Analysis of IT news

Tuesday, June 27, 2006

Case Study: What markets can Microsoft conquer?

With Bill Gates preparing his exit from Microsoft, let's have a look where the giant can go, and what markets it can conquer.

Microsoft has an impressive track record of capturing markets and kicking out incumbent giants: IBM (the PC), Lotus (spreadsheet), Wordperfect (word processor), Novell (network operating system), Netscape (Web browser), Palm (PDA).

On some markets, Microsoft hasn't gained supremacy yet, but the incumbent giants aren't in a great situation either: AOL (Internet portal), Sony (videogame console).

In some markets finally, the incumbent giants are still the undisputed #1: Google (search engine) and Apple (online music store and MP3 player).

So far, not once has Microsoft lost a market after it has conquered it. It doesn't mean however that any new victory is a major step forward for Redmond. A majority of its divisions are indeed losing money. But its policy has always been to invest in every pot to make sure to pick the winning one. That's how, in the early PC days, Microsoft was selling MS-DOS while at the same time co-developing OS/2 with IBM, developing Windows on its own, and owning licencing rights to a Unix for PCs.

Now, let's have a look at the various markets Microsoft is interested in:
  • The Web: the jury is still out there, as Google represents a very strong competition. It is however worthy to note that winning the Web browser war was an empty victory for Microsoft. The main purpose of Internet Explorer was indeed to control Web standards to tie the Web to Windows. This hasn't happened despite Internet Explorer's huge market share. So here Redmond has spent billions on a product which hasn't brought them any revenue and weakened Windows security. Worse, it could have cost Microsoft big if the Department of Justice had won its antitrust lawsuit.
  • The PC (client side): Microsoft two main cash cows are the operating system and the office suite. The big risk for those two markets is commoditization, as it's getting harder and harder to convince customers to upgrade. This is why Microsoft is trying to push for a rental model, where customers pay a monthly fee (you stop paying? your computer doesn't boot). Now, individual customers and corporate customers have different needs so will behave differently.
    • Individual customers: these are so over-served that there is a significant risk of a disruptive innovation slowly gnawing away this market from Windows. There might indeed come a time where an Internet appliance might be good enough for a lot of people. When that time comes, customers with small needs who are sick of all the problems with Windows will be tempted to switch.
    • Corporate customers: this is probably Microsoft strongest market, with no sign of change anywhere in sight. Windows, MS-Office and Outlook are here to stay on the corporate PCs. Whether corporations will upgrade as fast as Microsoft want is another story. The only thorn on Microsoft's side would be Linux. Not because it represents some real competition, but because it has forced Redmond to sweeten its deals with some large customers.
  • The PC (server side): Microsoft has been riding the PC wave on the server side, steadily gaining some market share at the expense of the Unix manufacturers (Sun's future isn't to bright). Icing on the cake, this is a market with wider margins than the client side. The main threat here is Linux as it is riding on the same wave as Microsoft: more and more powerful PCs.
  • The PDA: the market hasn't been that hot these last few years, but who knows? Maybe one day PDAs will be powerful enough so that road warriors prefer using them exclusively rather than carrying a laptop around.
  • The embedded market: Microsoft tries real hard to be into any consumer electronics device. Cell phones, MP3 players, video games, etc. Redmond is here trying to get a foothold in our living rooms. Once again, the jury is out there to determine whether Redmond will be successful.
Microsoft has several assets to win those markets: it has very deep pockets, it is ready to lose a lot of money if need be for a long term win (e.g. the Xbox), and it knows how to work with partners to enforce its products (e.g. the PC or PDA markets). However, it now has so many fronts that it can lose its focus. For instance, Bill Gates acknowledged that the focus on Internet Exporer made Redmond forget about the rise of Google.


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