Quo vadis, Microsoft?

Although, there is a lot of resentment among PC users about Microsoft, I am not going to comment on emotions, but rather will stick to facts and general trends. You can argue about Microsoft’s internal innovation capabilities and its sometimes controversial contributions to the shape of the IT industry. However, nowadays, Microsoft is without doubt the biggest player in the IT industry at least based on the market capitalization (see figure 1). At the same time, its arch rivals Apple and Google are getting closer with their business models more relying on Internet (in case of Google totally relying on Internet).

Figure 1

Microsoft’s obligatory SEC filling 10K reveals information about current revenue streams. The cash cow product is Office together with Enterprise Resource Planning system Dynamics (former Navision). Expectantly, second place with 25% share in revenues assumes Windows, followed by server software like Windows Server and Microsoft SQL Server. Then come so called “hungry dogs” represented by two groups. First, entertainment services with Xbox, Zune, and Windows Mobile and second “hungry underdog” On-Line Services with 5% revenue share (mainly coming from Microsoft’s Advertisement product). See figure 2 for graphical expression.

Figure 2

To expand on the On-Line services subject, where Google was able to generate $23.65 bil. of revenue with gross profit $14.86 bil., Microsoft generated only $3.09 bil. with operating loss $2.25 bil.! I would call this a strategic gap.

Apart from competition, Microsoft creates troubles for itself on its own. The most significant example is its operating system Windows Vista, which did not persuade corporate customers to switch from reliable and proven Windows XP. As a remedy for that, Microsoft had to launch new re-vamped operating system Windows 7 ahead of product roadmap followed by massive advertisement campaign. To add to the problems, Microsoft’s mobile devices platform shrink its market share to 7% in 2009 (see Figure 3).

Figure 3

What is going to be Microsoft’s reaction? Well, Microsoft always pursued strategy identifying the best technology or product at the market and than either purchase or replicate it. We have been noticing executing this strategy recently as Microsoft started replicating Google products like:

· Google Search vs. Bing

· Google Maps vs. Bing Maps

· Google Docs vs. Microsoft Office 2010 On Line

· Gmail vs. re-vamped Hotmail

· Google Sites vs. Microsoft Live Groups

Most importantly, Microsoft announced Google’s main technological pillar cloud computing as its cornerstone strategy for the near future.

On top of that, Microsoft is aware of rising importance of mobile internet. Recently, unusual news has been released that Microsoft, company which in the past refrained from engineering its own computer or mobile hardware, launched its own branded mobile phones KIN ONE and KIN TWO with totally re-vamped Windows Mobile 7. Moreover, Microsoft’s management felt a need for such a radical change that due to almost complete re-design of the operating system, majority of applications designed for previous version of Windows, will not work on Windows Mobile 7.

Steve Ballmer’s vision of Microsoft product mix from the CEO Summit 2010 is on Figure 4.

Figure 4

In conclusion, I believe that Microsoft could stay at the top of the industry at least for next two or three years, provided that it will shift its core products like Windows and Office even more into on-line services without the hassle of deploying additional technologies (e.g. Sharepoint Server for collaboration). This can be achieved by further moving to the cloud, which could overtake part of the IT infrastructure used today in corporate sector. Firms will definitely welcome low frill collaboration services and decrease maintenance costs. In the retail segment, imitating Google approach seems to be a good strategy. Also, Windows 7 was a genial way out of the “Vista” problem with additional cash from unhappy Vista customers. Now the stakes are on the Windows Phone, whether it can compete with Apple, Android, RIM and Symbian. Generally speaking, this year we will keep hearing about Microsoft.