We have seen a glimpse of the future of productivity apps this week, ranging from:
- Adobe’s smart acquisition of Virtual Ubiquity, authors of the RIA word processor, Buzzword, to
- Zoho’s release of a personal database tool, Zoho DB, blurring the lines between spreadsheets and databases even further, to
- Microsoft’s first moves to position its desktop tools as a service, instead of a product, with the release of its “storage in the cloud” model for documents, Microsoft Office Live Workspace, to
- Google’s external positioning for the enterprise mail business with the incorporation of Postini into the overall Google Apps bundle.
If you add these recent moves to the earlier announcements by IBM to join the Open Office cause (a lower impact move on the landscape), continued evolution of additional web-based and RIA productivity tools by smaller players (Empressr et al), it makes the case that what we once willingly paid $300+ for is now quite rapidly becoming the new analog to the email battlefront of the late 1990’s, where consumers benefited by efforts of Yahoo, Hotmail, and others: a disruptive free value proposition to earn/retain your attention/PVs.
The idea of productivity tools as features versus businesses has real impact only on one player of scale: Microsoft. As such, there has been much written about Microsoft’s upcoming demise. To me, the death of Microsoft is greatly exaggerated, but certainly, not all is well in the kingdom of Redmond. It’s worth more analysis to understand the full state of affairs.
At the highest level, Microsoft’s three profit franchises are the OS (the client division), the desktop tool suite (the business division), and the enterprise offerings (the server and tools division). The rest of the businesses are a portfolio of strategic investments (some quite massive, but none profitable), imho.
If you look at each of these three major earners individually, you see different threat horizons:
On the OS front, Windows has become less of a consumer visible and valued product, and much more of a utilitarian service. The stark contrast between the $500+MM Vista marketing launch, where you saw the total void of any consumer-supported momentum once the big initial marketing push ended, versus the Halo 3 launch, where you could feel the excitement of gamers as the release date approached, signaled the end of an era, in terms of OS-led and OS-dependent innovation. Is there a tremendous cash cow in the Windows franchise? Yes, but in some sense, it is due in large part to the extended ecosystem of hardware manufacturers that Windows fostered in its heyday. Disturbing early warning signs of the transformation include the share shift in domestic laptop sales between Apple and the Windows-powered competitors. If you look at the next five years, with the introduction of things like Linux-based Ultra-portable internet devices (led by Nokia and Asus, but soon to be joined by others – Mozilla, ARM and Samsung, to name a few), and more day to day use of web-based and RIA applications becoming the norm, consumers will operate at further levels of abstraction from the operating system than ever before, and as such, care less and less about it. Overall health of the business for Microsoft: Fair – it will continue to put lots of food on the table, and help fund their loss-leader efforts in gaming, IPTV, and mobile, but it will start feeling much more material pricing compression from OEMs in the 4-6 year event horizon.
The desktop tool suite is another strong earner for Microsoft, and we’ve trained multiple professional generations to operate in the Word/Excel/Powerpoint universe we know and love. The tools have evolved to be by far the best-in-class offerings out there. The challenge for Microsoft is the diminishing impact of new feature/functionality development. One of the issues Microsoft has historically had was balancing feature development (to continue to justify aggressive upgrade cycles in its corporate client base) with the fact that they had long since gone past the base needs of the average consumer (I think the soundbite at one point was the fact that the vast majority of folk used only 7% of the feature set of Office, and efforts like the beloved Clippy and others to expose more functionality didn’t move a dial here). Maybe the new ribbon and its contextual functionality it exposes in Office has had an impact, but if the documents I receive daily are a good proxy for functionality utilized, it sure doesn’t feel like it. This Office toolset is clearly under attack by Google, and having Adobe cast their hat in the ring has to also be disturbing, given their own reach (97+% of global PCs). I am bullish on the ability of new entrants to have a real impact, especially in the word processor and spreadsheet segments. They aren’t bringing two decades of baggage to the table, and are incorporating collaboration tools from the beginning. Overall health of the business for Microsoft: Weakening – unlike the OS, which has more legs to it, I think you’ll start seeing the pricing compression for Office begin in the 18-24 month event horizon – it’s becoming a fungible service. I know that in my old CTO roles, I would be using Google apps as a stalking horse in my next Microsoft renegotiation.
The enterprise product segment is a nice success story for Microsoft. Its growth has allowed Microsoft to add a third material profit piston to the MSFT earnings engine, and tools like Exchange have become de facto business standards. The development tools and runtime environments are good, and sometimes great. I know first-hand how productive .NET development shops can be, and I like how MSFT has managed to take its solution sets up to enterprise scale over the last seven years. If I look to threats here, they come from two directions. The first is the continued push by businesses to use the open source LAMP stack. I don’t see massive share shift between the Linux and Microsoft camps anytime soon. I think this will be a long, drawn out battle, with Microsoft continuing to be a major player. Selected products (most notably Exchange) will, however, feel more heat in the 3-5 year event horizon, through efforts by both Google and Yahoo (with its Zimbra acquisition) to get access to the prosumer through aggressively priced enterprise mail offerings. Overall health of the business for Microsoft: Good – The enterprise mail market is a tough one to penetrate, and the love/muscle memory for Outlook and Exchange are very substantial. The other products will survive and thrive.
Let’s not kid ourselves. The company did post $50B in revenue and $14B in earnings in 2007 – they aren’t going anywhere soon. Microsoft’s free cash flow is so substantial, there is always the opportunity for them to make a disruptive acquisition or offer a disruptively priced offering, something that can never be under-estimated.
Microsoft seems incredibly focused on the consumer sector right now. Are there opportunities for them here? Yes. When I think about where they could take TellMe as a hybrid voice/data portal in mobile, and how they could use their multiple consumer touchpoints for great behavioral targeting, I see multiple opportunities for material growth in the consumer segment by them. I just think that they have the problem of legacy consumer product successes still driving the vast majority of earnings (one that AOL faced for years, and took too long to navigate away from), and no matter what you say, it continues to shape their decision processes. They also have an enemy (Google) who has several of their key consumer-centric earners (desktop productivity tools and email) in their gunsights, and can and will be disruptive in their pricing strategy, which certainly is one reason they are so focused on acquisitions here.
I just see conflicting moves on the consumer front that seem at odds with its perceived importance. When I see somewhat lackluster things like the launch of Live SkyDrive as a 500MB free offering (a tenth of competing free offerings), I worry – moves like that will never turn a dial and change the current consumer market dynamics. We are at a moment of truth, in terms of momentum. It’s time for change. I think some real soul seaching is needed. Chasing Google and obsessing so much on advertising (symptom of obsession: the premium paid for aQuantive) and the consumer segment seems to me to be playing someone else’s game. You’ll never win a game where someone with that broad of a distribution channel can afford to attack so many of your historical consumer offerings with ad-supported alternatives – it will all be about fighting a rear guard action to maintain your share and margin structure for as long as you can. Use your financial might to fight another fight.
For me, it’s about playing to your strengths. Microsoft has some great and unique assets in its salesforce and its enterprise penetration – focus on continued leverage of them. Microsoft should consider making some material acquisitions in the enterprise space that can generate real earnings (e.g., acquiring SAP), instead of A) the current excessive focus on the search and ad space, and B) dividending so much cash back to shareholders (something that didn’t really achieve a material impact anyway). It’s time to add another piston in the MSFT engine – let’s make a bolder enterprise play!