Post-Gates Microsoft has issues to consider

Co-founder's departure raises questions about company's future

Oracle and SAP may still be bigger in enterprise applications, and Oracle in databases. Both IBM and Hewlett-Packard may reap more IT dollars overall. But in the ways that really count, Microsoft remains the king of the IT industry.

Now, though, Microsoft is at a major crossroads, with co-founder Bill Gates stepping away from his day-to-day job at the company this week. Although Gates has long been disengaging from Microsoft — he turned over the CEO position to Steve Ballmer in January 2000, and his retirement plans were announced two years ago — his departure raises questions about whether the software vendor's best days are behind it.

For example, Forrester Research CEO George Colony wrote in a June 16 blog post that Gates' "constructive monopolism" had created a set of de facto IT standards — to the benefit of users as well as Microsoft.

Gates wasn't a technology innovator, Colony says, but he "possessed the competitive drive to force his technologies into monopoly positions in the marketplace." That drive, Colony says, has been missing from Microsoft in recent years as Gates has focused less on the company and more on his philanthropic activities, allowing rivals like Google and Apple to steal the IT spotlight.

With Microsoft approaching corporate middle age (it was founded 33 years ago) it faces more threats than ever to its long-held and fiercely defended IT alpha dog position. The Microsoft-controlled standardisation of IT is being challenged by proponents of open document formats, while open-source software, Web 2.0 technologies and software-as-a-service offerings are nipping away at Microsoft's lucrative Windows and Office franchises.

Chief among the threats is Google. "When Microsoft looks at Google," says Rob Horwitz, CEO and head of research at consulting firm Directions on Microsoft, "it sees a younger, beefier and more suntanned version of itself, and it says, 'Wow.'"

Google Docs, an online rival to Office, is a dagger aimed at the heart of one of Microsoft's top profit generators. And collectively, Google's lineup of cloud computing technologies is designed to smash Microsoft's desktop dominance.

Unlike Microsoft, Google "doesn't have to deal with any legacy issues", says Creative Strategies analyst Tim Bajarin. "That's why they can be a bull in a china closet and experiment."

Bolstered by its huge web advertising business, Google can also afford to bide its time. Most of its would-be Microsoft-killers are still technically in beta and hence free to users.

Google is "trying to deny Microsoft revenue by getting corporations to stop renewing their enterprise agreements with Microsoft," says Enderle Group analyst Rob Enderle. "Even if [Google doesn't] make any money, Microsoft can't make money."

For now, Microsoft appears to be perfectly healthy. The company is expected to post a profit of US$16.4 billion (NZ$21.6 billion) on revenue of US$58 billion for its 2008 fiscal year, which ends June 30. That would represent double-digit growth from fiscal 2007.

Also, the respective market shares of both Windows and Office remain above 90%, and the company's $10billion-plus server and tools business — which includes Windows Server, SQL Server, Visual Studio and System Centre — continues to grow, as yet unopposed by any offering from Google.

But the continued strong showing is something of a mirage, according to Enderle. Microsoft is focusing "way too much on revenue, not on customer loyalty," he says. "It's good in the short term but badly damages you in the long run."

And Horwitz notes that Microsoft hasn't managed to come up with a new hit product "in nearly a decade," despite pouring about US$7 billion annually into research and development. Search technology is a prime example, and Microsoft's frustration in that arena is epitomised by its unsuccessful effort to buy Yahoo to help it compete against Google.

In addition, Microsoft's efforts to match up against Google, and other online application rivals are being hampered by the very success of Windows and Office products. Instead of following a pure SaaS approach, Microsoft has adopted a strategy it calls "Software+Services" that's designed to incorporate and protect its existing products.

Its contortions to preserve its star players show how a large installed base can be a "ball and chain," Horwitz says. He predicts that within five to 10 years, Microsoft will be forced to fundamentally overhaul both Windows and Office — potentially giving customers an opening to switch to rival offerings.

There are internal issues as well, such as the bureaucracy and complacency that sheer size can breed. Enderle, a former IBM employee, draws parallels between the two companies. "Microsoft's current problems," he says, "are like IBM's in the early 1990s: It's getting in its own way."

But that doesn't mean Microsoft is doomed to a downward spiral. In the past, it has shown an ability to face down threats, including WordPerfect, Lotus, IBM, Novell, Netscape — and even the US Department of Justice.

"I'm not expecting Microsoft to fail by 2015," Enderle says. Even the slow adoption of Windows Vista could have a silver lining. "You've got a development team that's been slapped upside the head," he says. "They're motivated to do something dramatically better."

And IT executives such as Jim Prevo, CIO at Green Mountain Coffee Roasters, remain wary about casting their lot with Google and SaaS.

"I like Google, but I don't see it in the same class at all as Microsoft's apps," Prevo says. As for SaaS offerings, "I'd be tying my wagon to a bunch of different horses for various business processes," he says. "If any one of those providers was to go belly-up, I'd have an urgent problem."

Moreover, Horwitz notes that Google itself is already contending with the same kind of monopoly concerns and industry jealousy that Microsoft has faced.

But like other vendors before it — such as HP and IBM, as well as NCR and Xerox — Microsoft may have to make some big internal changes in order to continue thriving in the years to come.

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