, open source works well such as it has been the case with Linux sometimes it does not work when support and release maintenance is lacking. However, it not possible now for any software company even Microsoft not to build an ecosystem for its product portfolio without the open source community.

Microsoft has been one of the most successful American businesses and continually confronting many technologies and competitive challenges such as Unix vendors, client-server architectures, more security in software products and of course the Internet.

When Bill Gates decided to offer for free Internet Explorer bundled to Windows 95, he pushed Netscape, which had over 50% of its revenues from Navigator, out of business.

But if Steve Ballmer decides to offer for free the online version of Office 2010 to take the lead over Google Apps, he will not drive Google, which has significant cash inflows from its online advertising product lines, out of business.

If Microsoft is not reinventing itself and playing to a changing game with the same business strategy it will be challenging for Microsoft to keep its growth rate.

And, maybe no High-Tech company even the most resilient one such as Microsoft cannot be built to last forever?

Note: The picture above is the 1978 Microsoft team based in Albuquerque with Bill Gates front row on the left and Paul Allen front row on the right.

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Categories: Business Strategy