Most of the time, the boilerplate text in annual reports of public companies is the next best thing to Ambien.
But every once in a while, an insight sneaks in. And on even rarer occasions the lawyers allow top management to tell the unvarnished truth. In public. Under penalty of perjury.
That happened recently when Microsoft released its 2011 annual report, filed with the Securities Exchange Commission as form 10-K.
By itself, the document doesn’t immediately raise any eyebrows. But compare the block of text beneath the Competition heading (under Windows and Windows Live) with the same section from last year’s 10-K and it’s downright revealing. Here is the marked-up version, courtesy of the SEC filings page at Microsoft.com, with a technological assist from Microsoft Word 2010 (naturally). The strikeout marks indicate text that was in last year's statement but was removed for 2011; the underlined text is new this year:
The big takeaways:
Linux is no longer a desktop threat. A few years back, it looked like Linux might carve out a niche on low-end, low-priced netbooks. But the iPad took care of that hardware category, and this year Microsoft confidently eliminated Linux from the list of competitors to the Windows operating system. That shouldn’t be a surprise. Even a self-professed “Linux guy” like my ZDNet colleague Steven J. Vaughan-Nichols, acknowledges that cold, hard reality. (On the server side, of course, Microsoft continues to acknowledge that Unix and Linux are strong competitors.)
It’s a three-horse race. Last year, Microsoft used Apple and Google as examples of “well-established companies” that make up its main competition. This year, it threw in the word mainly. “The Windows operating system faces competition,” according to Microsoft, “mainly from Apple and Google.” Full stop.
Mobile matters. Desktop doesn't. I've been making that case for a while. Microsoft has now publicly acknowledged that they get it, too. Last year the threat was from "new devices that may reduce consumer demand for PCs." This year those devices are no longer new, and it isn't just consumer demand that's threatened.
The online battle is now inside the browser. As a professional wordsmith, I’m fascinated by the rhetorical shift from last year to this year. In 2010, Microsoft specifically called out the competition to Internet Explorer. This year, it struck all references to the browser itself and focused instead on the services delivered within it. In the list of competitors to Windows Live software and services, Apple (and, implicitly, its upcoming iCloud service) now gets a shout-out, right alongside Google and Yahoo.
Security is in, “innovation” is out. For as long as I can remember, Microsoft has bragged in its public filings of its record of innovation—a word that’s almost as overused in Redmond as revolutionary is in Cupertino. So it’s especially gratifying to finally see Microsoft’s top management literally strike through the tired “delivering innovative software” line. It’s even more interesting to see them confidently add the word security to the list of Windows strengths.
Is Microsoft getting more serious about the hardware business? My eyebrows almost hit the ceiling when I saw the new sentence added to the end of this year’s Competition section:
Our PC hardware products face competition from computer and other hardware manufacturers, many of which are also current or potential partners.
Now, Microsoft is no slouch in the hardware business. Some very nice keyboards and mice come out of Redmond. But it’s never been more than a footnote on the P&Ls, so the increased emphasis on this category seems a bit, well, odd. In the coming fiscal year, is Microsoft planning to expand its presence in the PC hardware market? I wouldn’t mind seeing a Microsoft-branded Windows 8 tablet, and there’s been some not-so-crazy speculation that Windows 8 could ship as early as April 2012—well before next year’s 10-K is due.
One thing I’ve heard through the years from Microsoft employees is that the company does its very best work when its back is against the wall. Linux may be neutralized as a competitive threat, but Apple and Google are formidable, even existential competitors. The next 12 months promise to be very interesting indeed.
So, what do you think? Is Microsoft's assessment accurate? Or have they missed a key part of the competitive picture?
(Hat tip to Wes Miller for pointing out the revised 10-K text, via Twitter.)