Could Microsoft Create Its Own Market Break?

Recently, for the first time in years, we’ve sensed some activity in the nearly moribund Office Suite market.  Of course, it’s not that no one buys office software – we all do – but rather, that Microsoft has so completely filled the market that no one has felt it was possible to compete there.  Existing vendors have all but disappeared (Lotus SmartSuite) or kept to their accepted niches (Corel’s WordPerfect).

Suddenly, we see some interesting possibilities.  They seem to come about because of the interesting and unpredictable convergence of trends and events from very different places, all having an effect on how this enormous market and its primary vendor behave.  Before you think I may have lost my mind, let me offer a few facts:

Microsoft Plays The Annual Revenue Card

Microsoft has discovered (as have many mature software providers) that their corporate customers are unreliable upgrade buyers.  Corporate users, with their thousands of employees to upgrade, train, and support, are only too well aware of the costs of an upgrade (and very cynical about its purported benefits).  Office Suite upgrades just haven’t seemed to offer enough upside value to offset the formidable cost and trouble they imply. 

Microsoft countered by trying to find a new way to package upgrades and support that would at one and the same time appeal to the corporates by making the upgrade process continuous (fixes, patches, and upgrades all the time – no need to wait!) and at the same time, guarantee that every corporate customer would buy every upgrade for every user.  What they didn’t count on was the fact that corporate calculators might be sharper than rosy vendor estimates of costs versus benefits.  Many corporate customers quickly decided that this enforced schedule was (a) more expensive and (b) unappealing.  They rebelled.  Microsoft back-pedaled by pushing back the dates (twice) by which customers had to sign up or loose the ability to get upgrades at discounted prices.  The new (and avowed final) date is July 31^st.  In case you’re wondering, there seem to be a lot of hold-outs.

The Economy Affects It Budgets Badly

In the meantime, between the bursting of the dot.com bubble and the recession we’re just beginning to exit, IT budgets have been significantly decreased.  Most analysts agree that IT spending in 2002 will be flat or only slightly increased over 2001.  (If youo read the next article on CIO’s IT Survey, you’ll see that over the next 12 months, CIO’s expect IT spending to be up only 3.2%.) 

Financial results for many blue chip hardware and software firms have been less than happy as a result.  More to the point, IT managers are looking to save, not spend, money.  As one of our subscribers wrote me, “We are not purchasing anything new until the 1st of the year.”  Another said, when you have only a few nickels to spend, you spend them carefully.  As IT managers look across all their expenditures trying to make cuts, buying an upgrade to software that works perfectly well doesn’t look like an investment they want to make.

The Government (And Some Corporates) Start To Play The Linux Card

In the midst of higher prices and lower budgets, we have the rise of Linux.  We all know that the real cost of equipping office workers with computing function is not software (or hardware), but rather human costs, especially support.  We pay for support in every computing environment and it’s not cheaper in the Open Source world.  Nevertheless, it’s hard to discount the fact that Linux offers a free operating system and that some Linux software, including an office suite, is available free, too. 

Add to that the fact that there is a move afoot in some government quarters to consider Linux (as Unix was once considered) as a kind of magic key, letting all software run on all hardware, and therefore, to mandate it as the standard government platform, and you can see why Microsoft would start to get nervous.  In fact, they have recently tried to convince the government that (a) open source software represents an unacceptable security risk (Mitre, a highly respected government consulting firm has claimed that, in fact, open source software is more secure) and (b) it’s not fair for the government to spend U.S. tax funds improving Linux in competition with private sector vendor products.  (See http://www.washingtonpost.com/wp-dyn/articles/A60050-2002May22.html for the Washington Post’s coverage.)

This week the German government decided to favor Linux as its computing platform (this, in the land of OS/2), adding further fuel to the fire. (More on the German government story is here http://www.pcmag.com/article/0,2997,s=1582&a=27745,00.asp).

Market Break?

A market break occurs (you can usually only see them after the fact, not before or during) when some event changes what mainstream customers will choose to buy.  For example, The announcement by IBM of its Personal Computer in 1981 was such a break.  Before, users generally did with little or no individual access to computing (which was largely terminal based).  After, computing started on the road to becoming highly personal.  By the early 90’s, more than 80% of U.S. office workers sat in front of a PC, changing office work and office workers forever (and making Microsoft one of the most important companies in the world in the process).

Another market break occurred in about 1990, when Microsoft introduced Windows 3.0.  Before then, PC users put up with the user-unfriendly DOS interface.  After 1990, software that was Windows compatible pushed earlier software out of the market.  In fact, that is how Microsoft’s Excel came to exceed Lotus 1-2-3 in popularity and Microsoft’s Word to push WordPerfect out of its market dominance.

Conventional wisdom has held that there was no market break coming that could unseat Microsoft from its dominance in the Office Suite market.  But perhaps by changing the pricing formulas just as the economy turned down and new alternatives surfaced, Microsoft has helped to engineer what should be a market break.  We wonder.

Microsoft Is Nothing If Not Nimble

Of course, Microsoft has proven amazingly nimble when faced with past market changes.  For example, when the Internet changed the basis for competition, Microsoft was quick to shift much of its emphasis to the browser and to an electronic mail client, Outlook, that put it right back in the mainstream of the market.  We can think of several ways Microsoft could avoid any potential market break here:

1. They could once again postpone the price change for the Office Suite or they could simply select an additional pricing option and make it available to customers who don’t find what’s now on the table acceptable. This isn’t likely to be what Microsoft wants, because an annual subscription is a  milestone on the road to usage-based pricing, which is what a .NET-based office product is going to want, but Microsoft has been flexible in the past about pricing and it could be flexible again.
   
   

2. It could invest in a company in the Linux market.  Microsoft did this before in the Unix market and, with their investment in Apple Macintosh OS X (which is Unix) they’re most of the way to a Linux investment anyway.  An investment might be more palatable than the next option.
   
   

3. Microsoft could simply offer a Linux Office Suite.  Linux application software is NOT free software.  There is some free software available and some customers who will prefer it, but well-crafted and well-supported software is always worth more money and much of the available Linux software is still relatively young and less feature-rich.  Microsoft could compete if it wanted to.

Of course, Microsoft may believe there is no chance of a market break; as I’ve said we normally can only see these events after they occur.  Or they may have another game plan, but it may not yet be evident, even to those who believe we watch these markets carefully. 

Disavow Madness

It is important not to get swept up in the craziness that can abound when alternative options start to surface.  For example, recently a letter from Ralph Nader and James Love of the Computer Project on Technology surfaced, address to Mitchell Daniels, the Director of the Office of Management and Budget.  You may find it at http://www.cptech.org/at/ms/omb4jun02ms.html. 

In it, Nader demands that Daniels investigate how the government spends its money on Microsoft Office software.  Nader wants the OMB to use its role as a major procurer to level the competitive playing field by demanding that Microsoft provide its source code, port its products to other platforms, and other actions that seem clearly illegal and not appropriate government activities.  The OMB is certainly free to set up any legal requirements it wishes for government buyers to follow; it is not, however, I believe, in the business of telling whole industries to rearrange themselves to suit Mr. Nader’s strange notions of economics.

I suspect that this will not be the last strange demand we’ll see.  Perhaps we need to let our government know that while we encourage it to consider all reasonable solutions to its computer problems, we want it to do so by looking at reasonable products, offered by their vendors as commercial products to the marketplace and not by demanding that every possible combination, however uneconomic, be produced under some ill-considered doctrine of fairness.  Taxpayers might want to remember that it is we, ultimately, who pay the bill for whatever our government buys.   

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