Where Microsoft Is Most Exposed

Rob Enderle

I've been thinking about the problems of managing a complex company. As companies come out with their financials or run into problems (and a lot of that seems to be happening), I'm asked for my opinion on what I'd do.

 

While, at least recently, I haven't been asked this question on Microsoft, I figure it is only a matter of time and it might be nice, this time, to have actually spent some time thinking about the answer.

 

But, in looking across Microsoft, the complexity is daunting and it is easy to get lost in that complexity and do what many CEOs unfortunately do too often -- guess that figuring anything is better than nothing. What I thought would be interesting was to instead see if I can determine what I wouldn't do to first narrow the field. As it turned out, I think I got both answers.

 

We'll start by setting some context and then move into a discussion on what I think Microsoft's most critical assets are and what shape they are in.

 

Finding the Crown Jewels


 

Years ago, I did a massive research project on why IBM failed in the 1980s. Its most critical asset was actually the leases it had on mainframes and mid-range systems up through the mid-80s. These leases effectively locked in customers and made it almost impossible for others to compete with the company. Had IBM's CEO at the time realized this, he never would have eliminated them.

 

That elimination shifted IBM from an environment with very little risk to the company to one where the company was at high risk. The company almost died. In effect, while these machines were leased, IBM had near 100 percent control of the market, but for every lease lost for a non-current system, IBM lost control. By the end of the decade, its financials matched this loss of control, with dire consequences.

 

For Netscape, it was the browser, or more importantly, the browser market share. As long as Netscape was dominant, it was relevant, but if it ever lost dominance, it would be increasingly exposed, regardless of anything else it did. What I use is an 80/40 rule. Anything above 80 percent represents relative safety, in terms of market share. Between 80 percent and 40 percent is increasing, and anything below 40 percent, control is lost with potential terminal impact on the company. Netscape's delay in figuring out how to make its browser free and how to maintain adequate quality in the face of heavy competition cost it the company.

 

So, to be clear, what assures the success of companies like Apple, IBM, Microsoft and Netscape is control of their respective markets, not necessarily market share (when we get to Apple, I'll point out why this distinction is important).

 

Microsoft: Four Critical Products

 

In increasing order of importance, I believe the four critical products Microsoft has are Office, Internet Explorer, Windows Server and Windows Desktop.

 

Office: While important, Office is not a keystone product. Were Microsoft to lose dominance with Office, it might not significantly even affect Windows sales, let alone IE or Windows Server. It does generate substantial revenue and the loss would certainly be a huge blow, but Microsoft could survive. Currently, this product is at high risk; anecdotal evidence indicates Google Apps are moving strongly in education and these movements aren't being captured by existing metrics (meaning Microsoft can't yet see the extent of the exposure). Education is a good launching platform for this but I don't expect this to become a critical problem for five or more years. The bigger near-term exposure is the aging Office 2003 base. Once that base is obsolete, Microsoft effectively loses control of it and, from a standpoint of control, will drop below 80 percent.

 

Internet Explorer: IE, and the rest, are keystone products. However, Microsoft is not Netscape. While the loss of IE would cause a cascading pain to IIS and probably increase certain interoperability costs across Microsoft, it doesn't generate any direct revenue and while it is more strategic than Office, Microsoft could likely survive its loss as well. Currently, IE is at moderate risk. Increases by Firefox on PCs and Safari on cell phones, coupled with litigation by Opera, suggest that effective control, while still high, is probably below 80 percent but still at the high end of that range. IE 8 does appear to be positioning against this risk reasonably well, suggesting this problem is being resolved.

 

Windows Server: Windows Server is a huge keystone product, but Microsoft is already below 80 percent share of the market and has never been at the same level of dominance as any of the other platforms. Were this product lost, is would take out virtually all of Microsoft's back-office offerings. Competition is Linux and older versions of Windows Server. The cascading effect of a sharp decline would be near deadly but, because it isn't now dominant, if it continues to grow, the product actually represents far more upside right now than risk. Of the four, this offering is the strongest and in its 2008 configuration is being well received.

 

Windows Desktop (Vista): Windows Desktop is the keystone product of keystone products. If Microsoft lost dominance on Windows, the cascade effectively takes everything else out with the possible exception of Windows server which, due to its dependencies, might be left mortally wounded. The obvious risks to Windows are a rapidly growing MacOS base and a proliferation of Windows alternatives (ever smarter phones, set-top boxes and game systems, and specially built products like intelligent digital frames). The biggest threat, however, is Windows XP which, like Office 2003, is about to become obsolete, immediately dropping Microsoft control well below the 80 percent range and putting the company at risk.

 

So, what I'd do is develop a strategy to get more than 80 percent of the users onto a current copy of Windows and ensure they stayed there. Strangely enough, I think that was one of the early initial strategies Bill Gates probably had. Based on the IBM experience, I'd also look at turning as much of Office and Windows as I could into a subscription service to lower or eliminate the switching exposure and increase my overall control over the segment.

 

Wrapping Up: A Personal Perspective

 

This process is an interesting one because it can work personally as well. I had a relative whose most valuable asset was not his job, assets, or even spouse. It was his daughter. Had he realized this, no decision putting her at risk would have been acceptable. However, to enforce control (he disagreed with a decision she had made), he withheld funds from her, which created a cascading series of events and she died. He was never the same because her loss appeared to take the joy out of his life.

 

I wonder how many CEOs, or individuals, for a little extra cash or for something as trivial as making a point, put things at risk that they can't possibly afford to lose. Do you know what is most important in your life?

 

Something to think about this week.



Add Comment      Leave a comment on this blog post
Apr 3, 2008 5:15 AM kenholmz kenholmz  says:
Rob, my heart goes out to your relative. I can empathize with him.I find this article perceptive and worthy of attention. The world is ever changing and the leadership at Microsoft would do well to learn from history. Microsoft, through shrewd business practices, took a lot from IBM and others. Some fell by the wayside, other (including IBM) have survived and have evolved.You speak of getting more than 80 percent of all users on a Windows desktop. If the Microsoft leadership (including Mr. Gates) fail respond by offering lower prices and other incentives they will continue to lose market share. I confess I have done no exhaustive study, but I liken Microsoft to the Roman Empire. I leave it to the reader to consider the parallels. Reply
Apr 3, 2008 5:32 AM kenholmz kenholmz  says:
With all due respect, I must differ with you about Windows XP soon becoming obsolete. No doubt Microsoft intends to cease selling XP and also to end support for it. In time, but probably not soon, obsolete will be an accurate term. dictionary.com provided the following:1. no longer in general use; fallen into disuse: an obsolete expression. 2. of a discarded or outmoded type; out of date: an obsolete battleship. 3. (of a linguistic form) no longer in use, esp., out of use for at least the past century. Compare archaic. 4. effaced by wearing down or away. 5. Biology. imperfectly developed or rudimentary in comparison with the corresponding character in other individuals, as of the opposite sex or of a related species. verb (used with object) 6. to make obsolete by replacing with something newer or better; antiquate: Automation has obsoleted many factory workers.Please know that I write with respect for you. Obsolete is one of those terms that many (if not most) of us bandy about. I just don't see it applying here (yet). I may be wrong and I will certainly take my lumps if so. Regards... Reply
Apr 3, 2008 6:13 AM Rob Enderle Rob Enderle  says:
Hi Ken, I intend this meaning to the word:2. of a discarded or outmoded type; out of date: an obsolete battleship.Mid-year OEMs will no longer be able to preload XP, I believe this definition will then apply. I'm using this to talk to control, after mid-year XP will only be patched advancements will be Vista only from Microsoft, you steer a market through advancement. Google and others (Firefox) will still improve XP and effectively be able to take the majority of the market in a direction not consistent with Microsofts interests. If you can think of a better way to say this Ill certainly listen. Reply
Apr 3, 2008 10:32 AM kenholmz kenholmz  says:
Rob, I can't think of a better way to say it. Microsoft's interests undoubtly lie in being highly competitive and producing returns for stockholders and the company. The leadership may find the field of play has changed and be more nimble if they are to remain very competitive.I can understand definition #2 of obsolete. This seems to be subjective. I understand that Microsoft leadership want XP to be obsolete. I also expect some percentage of current XP users to hold a differing view.I look forward to the second half of 2008. Then we may all have even more objective data to look at.You have mentioned a few things Microsoft would best consider and hopefully they will take your analysis into consideration.Of course, I still consider Microsoft to (metaphorically) be the Roman Empire, while I am a member of the Mongal hordes pressing against the gates. Best to you, as always. Reply
May 13, 2008 9:45 AM alberto alberto  says:
i think Microsoft will continue to dominant in the area of IT for quite a long time. Reply

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