Yes, Microsoft really is doomed

Its cash cow is drying up while Apple and Google do the innovating

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In October 1999, I wrote a piece for these pages headlined "Why Microsoft Eventually Must Fall." [Sorry, it's not online.] With CEO Steve Balmer having announced his retirement last month, I thought I would look back on my prediction of gloom and doom. Unfortunately for me, last year's $78 billion in revenue wasn't exactly a harbinger of impending collapse. Was my pessimistic outlook just plain bogus?

I don't think so. Microsoft's market share is down and its stock price has been battered. The Apple logo now dominates Starbucks and Windows 8 is officially off everyone's Christmas list. But even with its bag of tired products, $78 billion smells a lot like success to most people. My insight from 15 years ago seems pretty lame.

To understand Microsoft's challenges, though, you need to understand its culture. It's because of that culture that I am more convinced than ever that Microsoft's days are numbered.

If Microsoft is such a loser, why is it still raking in the cash?

In the early years, Microsoft simply forced computer manufacturers to pay a Windows license fee regardless of whether they installed its market-dominant operating system or not. (The company eventually was nailed for doing this by the U.S. Justice Department and European Union regulators.) Microsoft always has focused on its marketing strategy, rather than technology, which seems pretty unusual for a company that led the personal computer revolution.

At any rate, money flowed to Microsoft like water. It stumbled its way through a half-dozen versions of its text-based operating system, broke some federal laws here and there, and managed finally to build a reliable version of Windows by the end of 2000. It wasn't pretty, but deep pockets can hide a lot of buggy software.

Live by the sword, die by the sword. As a rule, Mr. Balmer and company have systematically beaten back any new products that threatened the cash cows. The recent spin coming out of company headquarters seeks to assure us that new ideas are regularly "tested." Herein lies Microsoft's Achilles heel -- Steve Jobs made billions building products we didn't even know we wanted. Microsoft begins with a marketing plan and works backward to the cash. Product vision is not rewarded in its "show me the money" world.

This left Apple and Google free to poke large holes in Microsoft's business plans. Wall Street groaned this summer when it became obvious that Windows 8 was officially a dog. The stock price tanked, and Microsoft lost $31 billion in market capital in one day. A few weeks later, Mr. Balmer's retirement announcement actually boosted the stock a couple billion. Looks like my prediction might have legs, but what's taking so long for the flameout?

When I wrote the first gloomy article in 1999, Internet infrastructure was already moving to UNIX. Microsoft had become a non-player in the low-cost Web and database server market, and I was sure the company would fade away as its cash generator dried up. But I made the same mistake many Microsoft competitors did. It turned out that a better mouse trap, at least for a while, is no match for really good lawyers.

When Windows was updated at the turn of the century for Y2K, it became a pretty solid product. Unfortunately for Microsoft, IT departments didn't see the need to pay for upgrading it every year. The irony is priceless. Microsoft finally had Windows relatively bug free and suddenly its annual infusions of cash crashed.

The solution to this dilemma was vintage Microsoft. It simply switched from selling its software to licensing it. This meant it had a recurring revenue stream whether users wanted to upgrade or not.

The solid cash flow kept Microsoft complacent and left Apple and Google a free hand to dream and innovate. Steve Jobs may finally have had his revenge for naively walking Bill Gates through Apple's Walnut Creek offices 30 years ago and introducing him to overlapping desktop windows and the programmable mouse. (These core inventions were developed by the Xerox research labs, home to great engineers but lousy businessmen.) Microsoft was too busy counting cash and never saw Apple's iPhone and Google's Android coming.

The final irony is that both Apple and Google have based their operating systems on UNIX, which was literally a gift to the industry from Bell Labs and Novell. Because UNIX was originally developed to manage phone switches, it was always fast and highly secure (i.e., spam and virus free). With UNIX at the core, Apple makes money on hardware and Google makes money on advertising. There is no room at the party for Microsoft. It now must try to reinvent itself without killing its tired golden goose.

Apple and Android computers are here to stay. Most software developers have already switched to writing applications for these open platforms. The apps are inexpensive and easier to support because of iTunes and the Google App store. No more upgrade procedures. No more easy money for Microsoft.

Microsoft's major reorganization, announced last month, will combine departments, reduce some expenses and help the bottom line -- for a while. Microsoft will never build a successful cellphone, though, and Office is way too expensive for home email and letter writing.

Microsoft eventually WILL fall. The only question is how long corporate IT budgets can keep the cash flowing.

opinion_commentary - bizopinion

Nick Rossi (niccolorosso@yahoo.com), a former technical marketing director for Novell, spent 30 years running IT departments in the steel, health care and retail industries. He lives in Squirrel Hill.


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