Microsoft in Transition

Introduction

Bill Gates’ vision was to empower personal computers by providing the software that made them work. Bill and Microsoft were at the right place and time with the right product, and Microsoft soon dominated the emerging market segment of personal computer software. Today, Microsoft has global monopoly power, [1 & 2] unlike any other company, owning 98% of the global market for operating systems and desktop software. In fact, most people have never seen or experienced a different computing environment that the one provided by Microsoft.

Organizational Structure

Microsoft still holds to its vision of empowering the desktop computer as the company restructures to respond to industry changes. Recently, Microsoft announced that the company will soon restructure around the following three divisions [3]:
1. Microsoft Platform Products & Services Division -- Includes the Windows Client Group, the Server and Tools Group, and the MSN Group
2. Microsoft Business Division -- Includes the Information Worker Group and the Microsoft Business Solutions Group
3. Microsoft Entertainment and Devices Division -- Includes the Home and Entertainment Group and the Mobile and Embedded Devices Group
Microsoft envisions that this restructuring will succeed through 1) better product and geographic segmentation, 2) better tactics to compete against Linux (a competing operating system and environment) and 3) continued growth in emerging markets.

Business Unit Structure

Currently, Microsoft is divided into the following business units:

Business Unit	Marketing Focus [4]
Client (includes versions of the Windows operating system)	The Client business unit is focusing on market segmentation and piracy prevention for revenue growth. To better serve emerging markets, the Client business unit recently launched pilot programs in Southeast Asia in which Microsoft works with governments to distribute Windows XP Starter Edition, a lower-cost, easier-to-support version in an attempt to recapture a large piece of the market that is lost due to piracy.
Information Worker (includes various versions of Microsoft Office)	This unit is focused on geographic segmentation in an attempt to recapture overseas markets. New products include: the English Writing Assistant, an add-on to the Chinese version of Office providing (Web-based) guidance on English usage; and a forthcoming Japanese product called Office Interconnect.
Server and Tools (includes software for building databases and running server computers).	The focus is to propagate Microsoft's .NET (Dot-Net) platform at the expense of Java and open-source competitors such as Linux. Part of the strategy is to craft messages such as Microsoft's "Get the Facts" campaign, which highlights the advantages of Microsoft platforms.
MSN (includes Microsoft’s online subscription services).	Although dial-up subscribers are leaving the service for broadband access from other providers, Microsoft is focusing on advertising revenues and cost-cutting measures. Up to now, MSN has struggled to find its niche. Once positioned as a competitor to AOL, MSN has seen the most changes in strategy of any business unit.
Home and Entertainment (includes games and Xbox, with a focus on competing with Sony).	This business unit continues to be Microsoft's most expensive, with losses of more than $1 billion in each of the last three years—primarily due to the fact that Microsoft loses money on each Xbox sold. The business unit will probably be the last to become profitable perhaps by FY'07. Microsoft is working to establish partnerships and build well-known game franchises.
Business Solutions (these include enterprise applications for managing large amounts of data and business transactions).	Oracle, PeopleSoft, SAP, and Salesforce.com are seen as Microsoft’s main competitors in this space. This business unit is squarely focused on small and mid-size businesses. Microsoft’s entire enterprise resource planning (ERP) product lines having major releases scheduled for FY'05.
Mobile and Embedded (provides an operating system for embedded microprocessors found in mobile devices).	Microsoft’s smallest business unit is also its fastest-growing, and is focused on addressing new technologies and devices in the mobile and embedded industry.

Culture in Transition

Microsoft is considered a decentralized organization that allows its employees the freedom to decide how to get their work done with little oversight and control. [5] It is, however, becoming a company of competing cultures. While working at Microsoft, I have noticed at least four interacting cultures:

1. Employees who believe in the Microsoft vision, and faithfully support Microsoft’s management decisions, no matter what criticism the company attracts.
2. Employees who recognize that Microsoft has problems and would like to see structural changes, including a top management change. [6]
3. Contractors and consultants who don’t really care about Microsoft policies, preferring a steady paycheck. Most outsiders don’t realize that a majority of the day to day work is done by contractors, not employees.
4. H1B workers such as WIPRO employees (an Indian corporation providing software engineers) who are focused on Indian culture and values.

Microsoft has two internal opposing leadership bases represented by 1) Steve Ballmer – president of Microsoft, and 2) Robert Scoble – Microsoft’s product evangelist. These diverging leadership bases highlight the different culture within the company. Recently, Steve Ballmer earned the nickname ‘monkey-boy’ for his wild antics at company rallies, where his extreme acting-out has been known to shock his staff. [7] Ballmer is also known for his famous temper, and is known to scream and yell during meetings. He has been known to throw office equipment, such as chairs, across the room after hearing bad news. Many of his subordinates are actually physically afraid of him. [8 & 9]

Many people turn to Robert Scoble for the inside scoop on what Microsoft is doing, [10] and many employees actually consider him the de facto thought leader of Microsoft. Robert Scoble was a famous Web-log writer (blogger) before joining Microsoft, and had a large following among computer aficionados. He was brought on board to bridge the growing divide between Microsoft and the development (software writers) community.

Product Marketing and Differentiation

Microsoft’s flagship product is the Windows operating system and Office applications, which are widely used and most familiar to consumers. Because the products are so common and the installed base so large, Microsoft is actually competing with itself whenever the company introduces newer products. Part of the challenge is to appeal to customers that see the Microsoft products they currently have as already good enough. Microsoft differentiates its product mainly by upgrading the functionality and user interface of the Windows operating system and by changing options and menus mainly in its Office applications. Although Microsoft is always working to make the programs run more efficiently, most people upgrade simply to obtain a more enjoyable user interface experience.

Microsoft often presents a variety of licensing terms and pricing to the consumer to differentiate the product offerings, especially the business consumer in an effort to get them to upgrade. For example, Microsoft has different versions of its Professional Office Suite offered through a Software Assurance program, as a way for users to gain discounts, incentives and rewards for upgrading to current versions and releases. [11]

For corporate customers, Microsoft uses a sliding scale based on delivering more software performance in a "buying up" strategy, which is standard practice in the software industry. In this model, corporate users must obtain a license for individual users, or ‘desktops,’ where the service agreements are based on the number of licenses purchased. Microsoft also differentiates its server products and enterprise applications based on various configurations, features, and performance. [12]

Marketing Issues – Customer Perception and Innovation

Until the mid-1990’s, Microsoft was widely seen as the "good guy" in the computer software market. This was especially true when the company was new because they provided an inexpensive desktop alternative to expensive mainframe systems. But over time, Microsoft has lost its good guy image. Many pundits in the software industry have renamed Microsoft "the Borg" after the fictional race of aliens in Star Trek. It reflects the perception that Microsoft tends to acquire technology from competitors rather than developing products in-house, as well as to Microsoft's ability to overwhelm its opponents by leveraging vastly superior resources. Microsoft is also frequently accused of using trademark law and patent law to control a technology. Microsoft has also been accused of using propaganda under the appearance of being neutral and unaffiliated in an attempt to spread fear, uncertainty, and doubt about its competitor’s products.

Recently, Microsoft's networking- and Internet-related products have become the subject of intense criticism following several high-profile security lapses. [13] The end result is that many business users are starting to distrust Microsoft with their personal data because of the large number of security bulletins and patches that Microsoft has had to issue for its Windows product lines. Because of its size, Microsoft also inherits general negative feelings that the Web itself is inherently insecure, which affects how users react to Microsoft’s Web development platform (.NET) and applications built using it. [14]
Because of these issues, Microsoft often studies how customers perceive the company. Microsoft realizes that it can run all the ad campaigns and road-shows it likes, but if its users keep having to patch their systems because of security breaches, that's what the user will remember. [15]

Meanwhile, Microsoft is having trouble getting customers, especially enterprises, to upgrade to the most recent versions, including Windows XP, Windows Server 2003, and Office 2003. This is troubling because Microsoft is about to release a new version of it’s operating system and Office applications under the name Vista.

Because of image issues, reputation for inflexible pricing models, and security problems, the market may be ready to move away from Microsoft. If that is true, then Microsoft must rebuild its image, or the product benefits simply won't have the impact that Microsoft seeks. [16] Therefore, Microsoft must address customer perception on three fronts, 1) upgrading current applications, 2) security and 3) competition from open source products, which are available for free over the internet. [17]

Consumers often associate Microsoft with innovation. Although Microsoft lays claim to being an innovator and certainly spends a great amount of money on research, the company is actually known in the industry for its lack of innovation. Instead, Microsoft is known for buying smaller innovative companies and integrating those products and services into the Windows world. [18] Microsoft also has a history of buying competing software companies and then aggressively marketing those ideas and products as their own. When Microsoft does produce something truly innovative, the company struggles with successfully matching the product to the market. For example, the Tablet PC was a great innovation that was never able to catch-on. [19]

Product and Business Lifecycle

Microsoft, like most software development companies, determines the direction of software development depending on the business demands of their users. The software lifecycle includes constant upgrades due to changes in technology and customer demands for new features. In this way a solid business case must be made before software changes are made. Microsoft views a software product’s lifecycle in terms of the number of years the company will continue to support the product in a way that allows the product to function with other supported products, and also in terms of providing customer support for the product. If the installed base is very large (for a given product) and Microsoft wants to eliminate the product or come out with a newer version, then Microsoft simply phases-out its custom support. This is especially the case for legacy products more that 10 years old. If there is sufficient customer demand, especially for enterprise applications, Microsoft will offer custom support packages for these products. [20]

Channels of Distribution and the Distribution Process

There are two basic types or methods that are currently used by Microsoft (and other software manufacturers) to distribute its software products: 1) virtual (downloaded), and 2) physical (CD-ROM or packaged). The advantage of virtual delivery is that it is inexpensive for both the provider and the user. The advantage of physical delivery is that the provider (Microsoft) has more control over who receives a copy. Because software is digital of course, there are no real production costs or inventory issues associated with making copies. Issues related to physical products are evident with CD-ROM production and distribution, but they are minor compared to other industries.

Microsoft uses the following distribution channels [21 & 22]:

1. Internet downloads from the Microsoft Web site
2. Internet ordering of CD-ROM and delivery via shipping
3. OEMs (original equipment manufacturers, like Dell computer, etc.), which provide software that is pre-installed by the manufacturer
4. IAPs (internet access providers), which bundle software with other internet services
5. ISV’s (independent software vendors), which are vendors acting as a third-party on the behalf of Microsoft and other software manufacturers
6. (VARs – Value Added Resellers), which are retail stores providing packages software to the public

Microsoft is concerned with licensing [23] of software as a means to control distribution. Microsoft software licenses generally come with one of two kinds of agreements which specify how the purchaser may use the software. [24] The first kind, most familiar to users, is an End User License Agreement (EULA). If you have ever acquired a license for software from a retailer or purchased a new computer with software already installed, then you have probably seen and accepted the terms of a EULA. The EULA generally either comes in the box (on paper or cardstock) or, more commonly, pops-up onscreen when you install new software. You typically must accept the terms and conditions before the software will install. The second agreement type is termed Product Use Rights (PUR) and is similar to the EULA except that it pertains to software licensed through a Microsoft Volume Licensing program. This licensing program is preferred by large corporate users.

As an end-user, you never actually purchase the software, simply the rights to use it. Under the agreement, a user agrees to use rights only, not the right to resell. Because software can be copied and shared so readily, illegal copying, downloading, and copyright infringement issues are a major problem. Microsoft loses millions of dollars each year due to copies that are obtained without the user purchasing a license. For example, most of the software in Asian markets is illegal (unlicensed) copies of Microsoft software. Peer-to-peer internet networks, which also allow illegal copying, are a major concern to Microsoft. Copying of CD-ROMs is also very common. Therefore digital rights management (DRM) is very important to Microsoft.

When it comes to licensing, corporations are much less of a problem. Microsoft allows corporate customers to configure a server to automatically download software from Microsoft based on a service agreement. This form of distribution allows corporations to keep programs updated and add or remove software as use and licensing needs change.

Microsoft has many business partners who use Microsoft tools to build custom software programs that address both general and specific corporate needs. These custom software packages are often made accessible to Microsoft’s corporate partners through the Microsoft network. When distributing enterprise software, configuration issues can be a roadblock to successful implementation. Installation and support, therefore, become important components and are usually part of the service agreement.

Promotional Mix

Throughout the company’s history, the marketing strategy was driven by product launches or major release cycles. Although the general marketing effort is focused on successful product releases, the marketing message is now organized around an annual “go-to-market’ campaign [25], which aligns the message that is communicated from the different product groups, with Microsoft’s general business goals. Using this strategy a GTM can be subdivided into other specific or related GTMs. GTMs are usually designed to be broad in scope, so that sub-GTMs can then be designed to fit a specific vertical market. Microsoft also depends on partners and third-party providers to help with the sales and management of the GTMs. GTMs are owned by the particular product group heading the product launch.

The components of the GTM are:

1. A broad advertising campaign targeting a specific audience to raise awareness of the specific product and its benefits
2. Specific marketing aimed at target customers who have an expressed interest in the solution
3. Training and consulting offered to the target audience, especially if the product requires pre-deployment activities, such as solutions that are implemented within a large IT organization
4. Targeted project guides and documentation prepared for clients who have previously committed to deploying Microsoft products exclusively, to ensure that projects can be budgeted correctly, and that the possibility of a bad experience is greatly minimized
5. Special promotions and incentives such as upgrade opportunities and rebates for certain products

Using the Go-To-Market framework, each business unit addresses a unique market and designs its promotional mix accordingly.
Microsoft's own broad promotional message is: "Your potential, our passion,” which is designed to promote the mission of: "unleashing the potential in every person, family, and business, not just to unlock the potential of today's new technologies." This idea of bring dreams and passions to life using Microsoft products is explored through both TV [26] and print [27]. The 2004-5 campaign featured six major TV spots, and eight print advertisements, each delivering a targeted message toward a broad audience. As Microsoft prepares for the release of its latest operating system and upgrade to its Office suite, the company is planning a massive ad campaign that will run for 15 months throughout 11 countries. [28]

Advertising and Promotion Issues

Microsoft is often criticized for misleading advertising. For example, Microsoft has been accused of spreading false rumors about its competitors such as Linux by releasing press statements quoting studies that show how superior the Windows operating system is to Linux when in fact no studies actually existed. Microsoft has been accused of funding studies that are designed to ‘prove’ false claims. A classic example of misleading advertising occurred in 1999. With the Y2K problem looming, Microsoft urged email users to switch to MS Mail because the competitor, Lotus, was not Y2K compliant (which was not true). Those who switched to MS Mail then discovered that MS Mail was in fact not compliant and had to upgrade to MS Exchange. [29]

Because of these deceptive practices, Microsoft has lost a great deal of credibility among many in the software development community. To combat this issue, Microsoft has recently encouraged its employees to blog [30] about how and why Microsoft cares deeply about the software development community. Last year, (2004) Microsoft even hired Robert Scoble, a blogger with a huge following among the technical astute, to evangelize Microsoft’s position on issues in an attempt to win back the trust of the developer community. Mr. Scoble’s role is to converse with the technically-minded public to show that Microsoft wants to listen and collect feedback on a variety of issues. Mr. Scoble is free to explore the issues as he sees them, and so far it has met with good success.
Microsoft is always looking for ways to leverage the internet to get its message out. A good example is the Microsoft Press Pass Web site [31], which is constantly updated with company and product information, including FAQs (frequently asked questions), interviews, discussions, and demonstrations.

Pricing Strategies

Consumers don't really know how to judge the value of software. Therefore, the price of software, which has very little to do with the actual cost of production, is based on its perceived value. Microsoft has created a whole science to software pricing, and actually has a Pricing Group which monitors and evaluates the pricing of all software. Unfortunately for the industry as a whole, Microsoft has been accused of using pricing to stifle competition and increase its monopoly.

Microsoft has always used cleaver pricing tactics. When Bill Gates first modified and marketed DOS, Microsoft’s original operating system, he sold it for $5 to establish market share, then increased the price over time to $25 as competition faded. When a competitor arose, Microsoft quickly dropped the price again. In the 1980's a competitive market for operating systems developed and prices were falling by about 8% a year. But when Microsoft finally gained a monopoly in the 90's, prices started rising by about 13% a year. Microsoft has also used a 'bundling' strategy coupled with predatory pricing to get equipment manufacturers to not use competing products. This predatory pricing practice has gotten Microsoft in trouble with the Department of Justice more than once. [32]

Microsoft also uses differential pricing depending on the country it is selling into. Differential pricing may benefit Microsoft but it does so at the cost of worsening the competitive situation of Microsoft's U.S. customers who pay much more for the same software. [33] Microsoft often gains a huge pricing advantage because users tend to view Microsoft as the default standard for software, making Microsoft products the default choice. By dominating the market, Microsoft can set prices much easier then competition. Because their installed base is so large, consumers also view them as the "safe" choice. This view is propagated in the corporate world due to Microsoft’s software integration with other corporate software systems. A final important factor is the time that must be invested in learning how software products operate. People would need a good reason to take the time to learn a different system. Microsoft has other pricing advantages such as their ability to distribute development costs over so many more customers, coupled with the fact that they also have a huge global marketing machine.

Competitor’s Pricing Strategy and Revenue Model

Microsoft has virtually no competition in the desktop operating system and desktop applications space. However a new form of competition is gaining ground and it is based on a concept called ‘Web as Platform,’ also called Web 2.0. The movement’s leading company is Google. Google and other similar or emerging companies have, so far, not competed directly with Microsoft for a share of the desktop market, and they probably never will. Instead, these Web-based companies are leveraging emerging technologies that undermine the need for a desktop solution. In the Web 2.0 scenario, the Internet itself becomes a giant operating system. Based on the open standards of the internet, a company is free to use this platform to develop applications that build upon previous applications, known as Web services, which pundits claim will have a snowball effect.

Web services also use a completely different revenue and pricing model. Although no clear revenue model has yet emerged some of these models include a fee for service such as monthly fee, usage fee, or subscription fees. The best revenue model is the directed advertising model pioneered by Google. This pricing model is based on the number of visitors that access a specific sponsored link to an advertisement or Web site, and which can be targeted to a specific audience. This model allows a company to give away the actual service and charge advertisers instead of the product users. The paying customers become the advertisers not the service or software users. Because these models are still in their infancy, Microsoft doesn’t have to worry yet. The Linux operating system however, which is developed by a worldwide body of independent software contributors and given away for free, and which is the preferred operating system of the internet, is causing Microsoft to really worry. Microsoft hasn’t developed a pricing model to compete with free software, so the company responds by trying to convince potential Linux users that the Windows operating system is superior, but unfortunately Microsoft seems to be losing this battle.

Emerging Business Models

Three distinct internet-based business models [34] have emerged that represent both challenges and opportunities for Microsoft:

1) Connectivity providers – companies that connect people and businesses to the internet, such as internet service providers (ISPs)
2) Applications providers – companies that provide Web utilities or Web services (search, advertising, and e-commerce)
3) Content providers – companies that provide information or information services

In the 1990s, AOL Time Warner was the only company that tried to provide all three services, and its model failed. So far, successful companies have moved back to providing one business model. However, the latest trend is toward again becoming a hybrid. For example it appears that:

• Google and eBay are focusing on both infrastructure and applications
• Yahoo and News Corp. are focusing on applications and content
• Cable operators, wireless providers, and Telcos are moving toward infrastructure and content
• Apple and Sony are focused on devices and content

Where does that leave Microsoft? Because the internet is still in its infancy, Microsoft has had to expend little effort to respond to these market dynamics until very recently. But Microsoft, because of its size, power, and resources, is actually in a position to provide any combination of these services.

Strategic Issues Caused by Emerging Technologies

Emerging and changing technologies are also pressuring business models to change rapidly as companies begin to view themselves as potential competitors in new markets; examples include:

• Google has recently announced that it is willing to provide free WiFi access to all of San Francisco, with other cities to follow. This free service would ruin the business model of internet service providers (ISPs) currently serving the region.
• eBay has recently acquired Skype, an internet-based (free) “phone” service, putting it directly in competition with wireless and telephone providers.
• The major Telco’s are putting together a multi-channel video service to compete with cable operators.

These companies, although they have conceded the desktop to Microsoft, no longer fear Microsoft in these profitable new sectors, and their aggressive moves show that they are willing to take big risks to gain market share.

Microsoft has long worried that the Web itself would become a platform for both software use and related services that negate the need for users to obtain their own personal copies of software. This Web model would ruin the ‘cash-cow’ that Microsoft has long depended on. In the worst-case scenario for Microsoft, the internet itself becomes a software development platform and the need for the Windows operating system vanishes. Even though Microsoft knew that this scenario was possible, it still chose to move forward with its next generation of Windows applications instead of repurposing itself for a transition to the Web. Microsoft still seems to be waiting for a clear strategy to emerge, but the consequences are that it has allowed competitors such as Google, eBay, Yahoo, Apple and others, to gain a strong foothold in emerging markets. In a sense, Microsoft has missed this next wave of innovation, and will now be forced to play catch-up.

Microsoft’s new rivals have also found a different and perhaps a better way to bring software solutions to market, by developing software that inter-connects with other components quickly using open standards. This is the opposite of how Microsoft develops its software. For example, the Windows operating system is now challenged by a world-wide community of developers who donate their time to enhance the Linux operating system, which is freely available. Google, Yahoo, EBay, Apple and others are building platforms that rely on the connectivity of the internet to provide user solutions, and this environment is now preferred by third-party software developers. Microsoft is rightly worried. [35]

Microsoft seems to be faced with a classic innovator's dilemma. Over time Windows has grown bigger, more complicated, and harder to update. To make the situation even worse, nearly all of Microsoft's Web technology development is tied to the Windows platform. So far, Microsoft hasn’t been hurt financially. From fiscal 1997 to the end of fiscal 2005, annual revenues have grown from $11.36 billion to $39.79 billion, and net income has nearly tripled to $12.25 billion annually. But will the burden of success blind Microsoft to the next generation of technology?

Final Recommendation

Microsoft should break itself apart, and split into three separate companies. This would dramatically give the stockholders a new shot at fabulous stock growth, something the company has not seen in recent years. Each company could get back to lean and mean. Another advantage would be that Microsoft would not be under constant oversight by the Justice Department. Yet another advantage would be that both users and developers would view the separate companies in a new light. Each new company would be free to innovate and move forward at a faster pace to meet their new competitors.

According to John Dvorak, this is how it should happen. [36]

1) The Windows part of the company would retain the name Microsoft and own Windows XP, Vista and anything related to operating systems, including the new mobile and embedded OS space
2) The Office suite and all the applications would be spun off into a new corporation with a new name
3) The third company would be focused on the Xbox, including games and hardware

Conclusion

Consider the fact that 15 years ago you could not see pictures on the Web; that ten years ago you could not listen to speech or music on the Web; and that five years ago you could not automatically post and respond using a browser. Today you can do all those things and more. Like a changing tide, things are quickly migrating to the Web. Today, people seem to be using their desktop to create content, and their browsers to consume and share content. Also today, there are some applications that make sense as being internet-based, but many applications still don't fit the internet model. The trend, however, is that soon all applications may be integrated with the internet. Consider also that in between the two worlds of desktop and internet lay a whole new emerging market in mobile computing devices (cell phones, PDAs, etc.) which are quickly changing the habits of how people use both the internet and view the desktop. The internet is dramatically reshaping how we as consumers view and use software and computers and is no doubt changing the market dynamics related to how we will view desktop software produced by Microsoft. Even if the web is the future of software, Microsoft will no doubt be part of that change.

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36/ John Dvorak, "Microsoft: Prelude to breakup?" MarketWatch, Sept. 2005, <http://www.marketwatch.com/news/story.asp?guid=%7B4AA02389-CC09-40A2-B9D0-A6E3C27BFC9A%7D&siteid=mktw&dist=>

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