With Yahoo, Google and other players stealing market share, Microsoft is scrambling to reinvent its business
Digital Journal — It’s tempting to see Microsoft as a giant puppet-master, manipulating the high-tech industry’s strings at will. History supports that view — every time Microsoft changes direction (which it seems to do in neat five-year cycles) the smaller players immediately leap to follow.
And so we see Microsoft’s latest move to software as a service (SAAS), accompanied by chairman Bill Gates’ hosannas of a “major sea change” for the industry, as an attempt to jerk everybody’s strings to make them dance to Microsoft’s tune once again.
But this time, the forces amassed against the king of Redmond are larger than they have ever been. No longer does the puppet-master merely exercise power over its underlings; a new resistance is tugging hard on the strings that once controlled them.
It’s bigger than Apple’s graphical interface, which was in Microsoft’s crosshairs in 1990 when it released Windows 3.0. Bigger than Netscape, which Microsoft targeted in 1995. Even bigger than Linux, which is now in a better position than it has ever been to take on Gates and company.
No, the forces are nothing less than the way software has been made and sold.
For years the market has been geared to seeing software as a product, stuffed into a shrink-wrapped box and sold from a store shelf. The only variant is selling software by download and registering it online.
But with the advent of broadband, new revenue models have emerged, and cumulatively they have been presenting an awesome challenge to the MS empire. After all, SAAS is software you rent by accessing it through a browser. No real shopping needed.
Among the trailblazers is Google, especially when it made the leap from being merely a search engine to a platform for free services. For instance, the company’s latest bundle of software, Google Pack, can be easily downloaded free and includes Google’s Earth, Desktop, Toolbar and Talk, also throwing in Picasa and Mozilla’s Firefox. Besides becoming a reputable leader in SAAS, Google has found the Holy Grail of the Internet by making handsome profits from search-engine advertising. It now has a market cap of $100 billion, exciting investors but also threatening Microsoft with its user-friendly applications.
Another distinct player is the online auctioneer eBay, whose $2.6-billion (US) purchase of Skype is undermining all other Voice-over Internet Protocol phone services — themselves designed to be subversive to established telcos.
Yahoo, AOL, Salesforce.com, NetSuite, Plaxo, Intuit, Symantec and even IBM have also succeeded with the kind of online services Microsoft is now promising.
The biggest threat among them comes from Salesforce.com, which began with the unoriginal idea of selling software services over the Internet. Its 17,000 customers today, mostly small businesses, raised revenues 77 per cent in the third quarter of 2005, increasing the stock price 154 per cent last year. Salesforce.com also has a new product, AppExchange, which will offer services from various software makers, all built on the company’s platform. This is precisely the market Microsoft has been lusting for since it shelled out more than $3 billion for small-business software makers Great Plains and Navision in 2001 and 2002.
The success of Salesforce.com is particularly galling to Microsoft because more than five years ago the company had been toying with the same idea. CEO Steve Ballmer had considered buying the then one-year-old company but Microsoft insiders nixed the notion, sticking with selling software the traditional way. Now, Salesforce.com is scaring the willies out of Microsoft.
For good reason. Researchers at IDC estimate that software as a service is growing so quickly it will account for 30 per cent of all software by 2007 and become a $10.7-billion (US) business by 2009.
Jumping on the Bandwagon
So how is Microsoft planning on facing this staggering array of competitors? The company has hit on a name, “Live”, that is both appealing and deceitful, in that it distracts attention from the fact the company is offering little that is original.
Essentially, Windows Live is separate from the operating system and includes a set of Internet-based personal services, such as email, blogging and instant messaging. It also lets users remotely manage recording and viewing of TV programs on Windows Media Center-based PCs. Moreover, Microsoft is making its executable Web pages free on Windows Live, supported by unobtrusive ads and offering applications such as a Hotmail client on steroids and continuously updated stock quotes — something Google is already doing with great success. Microsoft says that with SAAS, Web pages will no longer be static, but will be replaced by programs that operate within a Web browser. Instead of connecting to your online bank and filling out forms, the bank’s server will temporarily install a program on your computer that will allow you to deal with the bank in a much more interactive way.
Sure, Windows Live — its full version available in late 2006 — looks a lot like the old portal pages, but it’s not fully developed and has no ads on it yet. And it closely resembles the old My MSN. Industry analysts speculate that the overlap between what Windows Live will offer and what the MSN portal currently offers is great enough that Live will eventually replace MSN as Microsoft’s portal for Web-based services. Not surprisingly, Microsoft is in the process of folding its MSN division into Windows.
Though the single-user community has bristled at the thought of losing control over applications thanks to MS’s focus on business clients, individual users can rest assured they’ll still be able to buy their own stripped-down software. Office Live, Microsoft’s next productivity package, will contain more online services, of little use to single users who can then switch to a cheaper form of the suite, such as Office Standard Edition or a beefed-up version of Microsoft Works.
Give ‘Em What They Want
There are several benefits to the SAAS model compared to some of the newer tech trends. A big factor is that by using downloadable applications, Microsoft is counting on SAAS to put the brakes on software piracy, which costs the company millions in lost revenue each year. Since SAAS sits on a server elsewhere, it cannot be downloaded and installed on someone else’s machine. SAAS will also allow Microsoft to patch its applications instantly instead of relying on overworked IT departments to distribute security patches. From a security point of view, the software will always be up-to-date.
Its applications can be tailored to individual businesses, which will relieve Microsoft from overloading its software packages to please everybody, a phenomenon sneeringly called software bloat. This last feature is particularly critical, as Microsoft has become aware of a growing resentment against applications that offer far more features than customers could want or afford. The company has been keenly sensitive to complaints about the so-called “80/20 rule” — that customers use only 20 per cent of the features of various software packages but have to pay for the other 80 per cent as well. With customized versions of applications, people can expect to pay less and get only what they need.
Microsoft has yet to outline the payment process, but it might be able to cut the costs to corporate customers if it follows the pattern set out by Ottawa-based Wrapped Apps. An SAAS pioneer in Canada, Wrapped Apps sells concurrent licences for the desired applications, instead of one for every computer in a company. Concurrent licences cover only the number of copies of the software in use at any one time. Paying for licences for applications on unused machines is an inefficient way for a company to spend its IT budget.
“The secret sauce is that we’re turning a single-user application into a multi-user one,” says Rob Lewis, CEO of Wrapped Apps.
There are two revenue streams in the SAAS model. The first is from licences, which can be much more flexible and practical than the ones for resident applications. The next stream will be maintenance fees for software upgrades — Wrapped Apps, for instance, supports any application two versions prior.
To Lewis, the idea is revolutionary. “We’re selling a shift in consumer behaviour,” he says.
Storming the MS Empire
The trend appears to be unstoppable, but whether Microsoft will be able to pull the industry’s strings its way remains to be seen.
Serious opposition will rise against SAAS. Retailers and supply-chain channels will find themselves cut out of the equation as their largest customer moves to deal with the end user directly. And they will not go down without a fight.
Linux users are also watching closely. Evan Leibovitch, former president of the Linux Professional Institute, sees the move to SAAS as a windfall for the open-source community. He doesn’t believe Microsoft is really moving to cut costs for companies, but that SAAS will ultimately end up denting IT budgets even more.
“Stuff like this drives the Linux people crazy,” he told me, “because they see the move as arrogance on the part of the proprietary vendors. Open source loves it every time the biggies upgrade their products. Customers see it as another bigger expense, and that’s an open window for open-source software.”
Moreover, he says, the move to SAAS is driven almost entirely by the software makers, not the customers.
“Where is the consumer-driven demand for it?” he asks rhetorically.
This all adds up to tougher opposition than Microsoft faced the last time the giant decided to manipulate the industry’s strings to change direction. This time, the strings are sure to get tangled, and the puppeteer might find itself playing to a much tougher audience than before.
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