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.

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