Microsoft held its annual Financial Analysts Meeting yesterday. There were 8 hours of presentations by Bill Gates, Steve Ballmer, Ray Ozzie, Chris Liddell, and other top Microsoft execs. There is a ton of good information in these presentations, but from my perspective, there are three big highlights; Advertising, Software + Services, and Consumer Entertainment.
Advertising - Microsoft is getting real serious about the advertising business. Steve Ballmer said in a C/Net story "We are hell-bent and determined to allocate the talent, the resources, the money, the innovation to absolutely become a powerhouse in the ad business."
Earlier I wrote about Microsoft's AdCenter, and the acquisitions of aQuantive, Massive, and AdECN. Microsoft has signed high profile ad deals with Facebook, Digg, and EA Sports. Web search is one of the biggest venues for advertising and Microsoft's Live Search gained 3 points of market share last month to get to 13%. Still small, but growing.
Software + Services - This shift from client based software to web based services has been happening for several years. It has been called SaaS, or "Cloud Computing" or "On Demand" computing. Whatever the name, the meaning has been all your applications and data will be hosted on a server "in the cloud".
Pundits have said this spells trouble for Microsoft. Possible, but I don't think so. First, because I don't think ALL your applications and data will be "in the cloud", and second, because Microsoft is working on a "best of both worlds" scenario that seamlessly blends client or server based software with hosted services.
Ray Ozzie has been leading the charge on S+S, pushed for the billions of dollars to build massive data centers, and led the Windows Live and Office Live teams in building out the base services for business and consumers. This is a big shift for Microsoft and will represent billions in future revenues.
Nick Carr brings an interesting historical perspective on his blog. Nick reminds us that back when the PC first came out IBM claimed "we are the only company in the industry" with the customer base, the capabilities, and the cash to dominate the next generation of computing. But as a small upstart named Microsoft showed Big Blue, that ain't necessarily so. Nick's quote is compelling because these are exactly the same words Ray Ozzie is using to explain why Microsoft will be successful in this paradigm shift. Hmmm... my view is that Microsoft is tenacious and unrelenting, while IBM was distracted, at that time, by a dozen other bigger opportunities. However, Microsoft needs to deliver early and often to avoid history repeating itself.
Consumer Entertainment - Xbox 360, Windows Live, Windows Mobile, Zune, Halo, IPTV, MediaRoom, Surface Computing, and many others are big businesses opportunities for Microsoft. These are highly competitive businesses, but Microsoft is committed to investing the time and resources necessary to compete and win.
Big shift - These three areas; Advertising, S+S, and Consumer entertainment, are multi-billion dollar opportunities, and a big shift from Microsoft's roots in PC software. But Microsoft has made big shifts before. Fifteen years ago Microsoft had no presence in server software. It was laughable to think of a PC software company moving into enterprise server software. Today, Windows Server, SQL Server, and Sharepoint Server are multi billion dollar revenue producers with growing market share.
Big shifts don't happen very often. We are seeing three big ones unfold simultaneously. It will take years to fully realize the potential, but there is no doubt this is the right direction.
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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.
Posted by: Bob Warfield | July 27, 2007 at 12:02 PM
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.
Posted by: Don Dodge | July 27, 2007 at 01:48 PM
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/
Posted by: Marc Cohen | July 28, 2007 at 09:44 AM
MS places to much focus on enterprise customer while their competitors focus on internet users. Classic Innovator's Dilemma.
Posted by: TanNg | July 29, 2007 at 12:55 AM