Microsoft

The Economist recently featured a cover photo of Bill Gates, the Chairman of Microsoft, since he is stepping down from his post and leaving Microsoft. Bill Gates is a larger-than-life figure because of his large foundation and his charitable works. However, while I am far from an expert on his non-work efforts, I do consider myself somewhat of an expert on Microsoft, and that is the focus of this post.

Microsoft has several business segments, as follows (per their most recent earnings release as found on their web site), along with quarterly revenues as follows:

– Client revenues (operating systems, Vista) – $4B
– Servers and tool revenues (Windows server, SQL Server) – $3B
– Online business revenues (MSN, others) – $1B
– Business system revenues (Office, Sharepoint) – $5B
– Entertainment (Xbox, mobile phones) – $2B

Thus the majority of their revenues and vast majority of their profits are from 1) operating systems (Vista), servers & tools (Windows server, SQL Server), and business systems (MS Office).

BRIEF HISTORY OF MICROSOFT BUSINESS SYSTEMS (from my perspective)

Microsoft used to be awash in competitors at the application level. Microsoft used Word to beat back the other word processing competitors (Word Perfect), Excel on the spreadsheet side (Lotus 1-2-3), MS Access on the database side (D-base, others), and Power Point (Harvard Graphics) for presentations. These applications are the “core” of Office, and they had inter-operability when the other applications did not, and they remained “backwards compatible” so that new versions could save files that older versions could read.

There were some major upgrades along the way. Office 95, that went with Windows 95, was a big step forward. Office 97 fixed a lot of the bugs in Office 95 (in Microsoft, as they say, Quality is Job 1.1). Office 2000 was the one lots of us stuck to, and then Office 2003 was the one that I am still on today, since Office 2007 is tied to Vista which I am attempting to avoid like the plague.

It is important to remember that, initially, Microsoft provided a great productivity boost. Over time, all of the MS Office tools started using the same tool bars and menu system. Data could be shared and copied between each application. Time to learn each specific application was reduced, as a result.

These tools also allowed individuals to be productive without waiting on the IT department or specialized groups. When I first started at Arthur Andersen, financial statements (for smaller companies that didn’t have a large annual report) were typed by hand on a Wang word processor with an amber screen. You had to write everything by hand and take them down to the secretary pool, and then proof read everything. Sometimes, if you got lucky, they were able to find the financial statements from the prior year so the typing was quicker but this seemed to be rare. The room was filled with women (sorry, that’s the way it was) who did all this typing, and staff people like me ran back and forth and re-arranged the queue of jobs in order of priority.

Spreadsheets made analysis far simpler; as an accountant we had to use a special, long type of paper with columns and made all of our analysis, by hand, and footed and tied everything. This was replaced by the spreadsheet, but initial spreadsheets were maddening because they didn’t have the “sheet tab” concept so people would just put formulas everywhere.

Another critical innovation (like everything else, Microsoft didn’t invent it, but they made it ubiquitous) was the WYSIWYG format for printing – you non old-timers probably don’t even recognize it, but it stands for “What you see is what you get” for printing – in the old days it took hours of formatting and tweaking to get it to look right.

Basically the important MS Office innovations stopped at Office 97, or maybe Office 2000 if you are charitable. By then the menus worked, the data could be moved back and forth, and you had a macro language (Visual Basic) to tie things together if you really wanted to get technical.

So that’s it, then… re-buying the same suite of Office tools over and over to get what you already had, and a bunch of items you don’t want. Like that paper-clip guy in the help system, for instance. The features didn’t make things faster, they generally got slower, and the operating system is slower, to boot (will get to that, later). I purchased a PC recently for a family member (the family member barred me from configuring it myself, for some reason) and had them buy the applications and configure it at Best Buy – I told the geeky looking tech guy to put MS Office on there and he kind of looked at me funny. When he rung up the bill, he said that he charged me for the student version of MS Office to save money (without me asking, for I wouldn’t have done it) – apparently he had trouble even CONCEIVING of someone paying hundreds of dollars for this bloated bundle of applications, so he was trying to do me a favor.

While the competitors to MS Office played Keystone cop and shot themselves in the foot for years, there now is some more formidable competition. “Open Office” and Google Docs both have decent combination applications that compete with MS Office – and they are free or nominal in cost. These new competitors benefit from the fact that you don’t have to build everything Microsoft puts in these applications, just the small sliver of functions that most people need. Thus their applications have the opportunity to boot up faster and run faster, and are more integrated with web applications than the desktop, which makes sense as more and more data is being stored “in the cloud” and the “mash up” opportunities require online access.

Microsoft Front Page was their attempt to break into the web space, and so I tried it since I like the relative simplicity of Microsoft products, but it failed and they recently replaced it with a new application. The web has mostly passed them by and it will be hard for them to make a significant dent in the competition.

A BRIEF HISTORY OF CLIENT REVENUES (operating systems)

I have some familiarity with Microsoft before Windows 95. Windows 3.1 was a big step forward, and their last operating system with the traditional blinking cursor when you started up rather than a graphical interface. Windows 95 of course was the big leap forward, with graphical menus and the start button, and had a lot of other neat improvements.

Windows 95 was also very buggy… Windows 98 was the last stable system before Windows 2000 and the move towards XP. Remember “Bob”? Their friendly operating system? They also had a couple of flavors of the operating system along with way, splitting home from business.

XP finally got it mostly right, and then the regulators made MSFT tear out the browser (Internet Explorer) from the operating systems so that other browsers, such as Netscape, could be used instead.

While open source is a critical challenge to Microsoft on the server side, until recently Microsoft had the desktop operating system to itself. Things are starting to change now, especially with the college kids and the “one laptop per child” laptop, which provides a viable machine featuring what non-office drones need including web browsing and music, among other functions.

Apple of course was always the long-term challenger, but it was pretty much left for dead for many years. Microsoft even invested in Apple to keep it alive at one point; it was easier to have a competitor than face the wrath of the European Commission and others. In recent years, however, the “PC vs. Mac” commercials and power of the cool new Apple machines have taken a dent in market share; they are in fact the machine of choice for many up-and-coming college kids who will someday likely shape the tastes of the world. Here is a site from Apple for those who are considering the switch from PC to Mac.

Part of the reason that Apple and the Linux variants are now a viable competitor to Microsoft is that Microsoft is buggy, slow, and contains few essential features not available elsewhere. Most people are only upgrading to Vista through their workplace or through buying a new PC with it pre-installed; there are no compelling features driving this upgrade process. Many people complain about how SLOW Vista is to load; by comparison the solid-state Linux machines boot up in a flash.

There is a campaign to “keep XP alive” since it “sucks less” than Vista… quite a hard fall from a company that popularized the GUI interface (yes, I know that they stole it from someone else, but they popularized it for the masses).

A BRIEF HISTORY OF MICROSOFT SERVER & TOOLS (Windows NT, Server, SQL Server)

Microsoft originally invested in OS/2 (operating system “2”, get it?) with IBM. They branched out their operating systems from their consumer systems with NT which was used to run servers. Ultimately they moved into Microsoft Server, which is the successor to NT.

These servers were used to run applications like SQL Server, a relational database that Microsoft started with the help of Sybase. SQL Server became a junior competitor to Oracle, and IBM was a bit of competition but on the mainframe side. Over the years SQL Server has grown more robust, and it has a cost advantage vs. Oracle, but now faces heavy threat from open-source SQL server applications such as MySQL. Until recently MySQL was missing critical features such as stored procedures, but these have been added in new releases, narrowing the gap of critical applications even further.

There are two competitors to Microsoft that cannot be called “keystone cops” – and one needs to be discussed right here. ORACLE has been moving hard against Microsoft for years in the database space, and their tool is generally seen to be the gold standard, although it is also quite expensive. Oracle is led by Larry Ellison, a character on par with Gates himself, and one guy who never backs down and has a long term vision. Now Oracle’s database prowess is squeezing Microsoft on the high end while MySQL and the free variants are killing them on the low end. Oracle also has bought tools all across the spectrum, including BEA’s application server product.

Another critical application is Microsoft Exchange, the ubiquitous email program. Microsoft exchange turned out to be one of the most important revenue sources, making Microsoft of vital importance since companies could not function at all without their emails nowadays. There are competitors to Exchange, but they still have a long way to go for corporate purposes. Microsoft exchange runs on Microsoft servers and SQL servers, so basically every corporation running Exchange (pretty much everyone) has at least some sort of Microsoft section in their data center that they can’t get rid of and which Microsoft can use as a beach head for further outreach.

The long term challenge here is LINUX, the open-source version of UNIX. LINUX has a massive footprint in corporate data centers, and they can use either free versions or supported versions (paid) from a variety of vendors. LINUX is continually evolving, built by a world-wide network of technical people, and while Microsoft initially snickered at the open source challenge it is clear that they are being left in the dust long-term by this army of faceless techies.

Along with LINUX are the other elements of the “stack” of open-source tools – the stack is called “LAMP” for 1) Linux (operating system), 2) Apache (the web server), 3) MySQL (the database), 4) PHP or others (the programming language). Here at Wikipedia is a brief site on LAMP.

One area that Microsoft doesn’t get enough credit for is the development of Visual Basic. Visual Basic revolutionized tool development in the same way that the unified application stack was a hit for MS Office. At the time, Visual Basic made PC and client / server development a practical prospect for non-IT departments who at the time were fixated on mainframes and giant ERP installations. Visual basic was just a much simpler, more contained interface that made programmers more productive and had a lot of backward compatible capabilities that were often lacking elsewhere. Yes, I know that a lot of VB was essentially beaten to the punch by Borland, but as always Microsoft outlasted and outspent their competitors.

Visual basic, however, has gotten hammered over the years by Java, which was developed by SUN (the anti-Microsoft). Java now has essentially adopted the open-source model and is continuously advancing and is supported world-wide, and it is free. Here is an older article describing VB vs. Sun, but for all practical purposes SUN has won the war for developer mind-share as well as integration into the web. Microsoft still has formidable hooks, such as integration into Office as well as their permanent foothold in Exchange (as well as enormous resources) but the long term tide has clearly moved against them.

In fact the “real” and hard-core developers build in C and variants of C (virtually all core applications where speed is important are built using this tool), but this isn’t a giant money maker for anyone since the audience is relatively small and hardcore (although critically important). Your father isn’t going to build anything in C or its variants in his spare time. It seems that over time Java and its variants will make more headway against C, but for now Java has a significant performance disadvantage.

BRIEF HISTORY OF ONLINE BUSINESS (web)

Of all the areas listed my experience is generally least in this area, because I never really have participated in Microsoft’s online offerings. MSN, their web portal, isn’t a must for anything too critical. The second competitor that is clearly not a “keystone cop” is Google and they clearly smashed Microsoft (and Yahoo!) to pieces in the online space, by building the ubiquitous search engine with a notably streamlined interface (MSN’s old portal was terribly cluttered) which became an advertising powerhouse.

In the old days Microsoft was clearly trying to link the web to their desktop dominance, with tools such as “Passport” and other immediately attacked variants that never caught on. Microsoft’s history as a PC and tool-centric company didn’t translate well to the web, and they just got blown away by the competitors and their ideas essentially never bore much fruit. This isn’t to say that they can be dismissed, because their applications have powerful ties to the web (i.e., Exchange with email) and Microsoft has a lot of money, but the war for search and advertising has pretty much been lost.

As for the browser itself, Microsoft has been an also-ran for years, after the tech bust in the early part of the 2000-2002 era ran out and Netscape and others lost steam. Microsoft entered an era of dominance but this is now under strong and seemingly endless attack by competitors such as Mozilla and other open source products. As of now, while Microsoft seems to have about a 75% share of internet browsers, Microsoft was also forced to un-bundle the browser from the operating system which was a critical long-term opening for these opponents.

It is important to note that Microsoft still has a lot of power in the internet space with Internet Explorer, it is just that as far as the technology goes, Mozilla has been leading in features for years and Microsoft is following along. The Microsoft browser is also a frequent target of hackers, and Mozilla is seen as more stable, whether this is true or not. However, since the browser business is essentially a “free” business, this is one area of leadership that is not filling Microsoft’s coffers. It is hard to see Microsoft reversing this tide, since they have been followers not leaders, but as always the future is hard to see.

Whether it is seen as a web product or something else, Adobe needs to be mentioned. Adobe is another serious competitor, and their PDF format makes the origination of documents less important and ensures that people around the world can view the output through downloading a free “reader”. It is Acrobat that allows for movement of documents regardless of source, and this is a critical wedge in chipping away the Microsoft tool dominance. Adobe also has powerful graphics tools and web creation tools that are preferred on the high end, and is a pretty savvy company as far as financials go (the idea to give away the reader and charge for the producer of documents was pretty revolutionary at the time and has served them well, although in a way they are a mini-Microsoft with the PDF standard).

A BRIEF HISTORY OF ENTERTAINMENT

Entertainment is mainly XBox, and this has been a relatively successful area for MS, when compared to MSN, for instance. XBox has become one of the dominant players, along with the Sony Playstation and Nintendo with the Wii.

This area is harder for Microsoft to make profits in than software because the hardware is expensive to develop and can’t be sold for much in the way of profits; the Xbox is an incredible piece of hardware when you look at it and consider the relatively low-price that it is being sold for (same with Sony’s product).

When you think about it, the incremental price of selling another unit of software, once developed, is nearly zero. They develop a tool or operating system and sell it over and over again and it is pure profit (incrementally). This is why Microsoft is so phenomenally profitable; but this model doesn’t work as well for them on Xbox because the developers actually make most of the profits. To the extent that Microsoft can move into software development for both Xbox and the other consoles this is an enormous opportunity. Sales of Halo drove this area to profit from loss, and Microsoft should not be counted out in this area, assuming that they can own a chunk of the intellectual product and licensing going forward.

Microsoft’s Xbox is doing well as a platform for other developers, and recent versions of Grand Theft Auto seem to have outsold the other platforms 2-1. Microsoft deserves a lot of credit for moving into this space and making it profitable, as well as a likely critical long-term component of the stock’s profit and value.

MICROSOFT AS FINANCIAL POWERHOUSE

The most under-appreciated element of Microsoft is how clever that they have been as far as managing the business. Microsoft makes a giant amount of money, and has implemented their operating systems and applications in a way that makes them extremely “sticky” for corporate customers and individuals, alike.

Microsoft receives money for virtually every PC sold, although there is a bit of a groundswell in PC manufacturing where individuals are putting Linux variants on the machine and using open source products exclusively.

Microsoft also has an incredibly sticky foothold in corporations with MS Office – while the features for Office 2007 aren’t very important or revolutionary, eventually everyone will be on them, except for some newfangled companies that will try to make it with a combination of web tools, open office, and PDF. It will take years and years for these alternatives to put a serious dent in Microsoft’s revenue, however, and they will not go quietly – Microsoft is very talented (seriously) at tie-ins for all their products with guaranteed maintenance and upgrades of the entire fleet of servers, corporate applications (exchange), PC licensing (Vista), and desktop tools (MS Office).

The fact that Microsoft has been able to keep thriving financially while their products are panned (Vista) and full of boring not revolutionary features (Office) and basically hated (Explorer) is an amazing testament to their financial prowess, and one that web heads and technology guys continually underestimate. While the tech guys think this is new it is as old as the hills; from their initial Windows GUI vs. Mac and their programming tools vs. Borland everyone hated Microsoft yet couldn’t stop their rise. This must be recognized as a supreme FINANCIAL achievement.

Microsoft also used their riches to start up the Xbox franchise, which looks to be a big long term winner. This is an example of a successful company bringing their successes into a pretty new area, and more often than not this is a failure.

I remember reading somewhere that the Microsoft CFO said that Bill Gates knew more about finance than he did, and I believe it. From his initial decision to own the operating system and not the hardware, and the fact that he didn’t sell out Microsoft stock on the way up, which led to him being among the richest people in the world, and his obvious continual focus on licensing and revenues, it is really a phenomenal achievement.

SUMMARY OF MICROSOFT AND BILL GATES

Thus here is my summary of Microsoft and Bill Gates (on technology, not his humanistic efforts), based on 20+ years of dealing with them and their products in various capacities:

1) Microsoft is first and foremost a financial company, with powerful licensing streams and well thought out efforts to ensure that their products are tied together in a way that makes “ripping them all out” almost an insane proposition.
2) Microsoft did perform a powerful service for productivity initially when they empowered employees that weren’t from the IT department to build client-server tools and to work on their own desktops with data in Excel in an integrated fashion. This productivity enhancement would likely NOT have occurred with the “Keystone cop” mix of competitors that existed in the early ’90s.
3) Microsoft also advanced developer tools with Visual Basic, and pushed forward these tools in a way that made more generalists and less-technical people able to create powerful applications. While these tools have been mostly eclipsed over the years, they were revolutionary for their time.
4) Microsoft was reliable and backwards-compliant and companies grew to trust that at least their products would (mostly) function for years and decades to come; hardly any other vendor (except maybe Oracle and IBM) can command that level of respect from the people that write the big licensing and maintenance checks at corporations.
5) Microsoft basically lost out to UNIX variants on the corporate side; while they retain a significant foothold due to Exchange and tie-ins with productivity applications, they missed the boat on creating an operating system that could have been dominant on the server side in the same way that they ruled (and continue to rule) the PC side.
6) Microsoft also never “monetized” their position on the web and missed a lot of that opportunity to Google, which is flat out thrashing them and Yahoo! combined.
7) Everyone hates Microsoft, and yet MS make more money than their competitors and are deeply entrenched in markets with lots of paying customers (corporations, not individuals). This is an amazing testament to Bill Gates and MS’s strengths.
8) Microsoft millionaires played an important role in starting up new companies that furthered the web boom; these millionaires only existed because they worked for financial genius Bill Gates and not one of his (often more technically sophisticated) competitors. Nowadays a lot of this role is played by ex-Google guys but Microsoft really started this trend.
9) Don’t count out Microsoft on the video game front; they are really doing well with Xbox despite the recent Wii hype (deserved for reaching a new generation of gamers). This is a good example of the firm deploying its long-term time horizon and cash to try to dominate a new platform, even though this time they are starting with the less-lucrative hardware side rather than the software side which basically built up their current vast war-chest of riches.

But, in general, their days as a leader have passed and their position of maximum influence is on the decline. Computer science schools don’t teach on Microsoft products; they use open source. Microsoft is on the desktop, but mostly because it is hard to eradicate, not out of love. Xbox is a big victory for them, but leading in hardware won’t bring the vast riches of software.

It is a credit to Microsoft that they keep their eyes on what they ought to for the stockholders – money. Their licensing streams are incredibly profitable, and being “liked” isn’t always bringing home the bacon for competitors (find me the open-source billionaires). Don’t count them out as a financial empire any time soon. Too bad that isn’t correlated with productivity enhancements or revolutionary ideas, but that is just the way it is for them at their current stage of existence.

Cross Posted at LITGM.