Microsoft Watch – The Beginning of the End?

Just five short years ago, almost everyone considered Microsoft to be the menacing 500 lb gorilla of the industry. It had monopoly power over the computer desktop and web browser markets and, as a result, was in the middle of a huge antitrust case against the United States Department of Justice. Because there were few worthy competitors against Microsoft, many were depending on that legal battle to take the software maker down a couple of notches. It’s amazing how much things can change in just five years.

Lately, a lot of small, but very important, pieces have been falling into place that could mark the beginning of the end of Microsoft’s position as market leader and monopolist.

First is the rise of an unlikely enemy: Google. Google first figured out how to make money (a lot of money) with online advertising through its AdWords and AdSense programs and has since moved into email, maps, instant messaging, and more.

Second, open source software continues to make inroads with each passing year. While Linux on the desktop is not yet a reality, businesses and organizations quickly adopted it as a rock-solid, low-cost server platform. On the consumer side, the Firefox browser has proven to be one of the most successful free/open source projects based on it being downloaded over 100 million times in just one year. And recently, OpenOffice.org, the open source alternative to Microsoft Office, has become a serious contender and is “good enough” for 95% of the tasks people commonly perform.

Third, Apple is in a completely different position than it was in 2000. While Microsoft has continually pushed the release date of Windows Vista, the successor to Windows XP, Apple is currently on the forth iteration of Mac OS X, which is widely regarded as the best desktop operating system available. Beyond that, Apple has had unbelievable success with the iPod/iTunes combination, to the point that it dwarfs every other competitor in the market. Despite all its efforts, Microsoft has not been able to gain significant market share with its Windows Media audio formats.

Fourth, there has recently been a lot of success in moving open standards forward instead of relying on closed, proprietary formats – Microsoft’s traditional specialty. In the past, documents stored in Word, Excel, and PowerPoint proved to be notoriously limiting in how you can create and modify them. For the most part, if you didn’t have MS Office, you couldn’t really work with these formats unless you could live with a small subset of their features. Now, formats based on XML, the general purpose markup language, let anyone create programs that read and right them. A very good example is the OpenDocument alternative to Microsoft Office formats, which is now gaining support from many companies in the industry, including Oracle, Google and Novell, among others.

Every so often, Bill Gates comes to the realization that something big is going on and that Microsoft is on the sidelines, out of the game. The best example of this is when he recognized the threat posed by the Internet ten years ago and began its infamous campaign to destroy Netscape. Other examples include when Microsoft first began taking the open source threat seriously in 1998 (see the Halloween Documents) and Gates’ push to put security and privacy as top company priorities in 2002. It also happened again just last week.

In an announcement November 1st and in “leaked” emails from Bill Gates and Microsoft CTO Ray Ozzie, the company has drawn some vague outlines of its software-as-a-service strategy. SaS is the way a lot of applications will likely be delivered in the coming years. Instead of you purchasing a license for Microsoft Office and installing it onto your computer, you’ll be able to pay a monthly subscription fee and receive the latest and greatest version through your web browser. This model may not be a good fit for everyone and for all computer programs, but it’s already proven itself through some business applications. Salesforce.com has been a pioneer in the software-as-a-service market and had much success getting subscribers for its web-based customer relationship management software.

Can Microsoft remake itself as a provider of software over the Internet? Time will tell, but a lot of people have doubts right now. In many ways, I think it’s a classic example of the innovator’s dilemma: Microsoft has a ton of existing customers with certain needs and expectations they must meet. Software-as-a-service may not be what they’re looking for, so the company risks losing them as clients. Looking at it the other way, Microsoft is also highly dependent on the licensing fees it gets from Windows and Office. Investors probably won’t be big fans of giving those up in favor of advertising and subscription revenues that might not stack up.

Personally, I think so much has changed to the benefit of the little guy and that Microsoft has too much momentum going in the wrong direction for this to play out well for them. A lot of technology people, particularly the influential ones, don’t trust Microsoft anymore and are instead moving toward Apple and the Mac OS on the desktop and a variety of open source solutions everywhere else. Microsoft may not die a horrible, dramatic , and public death, but I think the best days are over. Stick a fork in ’em and watch them fade away into irrelevance.