Wednesday, February 18, 2009

Microsoft's 10 Unlucky Breaks

Microsoft has had many lucky breaks over the years. The company's rise through the 1980s and 1990s is really a series of lucky breaks combined with business savvy and execution on the vision of one PC on every desk.

More recently, Microsoft hasn't been so lucky. Since the mid-1990s, the company has stumbled a few times and been unlucky even more often. Recent unluckiness is so great, I had a really hard time whittling down this list to just 10 items. I consulted the independent analysts at Directions on Microsoft for their advice; these guys have followed Microsoft since 1992, and some of the analysts are former employees.

The list is by no means comprehensive, and to some people may seem somewhat arbitrary. Well, yeah, there were just so many unlucky breaks to choose from. My list is unlucky breaks with monumental impact on the company—past, present and future. I encourage you to offer your own list of unlucky breaks in the comments or by e-mail.

Microsoft's unlucky breaks are in order of descending importance, with No. 1 being most significant and No. 10 the least.

10. Windows XP launch. The shocking Sept. 11, 2001, terrorist attacks against the United States affected Microsoft in a quite unexpected way. The company had already planned a late October launch of Windows XP in, of all places, New York. The timing and venue meant that Microsoft had to do a subdued launch event. How could Microsoft get all rah-rah about Windows XP with the American psyche still in state of shock?

Not only the launch event, Windows XP marketing was somewhat subdued, too. As the true inheritor of the Windows 95 legacy—a Microsoft operating system for businesses and consumers—Windows XP should have launched with blow-out marketing.

9. Stock doldrums. Microsoft's share price peaked at around $58 in December 1999, and it has not gone much of anywhere since. A year later, share price fell to around $21. There were a few rises—$36.50 (June 2001) and $36.81 (October 2007)—but generally shares have traded below $30. Microsoft shares closed at $19.26 yesterday.

Meanwhile, some competitors have profited nicely. Apple shares rose from about $7 in April 2003 to around $190 in Oct. 2007. Following some turbulence, Apple shares pushed back up to around $174 in August 2008, before beginning a steep decline tracking the global economic crisis. Shares closed at $99.27 yesterday. Google is another example. Shares rose from about $100 in August 2004 to a more than $740 peak in November 2007. The global economic crisis plowed Google shares, which fell to less than $250 a year later. Google closed at $363.05 yesterday.

Microsoft isn't alone in the stock price doldrums. Oracle, Novell, Sun and many other software companies have seen shares decline or seemingly go nowhere up during the 2000s. For Microsoft, the share price leads to negative perceptions about the company's value and future growth capabilities. I'm not an investor, and won't be as long as my profession is journalism. But if I invested, Microsoft wouldn't seem all that attractive, which really is strange. Microsoft sells products that most people use. A company with such reach and consistently increasing revenues and profits should be valuable to investors. There's a perception that Microsoft isn't a growth company, so the shares go nowhere. It's bad luck.

8. Passing on YouTube. In October 2006, Google announced the acquisition of YouTube for $1.6 billion. Six months earlier, Microsoft CEO Steve Ballmer passed on buying the video startup for about $500 million. He chose to build rather than buy. Microsoft built MSN Soapbox, which has gone nowhere. Meanwhile, YouTube has led to an explosion in online video content and consumption.

In December, U.S. Internet users viewed more than 14 billion videos, according to ComScore. Google's share of videos watched was 41 percent, compared with 1.7 percent for Microsoft. YouTube accounted for 99 percent of the videos watched at Google sites. About 150 million Americans watched videos online in December for an average of 96 per viewer. Google had more than 100 million unique viewers, with an average of 59 videos per viewers. By comparison, Microsoft had 29.5 million viewers, with an average of 8.4 per viewer.

Something else: If ComScore ranked YouTube as a search engine, the video sharing site would be No. 2, ahead of Yahoo. If ComScore tracked Google and YouTube as a single entity, the video sharing site would account for one-quarter of searches.

I debated about putting this one on the list. Was it an unlucky break or sheer stupidity that Microsoft let YouTube get away? Whichever, YouTube's popularity is explosive at the right time—when more people are watching videos online and not just from PCs. They're using mobile phones, too. Maybe it was bad luck. Steve had indigestion, and it led to a bad decision.

7. Linus Torvalds develops Linux. Linus didn't set out to popularize the free software moment, but that's the eventual outcome of his developing the Linux kernel in 1991. Linus would later publish Linux under a GNU Public License, whose origins date back to the mid-1980s and free-software activist Richard Stallman.

Microsoft co-founder Bill Gates took a stance against free software in his "An Open Letter to Hobbyists," published in the Feb. 3, 1976, Homebrew Computer Club Newsletter. The letter admonished other software developers for reusing code created by others and laid intellectual property concepts Microsoft would later adopt. Linus' work was bad luck for Bill.

Open-source software consistently causes sales problems for Microsoft. The problem is bigger than customers switching to Linux. Customers threatening to switch may get extra discounts, which is still lost revenue to Microsoft. Linux's success, while arguably limited compared with Windows, anchors the open-source movement and energizes the fervent anti-Microsoft community. Open-source gains in Europe foster anti-Microsoft sentiments there and almost certainly have contributed to ongoing antitrust problems on the Continent.

6. Apple's May and October surprises. The year 2001 should have been great for Microsoft, with the release of new Office and Windows versions. But the year was greater for Apple, which through three seemingly small events kicked off pebbles that later set off an avalanche.

In March, Apple released Mac OS X and again in September with the 10.1 upgrade. In May, the first two Apple retail stores opened in California and Virginia. In October, the first iPod shipped. From these three 2001 happenings, Apple's brand and market share revival started small before reaching a crescendo in 2007 and 2008.

Mac OS X proved to be a rock-solid competitor to Windows XP and, later, Vista. Apple offered XP-wary PC users something different and with lower malware risk. The retail stores exposed Apple products and brand to millions more people than had ever seen them in places like Circuit City or CompUSA. The stores also promoted a Mac lifestyle. Apple Store Genius Bars also offered an important point of customer technical support and satisfaction.

The iPod would derail Microsoft's Windows Media strategy. The company had banked on Windows Media DRM and media streaming capabilities built into Windows Server to woo content providers. But the iPod didn't support Windows Media, which would come to matter two-and-a-half years later when device sales greatly increased, along with those from the iTunes Store. It would be Apple, and not Microsoft, that would come to be the biggest distributor of DRM content.

Folklore has it that bad luck comes in threes.

5. Windows Vista. If there were a blueprint for product development disaster, Windows Vista would be it. The operating system seems to have been jinxed with bad luck from the very start:

  • Microsoft made big feature promises, including the ill-fated WinFS, that couldn't be kept.
  • The Vista project, then called Longhorn, ran aground in 2004. Developers started from scratch with Windows Server source code.
  • Repeated delays led to disaster: Microsoft missed Christmas 2006. Vista shipped in late January 2007.
  • Vista proved to be incompatible with enterprise software and demanded newer hardware to run. Oh, yeah, many drivers weren't supported either.
  • Microsoft targeted Vista for high-powered systems, but many users bought less powerful notebooks as the market shifted from desktops. Vista demanded too much from many notebooks and netbooks.
  • Reviewers panned the operating system, and businesses shunned it. Enterprise Vista adoption was a mere 10 percent at the end of 2008.

No Microsoft competitor could have launched an anti-marketing campaign as effective as Windows Vista. The operating system damaged Microsoft's brand and the company's credibility with customers, particularly businesses.

4. The Google economy. Google's success isn't its oft-hyped search algorithm, but how the company succeeded at the search advertising business pioneered by Overture. Finally, somebody figured out how to generate real revenue from the Web.

Google's platform is characteristically like Windows. There are APIs, developers and third parties profiting from the platform. It's bad luck that Google is so much more than a search engine.

Like Microsoft undercut competitors such as IBM in the 1980s and 1990s, so Google is doing to Microsoft. Microsoft could effectively bundle and integrate technologies into Windows because the company and its partners made money from the platform. Similarly, Google can give away technologies Microsoft must charge for. Advertising from Google's platform subsidizes the products and services. Google is a threat to Microsoft because it's a true platform competitor.

Google's platform is expanding, by way of the Android mobile OS and the Chrome browser. The time is quickly coming when Google will directly compete with Windows—it's already happening on mobile phones. Why not netbooks?

3. September 2008 economic crisis. During earnings announced in late October, Microsoft executives warned of a major dip in software sales, starting in mid-September. When Microsoft next announced earnings, the news was grimmer: Sales collapsed in December. The situation had become so unpredictable that Microsoft offered no revenue or operating income forecasts for the remainder of fiscal 2009, ending on June 30. Already, Windows revenues were down 8 percent year over year during Microsoft's fiscal second quarter; profits fell by 13 percent.

Global economic gloom is bad luck for pretty much everybody. But Microsoft has unique exposure. Annuity licensing contracts soften the blow because of billions of dollars of unearned revenue that Microsoft can amortize over time. That said, Microsoft is in a unique position of misery. Among various companies, cutbacks here, layoffs there, bankruptcies elsewhere will have limited impact on technology and other suppliers. Microsoft's products are used everywhere, so the potential sales harm is greater.

Whenever companies close, cut back or lay off, Microsoft loses something. In the past 13 months, the U.S. economy has shed 3.6 million jobs. With many of those jobs go people who had used Microsoft software. Because of Microsoft's cross-product integration strategy, each worker represents much either now or in future sales. One worker might represent licenses for Windows Vista Enterprise, Office Enterprise and Dynamics CRM, and client-access licenses for BizTalk Server, Communications Server Excel services, Exchange Server, SharePoint Server and Windows Server. Microsoft's good luck when businesses were buying is looking like really bad luck when they're not.

2. The United States vs. Microsoft. The May 1998 antitrust case left deep scars on Microsoft, and forever damaged the company's image. Microsoft carries the stigma of convicted monopolist. During the trial, government prosecutors played video depositions of a testy Bill Gates rocking back and forth. The depositions weren't taken to be shown in court, but the presiding judge allowed them there.

The judge broke his ruling into two parts, released in November 1999 and April 2000. He found that Microsoft had committed about 20 antitrust violations, and he ordered that the company be broken up into two separate entities. Microsoft would later avoid breakup, but a remedy trial kept the case alive and in the news until November 2002. Bad luck: U.S. government oversight of Microsoft was extended two years from November 2007.

The U.S. antitrust case led to more than 100 other lawsuits, most of which Microsoft settled. Dissatisfaction with the outcome here spurred on competitors and antitrust investigators in Europe. In March 2004, the European Union's Competition Commission found that Microsoft violated local antitrust laws. An appeals court would later agree. Since the ruling, the European Competition has fined Microsoft and launched two other antitrust investigations.

The damage to Microsoft is simply incalculable.

1. World Wide Web. It was bad luck that Microsoft executives were looking the wrong way when:

  • Tim Berners-Lee created the first Web server in 1990.
  • University of Illinois students developed the Mosaic browser in 1992.
  • Netscape released the first commercial Web browser in 1994.

Tim developed the World Wide Web using open or accepted standards outside of Microsoft's control. The Web shifted informational, software developmental and computing relevance away from Windows computers to Web browsers and servers. Tim's work caught Microsoft unprepared.

IBM dominated information during the mainframe era. Microsoft claimed informational dominance during the PC era, particularly through proprietary, binary file formats. The Web is Microsoft's big problem, and it's growing larger as Google and other Web platform companies exercise more control over information. The promise to end users: informational access anytime, anywhere and on anything. No Windows required.

Bill Gates fairly accurately defined Microsoft's problem in the May 1995 "Internet Tidal Wave" letter. It's a blueprint for how Microsoft should have fought back against the informational liberation started by Tim Berners-Lee. The letter is also a blueprint for how companies like Google can more effectively compete with Microsoft.

Microsoft can't put the Internet genie back in its bottle. Too alluring is the promise of anytime, anywhere informational access on any device, with no Windows required. Microsoft continues to fight for control, trying to pull informational relevance back to the desktop through products like Office System and SharePoint Server. Microsoft can't succeed. The mobile phone and Web browser is the killer combination that will eventually undo Microsoft's desktop hegemony. What bad luck.

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