MSFT will not be Trading in Ten Years

Update [11-Nov-2005, 12:32]: This post started some fun discussions (caught in the comments and trackbacks).  I've followed up with commentary here.

This began as a friendly hallway wager (for dinner) with friends at the Open Source Business Conference this past week.  The discussion has expanded, however, beyond a circle of friends so I thought it best to clearly state the "what" and "why" of the bet. To be clear, I don't wish the company ill will.  I just think they're about to discover some new realities.

Last Spring I posted an opinion on OpenOffice in a slightly different context.  Here are the bits relevent to this discussion:

• It will be OpenOffice on Windows XP that will cause a revenue slide, a few quarter on quarter losses, and the shareholders to react bluntly.
• Firefox has given Windows XP desktop users a taste of open source. The average consumer is merely downloading the binaries and discovering it's a more than good enough user experience.
• OpenOffice on Windows XP becomes an interesting next step. 
• With no licensing fee, it becomes a very inexpensive experiment to load OpenOffice on a large class of workstations in the average enterprise that already pays for Microsoft Office through its Enterprise Agreement. 
• OpenOffice reads Microsoft Office documents in a very direct manner. 
• The user interface is familiar enough.
• The ability to generate PDF for distribution in OpenOffice is also a god send.
• Once the experiment runs its course and the numbers become apparent, the enterprise procurement team can then have a different discussion with the Microsoft account exec when they arrive to negotiate the next three year enterprise agreement. I imagine they'll be able to at least call for a 20% reduction in Microsoft Office licenses.  (The sticking point for a larger percentage will likely be the Outlook email client, but even that switches nicely to Thunderbird on Windows XP.) 
  

This licensing negotiation will be even stickier if upgrading to the next version of Microsoft Office really requires Windows Vista to run. 

In the Innovator's Dilemma, Clayton Christensen talks about over delivering on functionality, but in the Innovator's Solution he gets into what actually happens in the market at that point.  When an encumbent starts over delivering, and customers can't absorb the new innovation fast enough, (and therefore are unwilling to pay for it) a call for standardization comes from the marketplace.

We have the terminology and economic models to actually see what's happening now.  We can witness forward so to speak, and not have to wait for a decade to dig through the data that would only have arrived too late to save the company anyway.

The standard has happened.  It's OASIS Open Document Format (ODF).  The vendor competition is driving this home.  Witness the speed of action from IBM and Sun supporting the Commonwealth of Massachusetts decision to require ODF for document archive purposes.  Andy Updegrove has a couple of excellent reports from last Friday's Open Document meeting in Armonk. 

Even if the political machinations that are ongoing in the Commonwealth cause the decision to be badly delayed, other governments will begin looking at the technology and route around the political minefields in their respective situations. Corporations will follow. 

Microsoft will react in very predictable ways.  (Here I'm even willing to give them the benefit of the doubt on their role in the Massachusetts political machinations.  I don't tend to ascribe to malice what can be explained by simple ignorance, or in this case the pettiness of politicians that weren't asked about an issue they felt they should have a say in.)  First, they will tell the sales force to "not lose to OpenOffice" because they believe it's about innovation and marketing, not value and solution.  They may even tweak compensation models to enable the sales teams to rapidly discount around the OpenOffice experiments.  This will accelerate their problem.  But regardless of whether an enterprise negotiates a discount based on lowered Microsoft Office licensing requirements or because the Microsoft sales team dropped the price, it's still lost revenue. 

Second, they will continue to hammer away at the message that it's about innovation, and tightly integrated innovation at that.  But the problem is that they've already innovated past the needs of most of their users in Office.  Delivering more innovation exacerbates the problem.  You can almost hear the bewilderment in Alan Yates statements around Microsoft Office formats versus ODF.  He doesn't "get" why customers would choose a "less innovative" solution. 

This situation is very different from Linux versus Windows: 

• Switching to a Linux desktop is a risk prone experiment in the eyes of the average CIO.  Here they can easily load OpenOffice beside Microsoft Office on the same machine for free. 
• Tightly integrated innovation still works in the delivery of Windows desktops.  Microsoft Office has massively over delivered and more innovation is the last thing customers really want. 
• Because of the fidelity between OpenOffice and Microsoft document formats, this situation is much more dangerous than the tough migration of Windows to Linux, and the speed that things change will likely be very very rapid. 

Microsoft Office represents a considerable amount of their revenue stream.  It won't take many OpenOffice experiments (15%?) to impact that revenue stream.  So there will be a down quarter or two and Wall Street will punish Microsoft through its stock price.  Microsoft will have to behave differently: they won't be able hire, compensate, and retain staff the same way.  They won't be able to execute in the same way.  A number of friends made reference to the war chest cash reserves Microsoft has as if this somehow proved the argument for them.  One has to remember that the cash reserve, large as it is, is the shareholders' money.  It's profits.  They won't simply be able to spend the cash reserve either. (Indeed one of the toughest things I learned in my first start-up was the hard decisions you are forced to make because of your fiduciary responsibility.) It will be interesting for the financial analysts amongst us to see how creative Microsoft becomes trying to cover for a down quarter out of the cash reserve. 

Microsoft is still on its original executive team.  When IBM stumbled and Gerstner came on board, IBM was already well past its first CEO and early brands around adding machines and later Selectric typewriters.  The Microsoft exec team still believes it's about delivering more and more value on the Windows and Office brands.  They will continue to execute on the current Windows and Office cash centers as well, because that is their high margin business, and that's what Wall Street rewards. 

Surrounded by the bricks and mortar of the Redmond campus, it's hard to think of a world without Microsoft, because there is obviously so much going on around you.  There are people everywhere.  The grounds are beautiful.  But as I sit here in Boston writing this post, I can remember a different time and a different company.  We wouldn't have believed Digital Equipment Corp. could fail either.  Yet in the space of 2 years from 1988 to 1990 they went from industry juggernaut at the top of their game to a very troubled organization thrashing about in a new market order. And a few years after that they were acquired by Compaq (at the height of their game). 

DEC had over delivered.  Customers couldn't absorb more and more innovative VAX technology each year.  Standards happened (POSIX/UNIX).  Customers migrated away from a vendor locked de facto technology to a de jure based standard with multiple implementations that were initially inferior to the de facto technology. The economic model works.  We are indeed watching history present itself. DEC employees went on to other jobs — some with Compaq — and some now with HP.  Buildings had new signs put on them.  The economy moved on and the high tech industry still calls Boston a home. 

Microsoft's hubris will be a belief that the software business is different.
Quod erat demonstrandum.
 

Comments

[goyishekop]

Interesting bet because it asks,
"Would FFox have made good if its only selling point were price?"

Or, maybe, "Would FFox have made good if it were a bloated-but-free, imperfect subset of IE?"

I've wondered that from time to time. Stephe forces me to see we have a test at hand.

I use and pimp FFox.

I'll say, in casual conversation, "You're still using IE? Try Firefox. It's faster, it does a lot more, it's free. What's not to like?"

I'll continue. "Hey, want me to show you? We can do it right now."

The download's instant . Presto.

OOffice? My excitement underwhelms.

Yes, I use both. Exclusively.

I haven't really used Microsoft products since 1983. I thought subdirectories a welcome addition to MS-DOS 2.0, but the total cost of a Microsoft platform was just too high. That was total *personal* cost: money, time-and-trouble, loss of functionality, inability to interoperate easily with my friends and co-workers, and total lack of "cool."

I use OO because it comes with Linux and sometimes I need to read word documents.

Would I use it if I had something else? Well, apparently. And why do I use OO instead of KOffice? Because it's the default that FFox launches.

Me, I'm a typical "early adopter." (Such a much nicer term than "geek," don't you think?)

I watch the TechCrunch RSS feed for new Ajax apps. I haven't looked for a feed reader for my cell phone because my phone won't let me try the apps I find.

I evangelize when I see things I like.

I've converted my friends to FFox. I hand out Knoppix disks like Halloween treats. I won't shut up about blogs.

I jump in with both feet.

I've been too cheap or lazy to buy a plan that gives me web access from my phone, but days after my provider gave me free text messaging, my friends all knew about Google SMS. I started using Backpack to send all my reminders to my cell and gave away my alarm clock.

I haven't had a land line for years.

I was even excited, for a day, when it looked like Google and Sun would launch OO as a web service.

My friends listen to me because I know whereof I speak, and I'm out there blazing some trail for them.

Would OO need to be slick and cool and have new stuff to excite me? Yup.

"Print PDF"? Yawn.

But does OO need people like me? Ah, now there's the question.

The bet is, "Price trumps all." Works for Wal-Mart.

Gentlemen, start your engines.

[Eric Shea]

Glad you blogged about this, great follow on to the Open Source Business models talk you gave.

I think that the early adopters have embraced Firefox and OOffice for slightly different reasons. Firefox for functionality, innovation, and perceived security. (It also didn't hurt that it was not MSFT and runs on Linux as well as Windows) OOffice is a replacement. *It does what you need it to*, thus hitting the top part of Christensen's user expectations S-curve.

I also 'pimp' FFox and OOffice. But the average user I talk to hasn't really cared about the innovative features like tabbed browsing. The two simple reasons my family would switch:

Firefox: No more spyware killing my computer, no more annoying popups.

Open Office: I need to create a Word document and you say this Open Office can do that AND IT'S FREE??

Stephen is right, there is no risk to installing Open Office. Once the users have tried it and realize it hits 99% of what they need, they will NOT be buying another MSFT Office product. Microsoft Office is entrenched but it's easy to picture the slippery slope once people find OOffice. (thank you to the Commonwealth for doing such a great marketing job)

[Eric Shea]

French tax agency planning on switching 80,000 desktops to OOffice.

http://news.com.com/French+taxman+opts+for+OpenOffice/2110-7344_3-5942180.html

[Ben Kloosterman]

7 years and counting now .. Office 2007 going strong Vista not.

Personally
- With regard to office MS may loose revenue but they may end up dropping the product to $200 once India and China come up ( yes most people including gov use illegal copies - the goverment here alone uses $US100B of illegal MS software according to some estimates i heard - eg 100 M copies of Office ).
- Microsoft offered works (dont know if they still do ) for$149 including a full copy of word , cut down excel MS Money etc . The thing is corporates are not intrested even though they can get it for like $50. If it included outlook i would have used works.
- web 2.0 will crumble , once people realize they are writing nTier apps in the most difficult to maintain slowest way people will go back to Java and .NET web delivered client apps MS are in a great position in this market.

Regards,

Ben