Microsoft Punished for Doing Research?
Jul 22, 2006 06:59 Filed in: Economics
The Associated Press reported this morning that
financial analysts are questioning Microsoft's
commitment to increase its spending by about $2.7
billion, much of which will be for research and
development. An increase in spending invariably
translates into a decrease in earnings, and the
plummeting price of Microsoft stock reflects this
drop in anticipated earnings.
As I see it, there are three factors that explain Microsoft's problems:
1. Microsoft has been a monopoly since the '80s, which means that its earnings have been based upon monopoly pricing of its operating systems and applications, not a true market price set by many buyers and many sellers. Because Windows and Microsoft Office are on virtually all the desktops of the business world, the file formats and protocols established by Microsoft have locked most businesses into a never-ending process of expensive upgrades that have enriched the management and shareholders of both Intel and Microsoft to an enormous degree.
2. As I mentioned the other day, monopolies have no intrinsic reason to innovate, and Microsoft is no exception. While there might be considerable differences between Windows 95 and Windows XP under the hood (which I doubt), the overall concept, GUI and "feel" have remained unchanged for eleven years and Vista, even after years and years of development, is looking to be more of the same with a few more bells and whistles.
3. Microsoft is now encountering competition from three directions: free software, (licensed under the GNU Public License and other licensing arrangements that limit the ability of developers to privatize code by simply altering it), Apple's OSX, and, perhaps most of all, Microsoft's existing software.
PC owners now have free, user-friendly alternatives to Windows and MS Office that didn't exist a few years ago. Many Linux packages come with word processing, spreadsheet, presentation and email software, all of which are as easy or nearly as easy to use as Windows/Office. It is a trivial task to download, install, and run Ubuntu Linux on either a PC or Macintosh. It comes with OpenOffice (word processing, spreadsheet and presentation software compatible with MS Office files), Firefox (web browser), and Thunderbird (email), all first-class applications that are comparable with their MS equivalents. Although Microsoft may brag that its software is easier to use and comes pre-installed, the difference in convenience is becoming smaller and smaller, and free exerts an attraction that is hard for expensive to beat.
Then there is Apple's OSX, based on the NEXT operating system, which is, in turn, based on BSD Unix, a tried-and-proven OS. Apple's GUI is reliable, relatively bug-free and an order of magnitude more secure out of the box than Windows. While Macintoshes form only a small percentage of computers in use, Apple's share is increasing, as it's easy-to-use software is attracting both businesses and home users. Further, the Macintosh's total cost to own has always been less than that of Window's machines, even though the computers themselves are considerably more expensive. Windows machines have always required an army of network and maintenance gurus to make them work, hence the preference of IT departments and consultants for a platform that justifies their existence. As the business world wakes up to this subtle con game Apple products are becoming more attractive.
Finally, Microsoft's biggest competition is Windows 98, Windows ME, Windows 2000, and before long, Windows XP. Windows XP is acceptably stable (finally!) and reasonably secure, provided that the user faithfully updates the software every week. As Moore's Law no longer guarantees the doubling of computer power every 18 months, the marginal advantage of upgrading is rapidly declining, resulting in longer upgrade cycles on the part of governments and businesses. Further, there is little to recommend the latest version of MS Office over Office 97 in terms of usability. Sure, there are enhancements and improvements, but for most businesses and home users the old software does the job just fine.
Seen in this light, Microsoft's predicament becomes obvious. Without an unassailable monopoly on the desktop and regular, significant improvements in the stability and power of its software along with faster microprocessors to run the new software, Microsoft must actually devote resources to innovation in order to stay ahead. Microsoft's tried and proven method of developing new products—buying up innovative companies—no longer seems to work as well as it once did.
Microsoft, one of the richest corporations in the world, has the talent and resources to easily maintain its lead as an operating system and application provider. The only question is whether its corporate culture will allow it to do so.
As I see it, there are three factors that explain Microsoft's problems:
1. Microsoft has been a monopoly since the '80s, which means that its earnings have been based upon monopoly pricing of its operating systems and applications, not a true market price set by many buyers and many sellers. Because Windows and Microsoft Office are on virtually all the desktops of the business world, the file formats and protocols established by Microsoft have locked most businesses into a never-ending process of expensive upgrades that have enriched the management and shareholders of both Intel and Microsoft to an enormous degree.
2. As I mentioned the other day, monopolies have no intrinsic reason to innovate, and Microsoft is no exception. While there might be considerable differences between Windows 95 and Windows XP under the hood (which I doubt), the overall concept, GUI and "feel" have remained unchanged for eleven years and Vista, even after years and years of development, is looking to be more of the same with a few more bells and whistles.
3. Microsoft is now encountering competition from three directions: free software, (licensed under the GNU Public License and other licensing arrangements that limit the ability of developers to privatize code by simply altering it), Apple's OSX, and, perhaps most of all, Microsoft's existing software.
PC owners now have free, user-friendly alternatives to Windows and MS Office that didn't exist a few years ago. Many Linux packages come with word processing, spreadsheet, presentation and email software, all of which are as easy or nearly as easy to use as Windows/Office. It is a trivial task to download, install, and run Ubuntu Linux on either a PC or Macintosh. It comes with OpenOffice (word processing, spreadsheet and presentation software compatible with MS Office files), Firefox (web browser), and Thunderbird (email), all first-class applications that are comparable with their MS equivalents. Although Microsoft may brag that its software is easier to use and comes pre-installed, the difference in convenience is becoming smaller and smaller, and free exerts an attraction that is hard for expensive to beat.
Then there is Apple's OSX, based on the NEXT operating system, which is, in turn, based on BSD Unix, a tried-and-proven OS. Apple's GUI is reliable, relatively bug-free and an order of magnitude more secure out of the box than Windows. While Macintoshes form only a small percentage of computers in use, Apple's share is increasing, as it's easy-to-use software is attracting both businesses and home users. Further, the Macintosh's total cost to own has always been less than that of Window's machines, even though the computers themselves are considerably more expensive. Windows machines have always required an army of network and maintenance gurus to make them work, hence the preference of IT departments and consultants for a platform that justifies their existence. As the business world wakes up to this subtle con game Apple products are becoming more attractive.
Finally, Microsoft's biggest competition is Windows 98, Windows ME, Windows 2000, and before long, Windows XP. Windows XP is acceptably stable (finally!) and reasonably secure, provided that the user faithfully updates the software every week. As Moore's Law no longer guarantees the doubling of computer power every 18 months, the marginal advantage of upgrading is rapidly declining, resulting in longer upgrade cycles on the part of governments and businesses. Further, there is little to recommend the latest version of MS Office over Office 97 in terms of usability. Sure, there are enhancements and improvements, but for most businesses and home users the old software does the job just fine.
Seen in this light, Microsoft's predicament becomes obvious. Without an unassailable monopoly on the desktop and regular, significant improvements in the stability and power of its software along with faster microprocessors to run the new software, Microsoft must actually devote resources to innovation in order to stay ahead. Microsoft's tried and proven method of developing new products—buying up innovative companies—no longer seems to work as well as it once did.
Microsoft, one of the richest corporations in the world, has the talent and resources to easily maintain its lead as an operating system and application provider. The only question is whether its corporate culture will allow it to do so.
|