Microsoft Profits Down: End of an Era?

Microsoft Logo (image from damclean on flickr)

Microsoft posted its worst results last week. Profits are down 32%. For over two decades the company has dominated the software business. Microsoft practically invented the idea of selling packaged software. Now things are changing. The business model of selling packaged software product in versions using a retail channel is fading away and being replaced, at least for the consumer, by Internet applications sold as services.

The biggest part of the profit decline for Microsoft is Windows. Windows profits are down 16%. Of course this is mostly due to the the weak economy as PC sales are down. The Netbook is also causing disruption since Windows for small computers gives Microsoft lower profit margins. However, there is an important trend here. The Operating System is becoming a commodity. The first OS to become a customer product was Windows 95 with people in lines to buy the system. With Vista, no lines, nothing. People are not that interested in an OS, it just has to be there, a commodity. The real value is in the network and the “live” software, an on-line service.

Software as a product seem to be a declining model. At its best times, Microsoft would ship new versions of its products every 1-2 years, where each version adds new features, better performance, and of course bugfixes and usually new bugs. Indeed, Office and Business software profits are down 4,51%. The always-on connectivity of the Internet is changing the game. Compare the old style Powerpoint presentation software to Prezi. People buy into a service. There are no versions, you just get the software service as it is. And the upgrades come when they are ready.

This does not mean that the client on the desktop is dead. It means that the model is not client/server anymore, but is client-as-needed/server, or RIA/Service. The client can run on the user’s computer if needed, but is maintained online. And the documents are online instead of the cluttered and almost full hard disk. The key point is the ability to share. Consider Jing.

This means that the cloud has an increasing role. Indeed, the only software that seems to be growing for Microsoft is the Server and Tools part.

The software market is changing is some fundamental way. Operating Systems have become commodity. Packaged software for retail is declining. Versions are out and service subscriptions are in. No doubt this will cause some challenges to Microsoft, and make interesting case studies. However, if there is one big company that has been resilient and capable to adapt it has been Microsoft. Can they still change?

Understanding Technology Disruption

Cover of a Dilbert book by Scott Adams. Book review: Excellent book. Notice that this image is stored on Wikipedia not hosted on this site.

New technologies can sometimes cause disruption in existing markets. For many, new technology is a great opportunity. New ideas and new business models with endless possibilities. For many companies, however, this can be threat to their business models. Indeed, established companies usually fail to see the opportunity side and look only at the technology as a threat, unless it helps them save cost. If threatened, the first action they take is usually legal. What surprises me most is the lack of understanding of technology that many business people and lawyers seem to have.

There are number of cases where this lack of understanding is demonstrated. It is not that these people are stupid, it’s simply that they have not taken the opportunity to or not bothered to understand technology and how technological changes occur. Actually it is not surprising since technological disruptions are not so easy to understand and not obvious. But if you think about the importance of understanding how the Internet is disrupting business, it is surprising.

In 1995 I gave a keynote lecture at a Nordic marketing conference of state Lotteries where I demonstrated the world’s first Internet betting system. In a naive way, I was expecting the marketing crowd to embrace the idea and opportunities of the internet. I was ready with lots of ideas of how this could be used. I was completely unprepared that these people might see the Internet as a threat. And of course I was not able to tell them who is responsible for the Internet, so it could be shut down by legal actions.

Another more recent example of technological ignorance was demonstrated at the Pirate Bay trial in Sweden when half of the original charges where thrown out due to misunderstandings. The prosecuters simply did not understand the technology. Due to the fact that this technology is not that complicated, it is surprising that they did not get some expert to advice them on the matter. However, this did not help the Pirate Bay owners who got a guilty verdict.

The latest lack of technological understanding is demonstrated by Associated Press (AP). AP is suing news aggregation web sites such as Google for using their content. It is understandable that the organization wants to protect their content and they should if the use is unfair, but when a search engine lists a news article and provides a link to the source, and hence directs the reader to the source, it difficult to see why they want to stop that. This is how the Internet works. It’s all about getting traffic. AP’s method could of course be a clever legal tactic in bigger scheme.

All these cases have technological ignorance in common. The interesting part is why it is so difficult to see technological changes and trends. This is not surprising since the first and easiest way is to look at the old models and apply the same thinking to a new on-line model which can be totally different. Even the music industry seems to be starting to understand how the Internet works.

Game Disruption from the Cloud

onlive2
OnLive microconsole and control

If you want to play a serious action game like a first person shooter with high quality graphics and fast action, chances are that you would go for a PS3, an Xbox 360 or even a Wii. These are the serious game consoles. You could also get a super fast PC with a powerful GPU. You buy these and install them at home. For games you buy disks or download the games from the manufacturers store. This is the traditional image of the world of hard-core gaming. Then image this. Instead of buying a powerful game hardware you buy a small device to connect to a screen and your internet connection. Then you use a powerful game ‘console’ located at a remote site and stream the image to the device and to the screen like a normal video signal. Games are now coming from the cloud and this can cause disruption in the traditional gaming market.

This is exactly what the company OnLive is doing. OnLive introduced its service at the GDC in San Francisco in March 2009. Games on Demand, or GoD if you will. The games are available through any PC or can be played using a micro-console, a pocket size device that hooks up to a screen. OnLive high-performance servers then compress and stream the content to the player’s TV. OnLive will offer the same games as available for the consoles.

Interesting thing is that OnLive started this development seven years ago, long before anybody was talking about cloud computing. Although the idea might seem plausible today, in 2002 it might need some serious convincing.

OnLive entrance to the market is a classic case of low-end disruption as described by the Disruptive Innovation Theory. It will challenge the traditional game console market and the retail distribution of games on discs.

There are few interesting things with this approach. First, you don’t need a big console or a powerful PC to play games. The computing is done remotely. A low-end computer, even the popular netbooks, is usable.

Secondly, it does not matter what type of computer you use. OnLive is independent of operating systems and computer types. As long as you have 1,5 Mbps or better internet connection, it can stream the video.

Thirdly, you don’t need to update your hardware to keep up with Moore’s law. New technologies go to the cloud, not your hardware.

Fourth, with games in the cloud there is no need for game versions. It seems that the new emerging model for gaming is to release a game, no particular version that needs to be updated a year later, but an experience that continuously evolves, keeping players constantly involved. The game doesn’t have to end. Gaming is moving from products to services where the business model is to pay for use.

Fifth, this is another prove of that the community is important. As social creatures, players want to play with other players and see what others are doing. This is one of the megatrends of our times.

On line games are not new. What is new is that OnLive brings high action, graphics oriented games without the need to own a high-end computer. But the question is how much disruption this will cause. Thinking of the lessons of history, the PC emerged since people wanted their own computer, hence the name Personal Computer. This is still a powerful force, owning and controlling your own stuff. But for most people, it just the games that count.  OnLive will be available later in 2009. It will be interesting to follow the disruption this will cause. This will make a good case study to my New Technology class in 2010.