What Microsoft still does not understand

Forget competing with open source. Might as well compete against air. Measure yourself against IBM instead.
Written by Dana Blankenhorn, Inactive

I have read the latest news on Microsoft's efforts to "compete against open source" with amusement and wonder. (Picture by Matt Elder, a stellar caricaturist.)

They don't get it. Microsoft still does not know what its business is, or who they should be competing with.

They seem to think they're in the products business. Operating systems and applications are products.

They cost a lot to make, but you amortize that against millions of sales and once your sunk costs are dealt with it's profit time.

That's how it was in the 1980s and 1990s. That's not how it is.

Software now is a service, a means to an end, a part of a solution, an input.

Open source helped make this happen. Drop marketing and distribution costs to zero, share development across everyone with a need, and you not only have an unbeatable product, you no longer have a product.

Software now is what it was said to be a half-century ago, a service leading to a solution. If you want to survive in today's software business you don't sell a box or a download, you sell the result of what it does. That could be a service that spins money for you, one that spins money for your customer, or something that provides a vital input into your customer's business.

If you don't want to be in the consumer electronics racket, a fashion game for which Microsoft is as ill-equipped as Jack Black is for a Bond movie, then you have to focus on the high end. The cloud, big contracts, solutions so complex reporters can't even find the words to ask questions about them.

Forget competing with open source. Might as well compete against air. Measure yourself against IBM instead.

It might surprise you to learn this but over the last 10 years IBM has outperformed Microsoft in the market, and since the recession started the differences have only grown wider. Over the last 10 years Microsoft has lost half its value -- IBM is up 17%.

This is not because IBM embraced open source while Microsoft dismissed it. It's because IBM focused on the high end -- big solutions, big customers, real services -- while Microsoft remained a products business.

The key to understanding is labor, and how it's accounted for.

  • Microsoft capitalizes labor. Everyone who works on Windows 7 or Vista or Office is lumped together with other costs, and those costs are matched against product income to determine profitability.
  • IBM expenses labor. It tries to make certain it gets more for each hour of employee labor than it pays for that labor. Its sales force writes contracts based on the cost of that labor.

See the difference? For Microsoft the labor goes in before the money comes back. For IBM it's the reverse -- the money is coming in before the work even starts.

IBM has this market practically to itself. No other tech company can scale as well. Often it's going up against engineering firms with little technology experience. It can practically name its price, because it has a history of delivering on its promises, and knows what it takes to keep delivering.

IBM chairman Sal Palmisano (above) and Microsoft CEO Steve Ballmer are of similar ages, with similar builds, but Palmisano is easy to lose in a crowd while everyone in the media knows Ballmer by sight. Services and big complex projects aren't sexy. They don't win you a lot of press.

Products have to be to attract masses of people. The way you do that is with a story, usually one about a person. Microsoft is still telling stories about Bill Gates, which should tell you all you need to know. Because Elvis has left the building. (Elder drew the picture of the top as Gates was working to change his company's image, but it's apropos in a different way now.)

How can Microsoft compete with anyone if it doesn't know what its business must be to survive?

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