Microsoft looks to services for growth

With the success of Windows unlikely to be repeated in today's market, Microsoft is banking on services as the next big thing. Elizabeth Montalbano reports

The Windows operating system may have defined Microsoft since its inception, but it will be services that give the world's largest software company its claim to fame in the future, analysts say.

Microsoft — which recently celebrated its 30th anniversary — fundamentally changed the computer industry with an operating system that now runs more than 90% of PCs in the world.

But that ubiquity itself poses a problem for Microsoft, says Jupiter Research analyst Joe Wilcox, because it means the company is essentially trying to outdo itself. "Microsoft is at this juncture where it's the victim of its own success," he says.

Exacerbating this issue is the fact that conditions in the technology industry have changed drastically since 1975, thanks in large part to Windows. Today it is much harder for a comparable product to become as pervasive as Microsoft's operating system, says Rob Helm of specialist Microsoft analyst firm Directions on Microsoft.

Helm says the reason Windows was so successful is that it rode the wave of two events — the invention of the PC and the arrival of the internet. That subsequent chain of events "is not necessarily going to repeat itself in the next 30 years," he says.

"The days of the killer application are long gone," agrees Dan Kusnetzky, vice president of system software research at research firm IDC. He says the packaged software that helped Microsoft rise to such a position of dominance is on its way to becoming obsolete, giving way to subscription models for services that customers buy to run the software they need.

So as Microsoft tries to carve out a niche for itself in a host of new markets, it will need to come up with new tricks in order to surpass the success of Windows, Kusnetzky says.

"What we're going to see Microsoft attempt to do is move away from a packaged software model and sell everything as a service," he says. "Microsoft wants to make sure people pay Microsoft for any use of computers anywhere. It's a very clever, intricate strategy based upon control and ownership of low-level things like APIs, tools, communications protocols and file formats."

The company's restructuring this week into three divisions whose services strategy will be overseen by former Lotus guru turned Microsoft chief technology officer Ray Ozzie clearly shows that services are now a major focus in Redmond.

Microsoft has also mandated that enterprise customers buy its Software Assurance service along with the upcoming Windows Vista — another move that proves Microsoft plans to drive a model where customers pay regularly for access to a network of software updates rather than a packaged product, Kusnetzky says.

One of the key services that might help Microsoft create a legacy beyond Windows in its next 30 years is Voice over Internet Protocol (VoIP), an emerging market ripe for domination by a large software company, Helm says. Microsoft has been "gradually getting the pieces in place" to provide VoIP service, a technology with the potential to be as disruptive as the internet was 10 years ago, he says.

In August, Microsoft acquired Teleo, a developer of services and technology that allows users to make and receive voice phone calls on their PCs via the internet. Microsoft plans to incorporate Teleo's VoIP technology into its own software to upgrade online services from its MSN division.

"If [Microsoft] could make the same economics of the PC apply to telephony — a small number of dominant hardware standards, a large number of hardware players and one big software company — it could yield returns [for the company] commensurate to the PC [market]," Helm says.

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