Is Microsoft courting disaster?

Globe Technology ^ | 9 January 2003 | Jacques Suveyer

[ShadowAce]

The author is a writer and consultant; he can be reached at www.thephotofinishes.com.

As any one who has substantial technology investments in the stock market knows, IT spending has followed the dot.com bubble burst and is in the doldrums. North American shipments of PCs and servers were down by 5 per cent in 2001 and it looks like this year will barely scratch out 1- to 2-per-cent growth.

The basic problem is that processing power is quickly approaching the point where it's an almost free resource as Moore's Law continues to deliver a doubling in computing power every 18 months; and millions of design engineers go out and translate that into better hardware, devices, storage capacity, and communication hardware.

But who needs it ? Nobody right now, because only the most ambitious of graphics, simulation, analysis, voice and handwriting programs and/or interfaces can hope to swallow sizable chunks of the power of a $2,000 computer. So for most users, corporate and home, why upgrade?

As a result, companies as diverse as AMD, Adobe, Cisco, Corel, Intel, Oracle, Sun, and the other big names of the computing revolution have seen their stocks crater in the past two years. Everybody is affected by the following major trends:

1)PC and Server market saturation are being reached as the power and reliability of existing software and hardware does not justify two- to four-year update cycles, because people and conversion costs are now the critical factors in the upgrade equation;

2)Software innovation is slowing down with no new killer application in the IT arena since the Mosaic browser. Also, Microsoft acts as a strict Gateskeeper of PC innovation - JPEG2000 and Java do not get in, but handwriting and voice do, on Microsoft's terms;

3)Hardware, communication and storage price/performance continue to improve dramatically - but the driver is fear of being displaced, as most developers and manufacturers barely eek out profitable returns;

4)Software costs and development are at transition - as the major player, Microsoft, raises its prices in contrast to just about every other software company.

It is this last phenomenon that I would like to examine in more detail.

In a Down Market - Raise Your Prices

In the DOJ/Microsoft antitrust trial, one of the expert witnesses testifying on behalf of Microsoft argued that the true test of monopoly power was not the holding of 60-, 70-, or even 80-per-cent market share; but the ability to do so for long periods of time - several years, if not decades - and then the ability to uniquely raise prices in markets while its competitors could not.

He then went on to argue that there was no evidence that Microsoft had done so in any markets where it had "large share positions."

What a difference a year and and few months make. Going into its seventh year of 80-per-cent-plus market share of Office Suites, Microsoft has been able, according to Gartner Group, to raise its prices by 30 per cent to more than 100 per cent, while imposing unwanted conditions of renewal and other product update conditions on its largest customers.

Now it its not my intention to debate the merits or drawbacks of the Microsoft Software Assurance Plan, but rather to examine the consequence of Microsoft boldy going where it has never gone before - being the highest-priced producer in some of its major markets.

Let us examine the notion that Microsoft has become like butter, the high-priced spread. For Office XP Standard Edition, CNET's November 18th average price was $390; for Corel Word Perfect 2002 Suite it was $270; for Lotus Smart Suite Millenium, $210; Sun Star Office was $80; and Open Office was and still is $0 (free download at OpenOffice.org). It is estimated that the Office Suite alone accounts for $10-billion of Microsft's $30-billion in annual revenue. For Windows XP Home the price was $190; for Mandrake Linux 8 it was $27 ($0 on direct download); for Windows 2000 Advanced Server it was $2,350 for one CPU 25 users; Redhat 8 Enterprise edition with unlimited users was $149; Solaris 9 on x86 with unlimited users, $90. The estimates vary from $8-billion to $12-billion for the revenue brought in by the Windows server and desktop editions. Microsoft's Visual Studio.NET was $750; GCC and other GPL developer software on Linux, $0.

So for more than two-thirds of Microsoft's software portfolio by revenue the company is no longer the best price/performance producer, but in fact often has one of the highest purchase costs. Now Microsoft might argue that they have the best features and functionality, and in the case of Visual Studio with its drag-and-drop designers and visual debuggers that may well be true.

But not so in the case of Office editions and both desktop and server operatings systems. The core features of Star Office/Open Office (they use 95 per cent of the same codebase) are very competitive with Microsoft Office. In addition, OpenOffice adds the the non-trivial virtues of cross platform performance including running on versions of Windows that Microsoft no longer supports, while supporting an open XML-based file storage format in contrast to Microsoft's proprietary format.

On the Windows side, Microsoft has set a hefty pace for including many free utilities and services with the operating system, but Sun's Solaris and many of the Linux distributions have matched most of those utilities and gone Microsoft two or three major systems better. For example, Solaris now includes an Application server plus complete Java development environ. Linux has not just a Java environ; but development tools for C, C++, Perl, PHP plus a very good MySQL database, along with a host of other utilities. So again, on the OS side the features and functionality of Solaris and Linux match if not exceed Windows.

But on total cost of ownership, both Solaris and Linux have much superior records for availability, reliability and especially security. In the past two years Microsoft shops have had a particularly onerous set of administrative- and cleanup-related costs associated with Windows desktop and server. Office, and especially Outlook and Internet Explorer, have racked up onerous TCO (Total Cost of Ownership) costs in the reliability and security areas.

So why does Microsoft raise its prices having surrendered one of its key competitive advantages - being consistently the best price/performance leader in many of its markets.

Well, as professor Schmalensee might argue, it's because as monopolists, they can.

Others would argue that Microsoft is taking advantage of the fact that software has entrenchment costs which now exceed almost all other IT costs. Companies don't want to switch because they might suffer high conversion and retraining costs. Then again, perhaps Microsoft executives believe that it has gained unmatched hypothetical leads in ease of use, manageability, and customizability of its software. And with the promise of better reliability and scalability largely delivered in SQL Server and to a lesser extent in the Windows OS, Microsoft managers might think why not raise prices when usable software easily displaces hardware as the crucial factor in delivering functional IT systems.

Or perhaps there is truth to the oft re-emerging rumour that Microsoft is determined to move much of its software over to an annual subscription model at the least and on-demand utility pricing models as the best for Microsoft and its customers as well.

But these are exactly the turbulent market conditions that famed Economist Joseph Schumpeter called capitalism's "creative destruction". Is eWeek right that given the increased prices, forced updates, and continued slow improvements to its core applications, Microsoft Office is courting a catastrophe? Stay tuned - Microsoft may be like a teenager changing lanes on the Enterprise IT freeway before it has mastered delivering the requisite availability, reliability, scalability and security capabilities across its total product line.

And we haven't even whispered any words on interoperability, until now.

[ShadowAce]

Given recent discussions of whether MS is a monopoly, I ran across this article and thought it might add to the discussion.

[RISU]

Greedy monopolist that double charges and tries to set up "toll gates" to use your own machine and hoards the cash so it can't get back into ciruclation so the boss can live in a neo-palace with artifical everything.

[Dominic Harr]

Thanks, interesting post.

I'll have to sit this one out today, and just read what others have to say later on this evening.

I'll be out at my parents-in-law's most of the weekend.

[Joe Bonforte]

This guy has completely missed the major trend that will force an upgrade cycle on most users. Starting in one to three years, we'll see lots of browser-based software replaced by software that takes a lot more advantage of the client machine.

Some refer to this as rich client, others as thick client, others as smart client. However you name it, the implication is that the client machine has to be able to handle more work. These applications will indeed have media, voice recognition, etc. mixed into them, and they will require some horsepower and memory to run.

This trend is fueled by the fact that rich client software is getting much easier and cheaper to deploy over the Internet, and to connect to Internet resources. Microsoft .NET leads this trend, with Java having the potential to become a player if Sun and IBM can (1) realize how important it is, and (2) figure out a way to get their runtimes/frameworks on the client machines. (I think this is the motivation behind Sun's recent lawsuit to force Microsoft to distribute the Java runtime.)

You can see various articles on the web already that discuss this trend. (Here's one published over a year ago.) And we're starting to see applications that run off a web page as soon as you click on them, as long as you've got the .NET Framework installed.

Now, the .NET Framework theoretically runs on 128MB machines, but we all know that it will need more than that. And all that rich client stuff is going to eat a lot of processor cycles too. So I'd say this guy's assumption that the down cycle shows no signs of ending because people don't need upgrades anymore is incorrect.

As to Microsoft raising prices, I think they see the rebound coming and see no reasons to panic the way others in the industry are. So they are holding the line on prices.

What this guy also fails to note is that, with Microsoft's changes in licensing, some customers pay more but others pay less. It's not an unambiguous price increase.

[gitmo]

Also, the development costs of a .NET application are a fraction of the costs for J2EE, or even old ASP. The environment is stable and inexpensive to maintain. I think this will be the major development arena over the next 5-10 years. Microsoft will be sitting pretty.

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[ShadowAce]

Yeah--there are definitely customers that would pay less, so an across-the-board declaration that they are raising prices is just wrong.

However, the assertion that they are the most expensive player in the Office arena is, I believe, correct. This is new ground for MS. It'll be interesting to see how they play this one.

[Cicero]

I think the writer is right to complain about Microsoft Office. I have it on all my machines because I want to be able to exchange files with friends and colleagues; but I never use it, I use WordPerfect by preference. Having Office used to be rather painless, but it is getting more and more expensive and more and more of a PITA. I really resent having to go over to a shelf, get out the CDs, and put them both into my computer every time I do a minor update from the internet. Significantly, Dell has recently offered WordPerfect Suite as an alternative on OEM computers, at a lower price than Office Small Business. New purchasers might just decide to revert to WP.

On the matter of having more power than any program needs, I think that's nonsense. If you build a highway, cars will come along out of nowehere and use it. If you build a more powerful computer, new software programs will appear out of nowhere to use it. That has always been the rule, and it will continue to be the rule.

Besides which, people are impatient. When you have the experience of clicking on an icon and opening a program almost instantly, who would go back to an older machine where you had to wait 10, 20, or 30 seconds for the program to open? You don't notice it until you try the faster machine. Then if you go back to the older one, it's very obvious and very irritating.

[ShadowAce]

I don't know if the writer is complaining about Office--merely pointing out that they are the most expensive right now.

In regards to your gripe about Office, try OpenOffice.org. It can read and write 99% of all Office documents, and it requires no install CD verification.

[ShadowAce]

Oops. I also meant to say that OpenOffice will run on Windows as well as a couple of other OSes.

[mrjeff]

The idea that .NET and heavy client apps are the wave of the future is still a dream in the eye of MSFT marketing. The only momentum .NET has is from the legion of Visual Basic programmers (dare I say sheep?) who march to Microsoft's orders.

[arthurus]

What a difference a year and and few months make. Going into its seventh year of 80-per-cent-plus market share of Office Suites, Microsoft has been able, according to Gartner Group, to raise its prices by 30 per cent to more than 100 per cent, while imposing unwanted conditions of renewal and other product update conditions on its largest customers.

This "monopoly is in the process of losing market to various linux offerings because of the cost problems. Many government agencies here and in other countries are going to linux as are many businesses. A monopoly can only be effective if the government protects it by raising costs artifically for competitors or otherwise restricting the market to prevent competition. A company can maintain a "monopoly" position only so long as it is sufficiently efficient and innovative that the customers remain satisfied that others do not provide the product cheaper and as good or better.

When the big company raises its prices because of its position as nearly sole provider to the point that other producers can undercut it in price and service then the exissting competitors must grow and new ones will enter the field.

[Dominic Harr]

Starting in one to three years, we'll see lots of browser-based software replaced by software that takes a lot more advantage of the client machine.

It started about 2 years ago, and Java rich-client tools are the hottest thing in corporate development today. I've got about a dozen deployed (I work for CSC), and have requests for about 5 years worth of work backed up.

The issue is not client power, but bandwidth.

*Warning* -- You need a high-speed connection for the first time you run this:

Java Rich-Client Demo.

We use the 'Java Plugin', there's a one-time download of the JVM. That is rather sizable, but not bad on a high-speed connection. You can also just load the JVM locally, if you'd rather, to avoid the download. The plugin is an amazing technology, we can actually designate the vm at runtime in the html.

.NET rich-client isn't even in the game, at this point. In 3 or 4 years, possibly, once .NET matures some. At this point, real .NET deployments are costly and buggy, with several deep issues in the CLR that MS will have to fix, one in particular which requires a complete rewrite of most code out there.

Then again, who wants to write 'windows-only' internet applications? Is the internet to become a 'Microsoft.net'?

That would be the end of the internet as we know it.

[gitmo]

And CIOs who want to save a bundle on development.

[Bush2000]

.NET rich-client isn't even in the game, at this point. In 3 or 4 years, possibly, once .NET matures some. At this point, real .NET deployments are costly and buggy, with several deep issues in the CLR that MS will have to fix, one in particular which requires a complete rewrite of most code out there.

What a joke. .NET Windows Forms kick Java Swing's ass in the rich client arena. Here's an interesting read. I've asked you to name these "deep issues in the CLR" several times and you consistently refuse to provide any specifics. This is what we call "demagoguing" an issue. And you wonder why no one takes you seriously: You never provide any evidence to prove anything you say.

[Joe Bonforte]

As usual, Dominic, your willful blindness where Microsoft is concerned causes you to miss the point.

I looked at the demo you suggested. A lot of fancy graphics (and pretty impressive at that), but nothing that can't be done in Windows Forms in .NET. I also noticed the long downloads, which are not going to help penetration of such technologies, especially if they can't offer anything more than fancy graphics.

Now let me tell you what's missing in this glorious Java world you promote for rich clients. Easy data manipulation locally (because it's built into the framework). A variety of data transport options to get data to and from the client and server systems over HTTP. The bulk of serious systems handle lots of data, and Java's client framework does not make that easy. (I see you shaking your head in disbelief, but it's simply because you don't understand what .NET will do.)

Other missing capabilities - a forms package that works outside the browser (at least I can't find otherwise, and your demo runs in the browser). An extensible code-access security model so that trusted web sites get more access to the client system resources. A default security model that allows rich clients access to a protected area of disk to store settings and data, without exposing the rest of the file system to malicious code. Complete local libraries for the rich client to use, including encryption, XML manipulation, various types of IO, printing, exception handling, interoperability with older COM software, etc. etc.

As for the two year stuff, yeah, my company has been doing these rich client apps for a little over a year, and I'm not talking a pretty front end for server stuff. One app required us to persist a 15,000 items list on the client to fill up drop downs. That took about ten lines of code and fifteen minutes of programming.

Here are things I don't know if Java can do or not, but .NET sure can: Run in offline mode (no server connection at all), store partial data results and later auto-update to the server. Local deployment with automatic updating. All this with minimal or no additional coding.

I tell you these things because I sincerely want you to understand the reality. If you Java guys keep up your mantra that Java is great and .NET is junk, you'll wake up one day no longer a serious competitor. If you think that's alarmist, well, I've already seen it happen. I remember the WordPerfect guys telling me how it was the standard and MS Word would never overtake it. I remember the Novell guys telling me what junk NT was, and how much better Netware was. Where are those technologies today?

The longer the Java community takes to recognize the hole they are in, the less likely it is that they will be able to catch up. And I don't want that to happen, because Microsoft tries harder when it has serious competition. When they have no serious competition, they get sloppy. It's happening in their browser right now. They innovated like mad as long as Netscape was a serious alternative, but when they dominated they stopped making IE significantly better (where's our pop-up filter blocker, for goodness sake?).

I had a conversation two months ago with a former Java guy. He's been doing .NET about six or eight months because his company (a consulting organization) added that line. He said he couldn't believe how much more he could do with smart clients in .NET, and how much faster it was to create software in .NET than Java. (It's ironic that ex-Java programmers can take advantage of .NET's OO framework much better than typical VB guys, because the Java guys understand OOP so well.)

You want more evidence about Java's troubles with client-based stuff? I do all kinds of Internet stuff. Yet until I needed to run your demo, I had no reason to get any recent Java downloads. How is the Java client stuff ever going to achieve critical mass on the client machines?

Finally, if Java is so great and is going to take over the world, why is the stock of Sun and BEA in the toilet? The investors don't care what technology wins as long as they make money on it. They've rendered their opinion. In a bit over two years (starting around the time MS announced .NET), Sun has gone from a high of over $64 to around $3 now. BEA has had a similar slide. To compare, Microsoft was at about $80 when they announced .NET (down from a previous high of about $120), and they're in the fifties now. If the Microsoft stuff is such junk and Java is going to take over the world, how do you deal with these facts?

[Joe Bonforte]

The only momentum .NET has is from the legion of Visual Basic programmers (dare I say sheep?) who march to Microsoft's orders.

Yep, we're all just sheep. I'm so braindead that I sleepwalked my way last year to an income so high I paid $40,000 cash for a new car.

But, according to recent surveys, there are several million of us Visual Basic "sheep". That's a pretty decent market for Bill, don't you think? I believe he might get some decent momentum out of that.

[RightOnTheLeftCoast]

Computers don't last forever, and warranties on disk drives have been narrowing. I think 2003-2004 will be banner years for new computer sales for these reasons. MS will do fine.