The beginning of the end of Microsoft

The Thinker by Rodin

It did not make many news reports, but on May 22nd something remarkable happened. Apple Inc. became worth more than Microsoft. The worth of Apple shares totaled $222.12 billion. Microsoft shares totaled $219.88 billion.

Why is this so important? Clearly for as long as most people can remember, Microsoft’s value out shown Apple’s by many order of magnitudes. Also, Microsoft technology is pervasive. You really have to look hard to find a business that does not have its information technology centered on Microsoft. In spite of this, and Apple being hardly seen in the business world, Apple is worth more.

How can this be when Microsoft Windows is on ninety percent of desktop computers, and its pricey Microsoft Office software is the de-facto business-standard? The answer appears to be that Microsoft has peaked. Its products are lackluster and generally boring. Apple on the other hand is now a brand with sparkle. Its iPhone, for example, is the pricey but niftiest smartphone on the market. Its newest product, the iPad, which left me unimpressed, is being snapped up across the world. Apple always had a reputation for having cool products. Particularly since the iPhone was released, Apple now has a product that is no longer niche but widely used by people at all income levels. Even if AT&T’s service leaves something to be desired, people marvel at the cleverness and usefulness of the pervasive iPhone, and take that as a sign that other Apple products are the same way. When the time comes to upgrade home computers, many are now happily paying premium prices for the Mac.

Microsoft’s strength has hitherto been playing copycat and offering similar but not as great products with the official Windows seal on them. Its Windows operating system began as a blatant rip off of Apple’s graphical user interface. I have to think hard to find any Microsoft product that is truly innovative. Its Microsoft Office suite is not. It’s success, like Internet Explorer, was due largely to its ability to bundle it with its Windows product. Why should a company buy Lotus 1-2-3 separately when they could get Microsoft Office preinstalled with their PCs? If I had to pick an innovative Microsoft product, I would pick its Xbox gaming console. Even there, Microsoft was hardly first in the game box market.

Microsoft remains a very profitable company, but reading its tealeaves should be making Wall Street reach for the Pepto Bismol. With the introduction of Windows 7, revenues are up substantially this year as businesses refresh their Windows operating systems. Yet, like most of their operating system upgrades, they did not get it right until they went through an unsuccessful introduction of another Window version, Windows Vista. Much of Microsoft’s revenue stream comes from customers paying premium prices for just so-so products: Microsoft Windows and Microsoft Office. However, both of these products have serious long-term viability issues.

Although Windows 7 is being well received, it is unclear whether ten years from now we will still want Windows at all as a desktop operating system. After all, Windows is proprietary. Open source operating systems have been available for a long time, and certain desktop Linux variations are entirely free. These have not caught on, but the Google Chrome OS might, once it is formally introduced this year. Particularly on lower end machines like cheap laptops and netbooks, computer manufacturers are going to find the combination of the free cost of Google Chrome OS along with its rapid boot up and swift loading time to be compelling reasons to use the operating system. If nothing else, a model with Chrome OS will cost less than the same model with Windows on it. Microsoft may find itself discounting the price of Windows, or maybe even making it an open source product so it does not lose too much market share. In either case, the profitable and reliable Windows OS revenue stream looks precarious.

On the Microsoft Office front, things look better for Microsoft but perhaps not forever. Google Docs is a sort of Microsoft Office-lite product that is free and lives in its Internet cloud. Right now, most people will not prefer Google Docs to Microsoft Office, but for personal use, Google Docs is free, whereas Microsoft Office requires spending at least a couple hundred dollars for a license. You don’t have to be particularly smart to imagine that the well moneyed Google will work hard over the next decade to up its Google Docs feature set so that it will work faster and be more functional. It is already pushing Google Docs for business, allowing businesses to offer similar functionality to Microsoft Office for a fraction of its cost. For businesses that need the basics and don’t want the hosting hassle, it’s good enough and quite a bargain. Microsoft Office is the other major component of Microsoft’s profits. Drive a stake into it, or just dilute its market share and shareholders will be hollering.

Microsoft Exchange and Microsoft Outlook rule the business email universe, but in a decade, this can change as well. Exchange is pricey, needs beefy servers and is hard to administer. GMail has proven to be reliable and as quick as Exchange/Outlook, plus there are no hassles with hosting GMail and no desktop software to install, maintain and patch.

Microsoft’s server and entertainment lines are profitable, but make up only a small percentage of their profits. Others, like their online services, currently do not make a profit, although Microsoft claims its Bing search engine should soon be profitable. It’s unlikely though that Bing will ever overtake Google’s search engine.

The general problem for Microsoft is the same: lack of innovation in general and always playing catch up with the more agile players in the IT world. At what point does the desktop become obsolete because most of the work is being done in the cloud? When that time arrives, the handwriting will be on the wall for Microsoft.

Things are not guaranteed for its agile competitors, of course. Google and Apple still have to show they can continue to be innovative. Given their records of accomplishment the smart money is on them, and was borne out recently in Apple’s share prices. Microsoft stockholders might want to petition Bill Gates to return as CEO and software architect. During Gates’ reign, Microsoft steadily advanced in both sales and market share. It is unclear though even if Gates could be convinced to return to Microsoft whether he could change the dynamics at play.

It appears that Microsoft is being slowly being bested. It won’t disappear entirely, but in ten years it may be but a shadow of its current self, perhaps where Apple was in relation to Microsoft ten years ago. If I owned a lot of Microsoft stock, I would make it a goal to sell about half my stock over the next five years. While it may lose market share, it will still be profitable for quite a while, just not as profitable as it could be. I would begin putting my money into more agile and promising companies instead.

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