Microsoft, A Death Foretold?

Article  by  Denis GUTHLEBEN  •  Published 20.01.2011  •  Updated 28.02.2011
Microsoft headquarters
The annual turnover of this software giant works out at around 2,000 dollars a second, yet it is often reported to be at death’s door. Time to take stock of the company, now in its 36th year.

Summary

Colossus, giant, mastodon, heavyweight there is no shortage of adjectives when it comes to describing Microsoft. Innumerable newspaper articles, books, programmes, Internet sites and blogs devoted to the American multinational have exploited the lexical field of gigantism to the point of exhaustion. Journalistic hyperbole? Very probably, but in this particular case, it is well and truly justified. The results announced by Microsoft for the tax year 2010 set the tone: the company employs 90,000 people around the world, has a turnover of more than 60 billion dollars, and makes a profit of 19 billion dollars. If these figures make you giddy, then close your eyes and imagine a place somewhere in the world where every second, 24 hours a day, 7 days a week, two lovely thousand-dollar bills fall from the skies. You are in Redmond, in the State of Washington, at the head office of the Microsoft Corporation.



The entrance to the campus, and front of a Microsoft building, Redmond, WA, United States

In recent years, however, an increasing number of epithets have been creeping in. The colossus is said to be shaky, the giant fragile, the mastodon breathless and the heavyweight swaying. In a sector where value does not equate with numbers of years, Microsoft is rumoured to have become too old to meet the challenges of the 21st century. At 35 years old and compared to its more pugnacious competitors, it resembles a tired, sick old grandfather. Some observers have even gone so far as to announce its disappearance. One such voice comes from programmer Paul Graham, who in a column published in April 2007 was already saying, "suddenly, a few days ago, I realised Microsoft was dead"[+]     NotePaul Graham, “Microsoft is Dead”, April 2007 X   [1] a violent death such as only the United States can dream up. In a word: murder. The long list of suspects Paul Graham draws up includes Google, Apple and Internet, to name but three, and his conclusion is worthy of Murder on the Orient Express: each of the suspects bears some of the guilt.

But here’s the rub. Three years have elapsed, and Microsoft’s heart is still beating. In burying the multinational with undisguised pleasure – "I am happy Microsoft is dead"
could it be that Paul Graham and his many successors have jumped the gun, rather? Have they not perhaps taken their wishes for reality by omitting to list, alongside the recognised weaknesses of the multinational, all the trump cards it still has in its hand? And have they not underestimated the figures, which are indisputable, revealing that for the last ten years, apart from a slight wobble due to the 2009 economic crisis, the company’s turnover and profits have been steadily increasing, making it one of the most powerful economic strike forces on the planet? Today, with earnings of 2,000 dollars a second, Microsoft is a rather healthy-looking corpse, whether its over-eager gravediggers like it or not.

Microsoft’s turnover and profits, 2001-2010
(as of 30 June, at the close of the tax year, in billions of dollars)

Abuse of market power

One outstanding event has marked Microsoft’s recent history, and it is neither technological nor commercial, but legal. The multinational has, in effect, paid the price for the aggressive sales practices that have always been one of its trademarks, in some high-profile lawsuits. Admittedly, these have not had quite the impact they are sometimes reputed to have had. The Redmond company has been dealt a bigger, tougher bone than all those it has hitherto clamped onto, yet has not lost its teeth for all that. So what is this all about, exactly?
 
In Europe, one immediately thinks of the role of the Brussels Commission, and in particular, of the 500 million euros it demanded from Microsoft in March 2004 for abuse of market power, then of the additional 900 million euros it claimed in February 2008. Yet the game was on even before that on the other side of the Atlantic. The multinational is effectively under permanent surveillance under the Sherman Antitrust Act, which aims to banish monopolies that run counter to free competition in the United States. From the early 1990s, Microsoft was in the hot seat and the various procedures finally resulted in a spectacular trial that opened in May 1998. At the time, the firm, under the direction of Bill Gates, responded energetically to accusations of which it publicly declared itself to be the victim, but of which no Softy, from base to summit of the company, doubted the validity. Scarcely veiled threats, unabashed bad faith the heavyweight flexed its muscles, convinced this was enough to keep its enemies on the ropes and persuaded of the validity of the famous adage, "what is good for Microsoft is good for America". No one could forget the images of the company’s boss defying his judges during hearings whose highlights were relayed by the media worldwide.

Bill Gates during the trial initiated by the American Justice Department in 1998
 
The decade now drawing to a close has, however, been characterised by a change of tone. The rodeo shows are over. Apologies, reconciliation and compromise are the order of the day. There is nothing very surprising in this. Microsoft has merely acted in the same way as any company faced with similar trials and condemnations. The 900 million euros demanded by the Commission is the heaviest penalty in all of European history, and represents more than 10% of Microsoft’s annual profits. But the problem is that although, in the end, the market has not evolved to any significant degree – nine client exploitation systems out of ten in the world are still Windows – Microsoft’s new position was quickly interpreted as a sign of weakness. The Redmond boss must have been feeling extremely fragile to be toeing the line like this, in particular by announcing to all and sundry grand principles respecting "consumer choice", "opportunity for other developers" and "interoperability for users"[+] NoteThe “Windows Principles” can be found on the company websiteX [2]. Has the Microsoft bulldozer gone soft? Perhaps this really was the beginning of the end and an open door to all its competitors.
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A generational quarrel: the old lion attacked by young cubs

The competitors did not wait for the old lion to show signs of lethargy before nibbling its prey. They began by running away with a few choice morsels such as online search engines in the case of Google and the digital Walkman in the case of Apple. And observers now believe the entire meal will be whisked away from under Microsoft’s nose. It is difficult not to recognise that the observation is, at least in part, valid. Financial data reflects this development: the growth of Microsoft’s turnover has been more or less linear, whereas that of Apple and Google has increased by leaps and bounds. Moreover, growth did not falter for the latter in 2009 and Apple was even hot on the heels of Microsoft in this respect, the outsider drawing closer to the reigning champion by “only” several tens of millions of dollars.

Turnover for Google, Apple and Microsoft, 2001-2010 in billions of dollars
(* first two quarters of the 2010 tax year)

Once again, criticism came thick and fast. There were two recurring themes. First, that Microsoft has revealed in the eyes of one and all its inability to develop and market products that are both innovative and attractive. You do not need to be a specialist in the new technologies market to realise that this particular criticism hit the nail on the head. The BOB interface, Tablet PC, SPOT watch and Surface tactile table are all dead and buried…like many other digital revolutions heralded with great pomp and circumstance. How many people listen to their favourite music on a Zune? And how many, on the other hand, on an Ipod? Apple, which is only two years younger than Microsoft, has managed to combat the image of an ageing company by offering a whole range of products firmly anchored in the latest modern trends. The Redmond multinational on the other hand, seems to be panting to keep up, bogged down in technological ideas barely worthy of the last century and has long been incapable of seeing which way the winds of modernity are blowing. The symptoms had already appeared around fifteen years ago when Bill Gates in the first version of his book The Road Ahead – omitted to tackle one element, and by no means the least important, in the picture he painted of the future of global information technology – Internet, no less…[+] NoteBill Gates, The Road Ahead, Viking Press, 1995.X [3].
 
In a similar vein, the second type of criticism concerns Microsoft strategy. One of its favourite practices is well known: copying the competitor, improving its product and flooding the market, completely crushing any competition. This has paid off more than once in the past and Microsoft earned itself a solid reputation as a "fast follower". But those days are gone, as can be seen in the field of search engines with the abortive attempt by Microsoft in 2008 to acquire Yahoo! so as not to be outstripped by Google: 45 billion dollars on the table, with a failure into the bargain, and a competitor, who, despite the indisputable qualities of Bing, continues to prance about in the lead.


Search engine market shares in the United States (August 2010)

To these difficulties can obviously be added others, such as the insistence, seen by others as madness, on selling packaged products in an era of online service, falling behind in the video games sector, the pirating that recent joint operations between the FBI and the Chinese authorities have failed to stamp out, and more. As the list gets longer, reports on the imminent death of Microsoft are multiplying. But can they be believed?
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Insatiable greed

In October 2007, Microsoft CEO Steve Ballmer announced plans for twenty acquisitions a year for at least the next five years. The multinational’s insatiable appetite would seem proof of its vigour. Things don’t quite add up, however, since Yahoo! has perhaps managed to escape, but it is still an impressive list. The body count for the 2009 tax year included, for example, the interactive games company BigPark, the data warehouse technologies provider DATAllegro, the software developer for corporate data Zoomix, the flagship company for comparative shopping technology Greenfield Online, and the pioneer in the use of natural language processing for online research, Powerset. We are therefore back at our point of departure: Microsoft’s profits allow it to acquire companies at the value of 52 million dollars each day, including Saturdays and Sundays. Who can beat that?
 
This bulimia reflects the company’s double objective: to strengthen its core business and to prevent markets it has entered more recently, from escaping its clutches – first and foremost, its core business. Exploitation systems are, and will remain for a long time yet, Microsoft’s central activity, and in any case will make the biggest contribution to increasing its turnover. As long as there are results in this sector[+] NoteAnd even if Microsoft does not manage to dominate the servers market where the latest published figures show that 60% use Linux -based OSX [4] – and nothing presages that there will not be in the medium-term – concerns over the company’s future are unwarranted. Despite the blow it received in 2006 with the launch of Vista, a system widely criticised by specialists and professional journalists, Microsoft was able to recover with the release of Windows 7 and the publication of all the highly favourable opinions that have accompanied it since October 2009. By regaining control just three years after this setback, Microsoft proved it had broad shoulders in the sector that drives its business. And given that Microsoft plans to equip two billion clients before the end of 2010, it has to be said that its core business is still healthy and has a rosy future.

But what of other markets? Video games, for example. Competition is cut-throat. In leaving the field of personal computers to make a dramatic entrance into that of living-room consoles, Microsoft was taking considerable risks. Above all, it gained itself some new enemies - Nintendo and Sony, no less. Its results are clearly not of the same order as those of these entertainment champions. But with the barrier of 40 million consoles and 500 million games crossed early in 2010, the Xbox 360 is not really what one might call a failure! All the more so since this market has enabled Microsoft staff to gain experience in fields where it was previously lacking. With the launch of Xbox Live, Softies are learning about subscriptions and trials carried out with a certain measure of success – ten million subscribers in 2008, twenty million in 2010 – could well provide grist to the company mill in other fields. For one of Microsoft’s great strengths is creating bridges from one sector to another, distributing innovation to the whole of the group. Once again, even if some of these sectors do not prove immediately profitable, the multinational can afford to wait.

World market shares for living room consoles in 2009

This is true of other Microsoft activities as well as video games. Armed with studies carried out over several years on online paying services, of which Xbox Live is just one facet, Microsoft has gotten itself into running order for the online advertising battle, conscious that the Web has become an essential channel in the purchasing process of consumers. Not only is the "fast follower" not out of breath, but it is increasingly managing to breathe in fresh air.
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Microsoft in the clouds

To enter these fast-developing markets, Microsoft has a key advantage over its competitors. One can ramble on indefinitely about the company’s innovation capacities and identify the extent to which it is lagging behind its competitors, but one figure remains indisputable: that of its expenditure on research and development. During the 2009 tax year this amounted to almost 9 billion dollars. Over the course of that year, moreover, Microsoft opened two new research centres, one in Cambridge, Massachusetts and another, the European Technological Centre (in Paris, London and Munich) dedicated in particular to online research, was inaugurated on 2 October 2008. By way of comparison, for the same period, Apple’s R&D expenditure was seven times less. This difference is not exceptional but reflects long-term development, which has always been very favourable to Microsoft and its 7,000 researchers around the world.


Microsoft and Apple’s R&D budget for 2001-2009 in billions of $

There is no lack of examples of innovative research. Microsoft is constantly improving its search engine, Bing, in a bid to differentiate itself from its competitor, Google. It is also exploring new avenues in the entertainment field as its Natal Project for Xbox 360 testifies. Natal Project uses a software program and special sensors to follow the body’s movements, recognise faces and respond to verbal instructions or even changes in the user’s tone of voice. It heralds, as Steven Spielberg revealed in June 2009 at the Electronic Entertainment Expo in Los Angeles, the disappearance of the manual control stick in interactive leisure. In a similar vein, "intelligent information technology" should make it possible not just to respond to the needs of personal computer users but to understand and anticipate them, allowing them to save time by concentrating more on their objectives than on the procedures they must follow to achieve them. The first breakthroughs in the field of what is known as artificial intelligence are very encouraging. They may well even cause tremors of excitement in science fiction fans.
 
But that is not all. For its future growth, Microsoft’s great challenge centres on its capacity to combine the power of office automation software and the Internet audience. This technology is known as "cloud computing" and is supported by the Windows Azure platform, which reached the market in February 2010. For Microsoft, this represents a real revolution, of the same magnitude as the microprocessor in the 1970s. It aims to link the equipment of each user – at present these are mainly large companies – to gigantic data centres allowing them to access their own environment and the information they need from wherever they may be. There are, of course, no lack of competitors including Amazon, IBM and Google. But this time, Microsoft is not going into battle alone and its alliance with Hewlett Packard and Intel has attracted influential clients. As recently as early October 2010, Sogeti, the computer services organisation subsidiary of the big computer services group Capgemini, joined its cloud platform[+] NoteIt is interesting to note that the term "cloud" appeared for the first time in 2001 during a Microsoft company conference.X [5].
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Microsoft, RIP?

So, rest in peace, Microsoft? It all depends on how one looks at the Redmond mastodon. It is highly tempting, it is true, to examine each of its component sectors one by one to identify weaknesses and gaps. Bing, which is admittedly on the up, still cannot hold its own in the face of Google. Xbox sales are puny compared to those of Nintendo’s Wii[+] NoteEven though the launch of its latest console, the Kinect, a descendant of "Project Natal" - and the first figures hint at a repositioning of the company in the video games sector - make it a more serious competitor for Nintendo and SonyX [6]. Apple’s Ipods have met with a success that continues to elude Microsoft products, which are substantially less user-friendly. And one could go on and on until one realises that Microsoft is not just the sum of unconnected sectors, but a real group, which, whilst not quite a monolith, is strongly cohesive.

Why are the critics always so quick to forget this nonetheless vital fact? Alongside all the technological, commercial and sometimes editorial considerations – announcing the death of Microsoft has always been, ever since it was created 35 years ago, a sure way to sell papers – there is a strong psychological dimension: the story of the giant who bites the dust has seduced generations of readers and listeners since time immemorial.

Taking a stance against these attractive stories which often have no sequel, we venture to place a bet on the future and predict that Microsoft will long occupy a prime position in the global economic landscape despite tough competition within the IT sector. The stake is 2,000 dollars a second.
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Key Figures

  • Founded: 1975
  • CEO: Steven A. Ballmer
  • Chairman: Bill Gates
  • Head Office: Redmond, WA, United States
  • Number of employees: 88,596 (30 June 2010), including 53,601 in the United States
  • Turnover 2010:  62.48 billion dollars
  • Profits for 2010: 18.76 billion dollars
 
The five Microsoft divisions
Division
President
Description
Latest product(s) launched
Windows and Windows Live
Steven Sinofsky
 
 
Responsible for all Windows products, packaged or online, this division also manages relations with PC manufacturers.
Windows 7
Server and Tools
Bob Muglia
Responsible for servers and server solutions.
Windows Server 2008 R2
SQL Server 2008 R2
Visual Studio 2010
Windows Azure
Online Services
Qi Lu
Management of the online advertising platform and Bing information offer.
 
Microsoft Business
Kurt DelBene
Division mainly concerned with the Office suites and office services programmes.
Office 2010
Exchange 2010
SharePoint 2010
Entertainment
Robert J. Bach
Division responsible for the Xbox and its accessories, games, Xbox Live, and all entertainment (PC games) and music (Zune) products.
It is currently undergoing restructuring after the announcement by Robert J. Bach that he is leaving.
10.3 million Xbox 360 consoles sold during the 2010 tax year.
Launch of the Kinect in November 2010.
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References

  • Roberto Di Cosmo, Le hold-up planétaire: La face cachée de Microsoft, Paris, Calmann-Lévy, 1998.
  • Mary Jo Foley, Microsoft 2.0: How Microsoft Plans to Stay Relevant in the Post-Gates Era, Wyley Publishing, 2008.
  • James Wallace, Jim Erickson, Hard Drive: Bill Gates and the Making of Microsoft Empire, Collins, 1993.

Translated from the French by Liz Guill
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  • 1. Paul Graham, “Microsoft is Dead”, April 2007
  • 2. The “Windows Principles” can be found on the company website
  • 3. Bill Gates, The Road Ahead, Viking Press, 1995.
  • 4. And even if Microsoft does not manage to dominate the servers market where the latest published figures show that 60% use Linux -based OS
  • 5. It is interesting to note that the term "cloud" appeared for the first time in 2001 during a Microsoft company conference.
  • 6. Even though the launch of its latest console, the Kinect, a descendant of "Project Natal" - and the first figures hint at a repositioning of the company in the video games sector - make it a more serious competitor for Nintendo and Sony
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