Ballmer: Caught between a software rock and a services hard place

Ballmer: Caught between a software rock and a services hard place

Summary: If you were Microsoft's CEO, what would you do, at this point, to make sure not to cannibalize your existing software business while moving to more of a services-focused one?

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Microsoft CEO Steve Ballmer is not one to make concessions. He has laughed about Linux's prospects. He has pooh-poohed the iPhone. He has called Google bloated.

But on July 10, during his keynote address at Microsoft's Worldwide Partner Conference in Denver, Ballmer came the closest I've ever heard him to admitting that Microsoft needs to change its course. And fast.

"Consumers expect a move in this (Web) direction," Ballmer said.

While enterprise users are still in the planning phase, home users, small businesses and developers are moving full steam ahead on taking advantage of Web-based services, Ballmer conceded.

Ballmer's talk was billed as an attempt to clarify Microsoft's Software Plus Services (S+S) strategy, and explain how and where Microsoft's resellers, solution providers, integrators and other members of its channel fit into that strategy.

Ballmer did touch on those topics during his keynote (which I watched via Webcast). He reiterated that Microsoft believes customers will want not just services, but on-premise software, too, for the foreseeable future.

But Ballmer also went a step further and explained how Microsoft is reorienting itself to move more of its assets to the Web.

Ballmer explained that Microsoft already is rearchitecting its core platform to be more of a Web-centric one. As he told the Partner Conference audience, "the programming model stays .Net and Windows." But beyond that, Microsoft is is redoing its products and business models from scratch.

In a nutshell, Microsoft is taking the datacenter infrastructure it has been building to support Windows Live, Office Live, Xbox Live and other Live services, and is making it the crux of the company's future products, all across the board.

Picture a typical Microsoft architectural diagram. At the base level is what Ballmer called "cloud services." These are the core storage, networking, computing and management and operations infrastructural elements that some have called the "Cloud OS." On top of that, envision a layer of "Foundation Services" -- directory, device management, etc. And on top of that, "Application Services," specifically productivity, collaboration, commerce, search and community services.

If you took Microsoft's Windows Server, its core server applications and its Office products and turned them magically from software into services, you'd get a diagram like Ballmer showed.

"This is an ambitious project for us," Ballmer told the partner audience.

Wow. That's an understatement.

But Microsoft isn't really starting from zero. The company already has layed a lot of the groundwork. Windows Live Hotmail, Windows Live Messenger, Windows Live Spaces, Office Live, Xbox Live -- they already run on Microsoft server farms. And they already make use of an increasingly common set of interfaces and software.

(Compare Ballmer's architectural diagram with the Windows Live development platform outlined by members of the Live team in January. They are almost mirrors of one another.)

Ballmer warned partners on Tuesday that the vision he outlined isn't something that's way off on the horizon. He characterized the platform and vision he outlined as something that will start being relevant within the "next year to two years."

Ballmer said he believes Microsoft will "lead in driving this generation of computational model(s) and user interface" as it has in the past. Priority No. 1 is making sure the transition to a services-based platform is "a successful one for our customers, our partners, and of course, for Microsoft," he said.

Microsoft is in a tough spot here. The company is trying to sell shrink-wrapped Windows Vista and Office 2007 software. In February 2008, it's set to launch a bunch of new software -- Windows Server 2008, SQL Server 2008 and Visual Studio 2008. It needs its partners to be jazzed about selling this stuff. And it needs customers to believe they should buy and upgrade to these new software products, and not simply wait for hosted, managed and/or Internet-based versions of these products.

If you were Ballmer, what would you do, at this point, to make sure not to cannibalize your existing software business while moving to more of a services-focused one?

Topics: Windows, Microsoft, Software

About

Mary Jo has covered the tech industry for 30 years for a variety of publications and Web sites, and is a frequent guest on radio, TV and podcasts, speaking about all things Microsoft-related. She is the author of Microsoft 2.0: How Microsoft plans to stay relevant in the post-Gates era (John Wiley & Sons, 2008).

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  • Take the money and run

    [i]If you were Ballmer, what would you do, at this point[/i]

    The stock market won't let Microsoft do anything radical enough to deal with structural market changes (see [i]The Innovator's Dilemma[/i]). That's a major reason why [url=http://finance.yahoo.com/q/bc?s=MSFT&t=5y&l=on&z=l&q=l&c=ba,ibm,rht]Microsoft stock has been flat for the last five-plus[/url] years while others are substantially up:

    Microsoft: flat
    IBM: up ~50%
    Boeing: up ~120%
    Red Hat: up ~300%

    In a situation like that, the best that a CEO can do is leave the problem to someone else. Whether he pumps the short-term results before he leaves (thus going out a hero and incidentally pocketing a wad of bonuses) is a personal decision.
    Yagotta B. Kidding
    • Actually!

      I think Microsoft's market cap is greater than any of the companies that you've listed here. I don't see Google listed as that company more closely resembles the market that Microsoft is going into.

      If Microsoft's stock were to double it would be the most capitalized stock anywhere, including Exxon. Forget the bonuses Ballmer would get...that pales in comparison to the stock options/appreciation. Ballmer has a "few" shares still.
      THEE WOLF
    • Interesting "competitor"...

      Anyone can see how Red Hat and IBM fit in the comparison, but... Boeing? I'm pretty sure Microsoft doesn't make planes ;)
      Tony Agudo
      • Did I say competitor?

        [i]Anyone can see how Red Hat and IBM fit in the comparison, but... Boeing?[/i]

        I might have included pharmaceuticals or energy instead -- I added Boeing simply because I'd looked them up this weekend.

        Maybe the Dow would have been better? It's up 50% (about the same as IBM) while MS is flat.

        The point is that Wall Street doesn't seem to love MS any more. MS is pulling up the tail of the Blue Chip parade and its stockholders shouldn't be happy.
        Yagotta B. Kidding
        • It's even more interesting that in the last YEAR

          they've done better then Boeing AND Red Hat

          Plus, They haven't done it by selling off major divisons like IBM (a one time trick as they don't have them to sell off anymore) but on a slow and steady rise, a stock that will allways make you money (plus don't forget the stock slpit)

          Smart call on the "take the money and run" idea. I did: with Red Hat! (Bought for like 2 and a quarter, sold for 29) Smart move looking at the chart now (though I should have steeled out for 32).

          Boeing sells airplanes, not affected that much by the "tech sector" so that was odd.

          Should have done Apple
          John Zern
          • Does having MS stock make you money?

            If you buy right now will you make anything? I'm not seeing it personally. Strong and steady is fine for income trusts but not so great for companies like Microsoft.
            voska
          • Actually

            [i]Strong and steady is fine for income trusts but not so great for companies like Microsoft.[/i]

            And why not? isn't strong and steady an idication of future vitality?

            Too many people today are into "in and out quickly" which can actually lend to a company's future but, as in many cases we've seen also send a company into ruin as artificially high prices have no ROI.

            I have enough MS stock to realize that come the future when I wish to sell, it [i]will[/i] make me money, but in a case like Red Hat, selling it at 29 made sense to me as I can't gaurantee that it will remain high. Look at the people that bought RHT a year ago at 29 to 30: It hasn't hit that since.

            MSFT on the other hand at 19 to 26 a year ago will have seen the occasional drop, but has risen above that threshold.

            Look at Sears Holding Corporation: Their stock has risen (1000%) compared to Wal-Mart, after they merged with K-Mart to fend off... you guessed it, the darlings of Wall Street, Wal-Mart. Wal-Mart has dropped.

            Heck, MS told investors they would take a Billion Dollar hit on XBox repairs, and Wall Street didn't even flinch.

            How many companies can get away with that with their stock intact?
            John Zern
          • If you already have stock

            Then I think Microsoft is a safe bet to keep you money in. I'd say Microsoft is more of long term investment if you were to buy in now. If you want to see returns over the next 5 years you probably stand to lose money.

            I think you'd lose money because in most cases where significant gains are made they are always preceded by a drop. The drop followed by a gain that shoots past where you were before the drop. I don't see this happening in 5 years but in 15 years I do.
            voska
          • Stagnant Stocks Rasing Telltales in the Wind! ;)

            I think where the stock market has gone over the last 5 yrs., I have to side with "Yagotta B. Kidding"! Boon Days of M$ are about to go Bust and Bill abandoned ship just in time!

            The problem with the common share holders is that they tend to be too casual. Relying on surface indicators and past performance of company. So they never make a move until the ship is sinking. The smart and short term people are long gone, and taken their money and ran. Especially after M$'s own Patent Infringement fiasco and assorted court battle losses. Add that Billion here, Billion there Xbox defects, the fact that the almost yearly stock split being gone is gone, stagnant share price, Cash Reserves down from $60+ Billion to well under $30 Billion in three years, Zune not selling, Billion $ losses in game division, and now Balmer throws a stick of in the works with a long fuse that's sizzling away into next year.

            Do you run now, or stick in there with the old cronies parked on the "Ground Zero" lot?

            Reminds of that old Ramones song, "Should I stay or should I go, if I go there will be trouble, if I stay there will be double"!

            I sold my M$ shares 3 years ago. Then bought IBM and Sony shares. I must say, I feel very vindicated by that move as Microsoft faces it's quandary of gargantuan proportions. The effects of which will either make or break Microsoft over the next 5 to 10 years. If it was Bill Gates at the helm, I would have been more willing to take the gamble. But when you look at the hand dealt Steve Balmer, envy is not something that comes to mind!

            So Steve! Just take the money and run if your smart. Bill did!
            i2fun@...
  • Big dividend

    I'd announce a $20,000,000,000 cash dividend and move into bioFuels.
    swhiser
  • enterprise "cloud" services

    Mary,
    Even given the push to "software and services" I still don't see the day when corporate enterprises will see fit to let all their data live in "the cloud". However, the software and services model can still live in that scenario - its just that "the cloud" is an enterprise's own network rather than the internet. In other words, an enterprise's network isa microcosm of the WWW.

    Here's an example - I don't think many people doubt that Microsoft will eventually provide a version of Office that runs entirely in a web browser (or something like that anyway). At the back end of that is a web server but who says that that web server has to live in a Microsoft data center? It could just as easily live in an enterprise's data center and that way the enterprise is in charge of rolling out new functionality when THEY want, not when Microsoft roll it out "in the cloud". And of course, rolling out a new service is alot easier than rolling out software onto thousands of desktops.

    That's where I think they are going with this.

    -Jamie
    jamiet
    • So why ZNET doesn't hire you

      Finally someone gets it. In addition I think MS will also continue to allow internet service providers to provide "cloud" services - the outsourced data center services - which can be cheaper in many cases than in house data centers. I am guessing Microsoft won't require all ASP services to be by Microsoft itself. Although we have seen MS move into this area. First with MSN. Then when they bought BCentral and started hosting FrontPage web hosting. Then they added SharePoint hosting. Competing with one segment of their customers which is ISPs and ASPs. But not everyone switched to Microsoft hosting as they probably didn't want to increase MS's monopoly power. Not to mention prices dropped dramatically in hosting and dedicated servers and even in dial up internet connectivity. If didn't allow any web/email or dedicated server hosting providers to use microsoft servers, to try to get all that money themselves, the hosting providers would focus on *nix, and some customers would switch from Microsoft hosting platform to *nix due to the not wanting MS to have increased monopoly, while some would faithfully switch to MS in house hosting and services. Which would further erode Windows "market share." When clearly what MS is into as priority 1 is market share - they would never make such a move in my opinion.

      So why ZNET doesn't hire you to write their articles instead of all the ZNET authors who are for some strange reason infatuated with Google is beyond me. With all this talk stock in this thread, I'd almost assume ZNET holds stock in Google.
      bearlyworking
  • Just like MS

    This is typical for MS... late to the party. Now, like several times before, they will attack with fangs and claws to re-capture their top position, but this time it's going to be tougher. Google is way ahead, and making huge strides. Then, of course, you have literally dozens of other loose-knit efforts that are also superior to MS's online services.

    I don't know, is it me, or does online services look like MS's Waterloo?
    cyngaines
    • my gues is it's just you.

      Yes a little late to the starting gate, but full all out adaptation is nowhere close to saturation.

      MS see's money (as do many others) and wants in on the game. Yes, they'll sell billions in software, but at the same time, if there's a monet to be made on services, you can bet that MS will be there.

      I think we're seeing the resurgence of Microsoft.
      John Zern
      • I don't think so

        I'd say it's too early for that. Microsoft is still holding the king of the mountain position. You can't really have resurgence if there is nothing to come back from. It's kind of like having the Heavy Weight belt and making a come back. You already have the belt. what are you going to do fight yourself?

        No, Microsoft has to fall first then they can make a resurgence. I have no doubt Microsoft will fall. It's just a matter of time and it happens to all large corporations. In fact it seems large corporations need to fall just like a forest needs a forest fire. It cleans out the old and clears room for the new.
        voska
  • Tough Road Ahead

    MS dominates the desktop, but it really isn't that much of a player in the web space (Live, maybe MSN search), etc. They are not the big dog like Google, YouTube, MySpace, Music, Movies, etc. Given that most of the web (content, web 2.0) is largely free of control by MS, they will have a hard time convincing others to rely on their technology and become once again dependent on them. This is a case where MS's past history of embrace then extinguish may cause them to never gain control. People are far to wary.

    TripleII
    TripleII-21189418044173169409978279405827
  • Can MS freeze the market until it can develop online services ...

    Can MS freeze the market until it can develop online services that can successfully compete with the others (Google, salesforce.com, etc.)?

    That is the question. . .

    Time will tell. . .
    Basic Logic
  • Consumers take what certain people say as gospel. They do not think.

    The web-based myth is going to eventually fail.
    HypnoToad72
  • Online services is not where its at. Despite the hype

    I know lots of computer users. Lots and lots. Individuals of all kinds and types shapes sizes and computing needs. And any time online services/applications is suggested as a possible wave of the future, every single person I know draws to the same conclusion.

    1. If there was so kind of application they seldom or hardly ever used, and it was available online, quick easy and free for those few minor times they find themselves needing it, that would be great.

    2. Any application or service used on a regular, or even semi-regular basis is far to important a commodity to trust to the availability of an internet connection. Bottom line is, if they loose connectivity for any reason, even briefly, they do not want to loose availability to even one of their top 10 services or applications, even those that may only get used once and a while through out a workday.

    3. Many of the people I am talking about now have very strong and fast computers, frequently with their preferred settings in most of their applications, and those applications snap to attention pretty quick and they just cant see similar performance from an online service, not now or in the near future.

    4. If the online services only made changes to the online offerings that suited them personally, in fact making changes that appealed to them and never making changes that they didn't personally care for individually, that might make it nicer...but how do you do that when the application or service is being accessed by millions of people who are bound to have some contradictory opinions on what would be better or worse.

    5. Finally, anyone I have talked to who actually likes owning a computer as it turns out also likes, a lot, owning their own software and having it run off their own HD. I guess its just a human thing; when we think on it awhile we would always rather own things then borrow them so to speak.

    The fact is, any software company worth a pinch of anything for brains is looking towards online services as their longterm financial savior. If it can be made to work by sucking in enough of the public, and increased technology of course, it would be a system cheap to run and could open up massive, piracy proof, profits by way of offering "deluxe versions" of online services for fees. It wouldn't be long before even your OS booted up over the internet and you no longer "own" a computer in the sense you do now; instead you purchase a box, like you do with a TV today and get all your content on a temporal basis from online services paying as you go and praying your connection doesn't die. Purchase online services packages the way cable TV packages are now...never quite the package you would really like, and difficult to impossible to add to or subtract from on a piecemeal basis , just try and avoid to much crap you don't want, but are stuck paying for while getting most of what you want without sacrificing anything you really need.

    The only thing different in a future with broad and widespread online services would be that you still wouldn't have access to every program or service you want, but you would be paying for a few you don't want, and if your internet connection goes down, or your service provider gets ticked at you for any reason, all you have at home is a so called computer thats more like a TV without a network connection, a big useless box.

    Its better to own, even if you cant own it all.
    Cayble
    • To add to that

      What happens when the software online is upgraded and will not work well (at all) with a user's old gear? I really don't think the software folk are going to host a long version trail for those who don't want to or can't afford to upgrade.
      zkiwi