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July 27, 2007

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Bob Warfield

It will be interesting to watch the Microsoft SaaS plot unfold. I believe wholeheartedly in the business model, and I understand why they must embrace it. At the same time SaaS is singularly hard for perpetual license businesses to embrace.

The reason is that the two are oil and water--they are extremely hard to mix. This comes about because they are fundamentally competitors to one another. They compete for customer mindshare/budget, but also for internal mindshare and budget. To make matters worse, perpetual has immdiate short term benefit while SaaS has long term benefit to the financials.

Microsoft of all software companies is profitable enough that they can ignore this to a degree, but any significant shift to SaaS will impact their profitability negatively. SaaS front loads expenses and backloads revenues, and at the same time it mixes much lower margin services business in great heaping bagsful with uber profitable license business, dragging down the overall profitability ratios tremendously.

The mention of services somewhat brings me to the next question for Microsoft. SaaS is hugely services intensive, but Microsoft is not widely regarded as being a very services savvy or customer friendly organization, particularly not at the Enterprise scale in the way companies like HP, Oracle, Accenture, or SAP are perceived as playing the game. Microsoft will focus on SaaS as a technoloogy, but that's only a part of the beast, and not a particularly earth shattering one at that.

The short elevator pitch to all of this is that Microsoft will come at SaaS as though it is technology and product, and it isn't. It's a way of doing business. Microsoft has changed technologies frequently (and not always for the better--they never should've dropped Java!), but when was the last time they changed the way they did business?

There has been one example, already: the Internet. Microsoft viewed it as a technology and won the browser wars. But countless others including Google, Yahoo, Amazon, eBay, and more recent entrants like MySpace, YouTube, and Facebook et al understood that the Internet was a way of life and that this was more important than technology. Despite spending a fortune, MSFT has made little progress there. Worse, the Internet "way of life" has cut Microsoft largely out of the implementation, tools, and platform side of things on the Internet. Java, PHP, Ruby, Python, mySQL, Linux, AJAX, Flex, and Flash are the names that spring to mind.

MSFT is a great company (I'm a shareholder), but Innovator's Dilemma will kill you in cases like this.

Don Dodge

Bob, you are right, SaaS and the perpetual license model mix like oil and water. It is nearly impossible to sell the same product under both models.

However, I think Microsoft will be successful for precisely this reason. Windows, Office, Sharepoint, and other client/server products will continue to be sold in the traditional way. The new Windows Live, Office Live, and other new hosted apps will be sold on a subscription or advertising supported basis. No overlap or mixing of models.

The functionality of the new "services" supports the "software". They will not overlap significantly. Instead they will seamlessly integrate and add value. That is the strategy. If we fail to do that, and the "services" do overlap with the "software" then you are right, there will surely be a problem.

The "Service" in SaaS (Software as a Service) is not inteded to be professional services. If SaaS is designed and architected with end user customization built in, then there should be no need for lots of professional services. Again, if we fail to deliver customizable "services" there will be a big problem.

Thanks for your insightful comment. You rightly point out the risks and potential issues. Hopefully we are smart enough to manage around them.

Marc Cohen

I think this new strategic focus has the potential for tremendous success. So far, however, in its implementation I believe that Microsoft has been playing catch-up and missing opportunities to innovate.

It seems to me that the company is overpaying for acquisitions in an effort to chase Google in Internet advertising.

Regarding the Zune, which offered no compelling difference to the ipod at launch, it will take Microsoft a year from launch to release a flash based player, which Apple had years ago.

In order to succeed Microsoft needs some game changing products to support its strategy. In-game advertising is promising (pun intended).

I hope Microsoft doesn't miss the boat on advertising supported downloaded music. The revenue potential of this market is huge and conforms to the new strategic focus you describe.

Check out the Ad-Supported Music Central blog: http://ad-supported-music.blogspot.com/

TanNg

MS places to much focus on enterprise customer while their competitors focus on internet users. Classic Innovator's Dilemma.

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