Monday, May 16, 2005

Microsoft Besieged

Is Microsoft besieged and going the IBM way? Has it lost its focus and spread itself too thin? Has its business model become obsolete due to the new ‘open source’ paradigm to which it does not subscribe? Has it become a stodgy bureaucratic company that is unable to innovate? These are some of the questions, which this article will try to analyze.
Microsoft owes its tremendous success due to its flagship Windows OS which became the de-facto standard on desktop PC’s. This product coupled with the explosion of PC usage at the office and home added to their success. Along with their Office Suite of applications, Microsoft has dominated the market in the OS and software segment in the PC market. New products like MS Mail and RAD Client Server programming languages (Visual Basic) and databases (SQL Server) further helped them consolidate their market share.
Microsoft was not the first on the browser market, Netscape was. However in a few years Microsoft’s IE came to dominate PC browsers. Allegations of unfair competition and anticompetitive practices were leveled against Microsoft but the company succeeded in carrying the day. However this did blemish the company’s reputation especially in regards to their business practices.
Today Microsoft is perceived by some as a massive behemoth ($36 Bn in Sales, $8.2 Bn in profit and a staff of 57,000 (2004-BBC figures). It is facing the challenges of a large corporation, changes in technology and leaner aggressive competitors. Is Microsoft capable of assuring it’s future dominance or will it falter? A study of the issues facing Microsoft will aid us in our analysis.
Microsoft’s OS has faced numerous virus attacks and is perceived to have serious potential security flaws. It is extremely important for Microsoft to prove that it can create a secure OS. If they do not succeed, PC users will have a strong reason to migrate to another OS. One of the biggest challenges facing Microsoft is the new ‘open source’ paradigm. The Linux OS is based on this model. The model allows the source code of the OS to be shared, developed and improved upon (by any OS developer) and is not proprietary. Linux is perceived to be quite secure, easily customized and most importantly FREE to download and use. Linux has eaten rapidly into Microsoft’s share of the OS market. Also China, Japan and South Korea are exploring the option of developing an Asian version of Linux, which, if it occurs will be a serious setback to Microsoft. A new ‘open source’ browser Firefox has eaten into Microsoft’s IE browser and is showing explosive growth. Many of the features expected in Microsoft’s next OS ‘Longhorn’ are already available in the market while the actual release date of Longhorn is more that 1 ½ years away (at the earliest). In the multimedia market, Apple’s iPod and iTunes have dominated the market with Microsoft not having any comparable product. Clearly Microsoft is not able to innovate fast enough. Adding to Microsoft’s woes are regulatory and legal issues still being faced by the company.
Of course to preserve its dominance Microsoft has come up with multiple strategies. It is concentrating on improving security in its OS and is billing ‘Longhorn’ to be immune to security attacks. It is following an interesting strategy of trying to dominate multiple segments of the IT market. It is targeting the home ‘Living Room’ by making its ‘Media Centre Software’ a part of. home audio-video entertainment systems. It’s ‘X-Box’ product is targeted at the huge software gaming market. It is negotiating with Nokia to enter into a long-term contract for providing mobile software for Nokia’s phones and seeks to create a space for itself in the mobile software market. It believes cell-phone like devices will dominate the mobile market and will challenge products like iPod. In regards to Linux, Microsoft believes that it is at least ten years from being a consumer product. As far as open source is concerned, it is our view that this model cannot be a serious threat as it will not be interoperable with other software and that open source and secure software are oxy-morons!!
Microsoft has based its strategy on its vision of ‘Convergence’. It believes that software will be user centric, a digital nervous system, and that it is shaping this system. To gain dominance in this future environment it is seeking to establish a leading presence in the key future components of this system. While the vision is grand and the strategy all encompassing and has its merits, there are multiple pitfalls that Microsoft may face. We will briefly attempt to play devil’s advocate to their strategy.
Microsoft is discounting the ‘open source’ model as it has no real answer to this. This model does have benefits. It is innovative, customizable and FREE. It is unwise to discount it and we believe that Microsoft should examine sharing its source code openly. Microsoft has played a clever strategy of sowing doubt in regards to the security of an open source model. They may have a point there. One of the things that strike us is that Microsoft is not a pioneer or leader in any field. It has still not come up with a flawless OS and is not gaining required efficiencies from its learning curve. It is spreading itself thin over multiple areas (mobile, home-entertainment and gaming). Does it really have the core competencies to succeed in these areas? It seems that gaming is more about content than hardware/OS. The hardware/OS should be ubiquitous. What is to stop a cell phone company from writing its own code for mobile devices? Why is it so important to follow the Microsoft standard? Microsoft has done a very good job of managing competition based on its financial strength and monopoly in the past. Is this really sustainable if it does not excel in anything? Is this a sustainable strategy?
I guess time will tell. We are in for an interesting decade ahead!!

Daniel Chi, Arun Mohanchandra, Arvind Ramanathan

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