Will Microsoft become the General Motors of software?
It has near-monopoly status and nimble, disruptive competitors. We’ve seen this movie before.
By Jay R. Galbraith, president and founder, Galbraith Management Consultants
Galbraith questions Microsoft's resolve to change. Image: Galbraith Management
The more I learn about the current situation in software, the more Microsoft’s position seems to mirror General Motors’ position in the auto industry a few decades ago. Like Microsoft (MSFT) today, GM was an icon in its industry, held a quasi-monopoly, produced eye-popping profits and was often distracted by antitrust lawsuits. When a company experiences this kind of environment over a couple of decades, it eventually loses its competitiveness. Of course, Microsoft would vigorously deny any such comparison. The top executives in Redmond, Wash., claim to be on top of the trends in the industry. They are confident they can develop all the software they will need to be competitive.
My concern is not with the leadership of Microsoft; I am sure Ray Ozzie, the chief technical officer, will stay on the cutting edge of the technology. But its 15,000 to 20,000 middle managers have never been through a downturn (assuming they’ve worked only at Microsoft). And to me, you are not a real company until you have been through a downturn. Growth and high margins are very good at covering up a company’s bad habits and unresolved issues. When a downturn hits, all of the flaws come to the surface and the company purges itself of its bad practices. A 3% decline in sales in 2008 – Microsoft’s first ever – during the worst recession in decades will not wake up Microsoft. The bad habits will persist.
Microsoft’s Options
The best thing that could happen to Microsoft would be successes by Apple (AAPL) or Google (GOOG) that cause a significant loss of sales and market share. The shock would create a sense of urgency and cause the leaders to clean house. The worst thing that could happen is a success with Windows 7, which would reinforce management’s focus on the desktop. Then, as customers move away from the desktop to smartphones and other devices, market share will decline. But if share declines slowly, maybe a point or two a year, the drop will not be enough to overcome the pride that comes with high margins and high profits. Over time, the desktop mafia will experience a shift from pride to hubris. Welcome to the General Motors scenario.
I am not concerned about Microsoft developing the software. They always have. My question is whether they will develop the new business models. As computing moves away from the desktop and onto small mobile devices, the industry moves away from Microsoft’s strengths. Consumers are driving computing now, though, and customer-centricity is not a Microsoft competence. Steve Ballmer, Microsoft’s CEO, will have to give a lot of his famously YouTube-worthy stage performances to convert the middle managers who are currently enjoying monopoly profits.
Microsoft’s Path Ahead
Microsoft also suffers from the incumbent’s curse during a technological transition. The curse is well described in Clayton Christensen’s research. Cloud computing, in which software and other applications are housed in a central location and delivered over networks to end users, could lead to a shift away from desktop-based computing and from complicated operating systems. As Microsoft adapts to it, will it promote cloud computing or protect Windows? Will the team leading Microsoft’s Azure cloud computing business have the freedom to cannibalize the desktop? Or will it be integrated into Windows, where the desktop mafia will slow, modify and dilute the efforts to convert to a new business model?
The General Motors scenario does not have to happen. Ballmer can focus inward on transforming the desktop mafia to the new computing paradigm. Or, better yet, appoint a hands-on, change-experienced chief operating officer who can do it with him.
Galbraith is founder and president of Galbraith Management Consultants, an international consulting firm that specializes in solving strategy and organizational design challenges.
RBZ (Tucson AZ) makes some great points. However, I don't think Microsoft quite fits the definition of a "monopoly." Even if they have dominant market-share, Apple is definitely a strong competitor that influences the market and Microsoft's strategy in the PC market.
Cloud computing may eventually get to the point of being abstract beyond the operating system, but it isn't there yet for cloud application developers. If you are building applications for the cloud, the service you use runs on one operating system or another (Amazon.com's EC2 gives you a choice of Linux or Windows, Windows Azure runs on Windows, for instance) and you need to be aware of this.
Users of applications, on the other hand, don't need to know what OS the app is running on, but this is not specific to the cloud. If I use an application on my friend's computer, I don't need to know what the OS is either. (Yes, certain common behaviors might give it away, but most cross-platform applications at least attempt to provide a common user interface to every OS it is built on.)
However, some aspects of the OS are abstracted from the developer in cloud computing. Installation, patching, upgrading, hardware drivers, etc. are handled by the hosting service, so the developer can focus on building apps.
Even if a truly platform-independent language is used, the developer still must consider whether to use that language or a plaform-specific language, which might be better-suited to the developer's expertise and types of tasks he/she wants the application to perform.
Perhaps the cloud will, at some point, allow true OS-agnosticism, but it isn't there yet.
This is a decent assessment of the situation. However, there's an underlying computing issue that is at the heart of Microsoft's monopoly that you don't touch on. The trend in computing over time is for the level of abstraction to rise. Initially computers were programming at the lowest level with the actual 1 and 0s. Languages were invented to make that easier. When IBM first came out with the IBM PC, it was slow enough that the first applications wrote to actual machine registers, forcing slavish compatibility to the actual PC architecture. When competitors were able to legally reverse engineer the IBM "BIOS", the PC compatible was born. As PCs got more powerful, Microsoft's Windows OS, thoroughly intertwined with applications that Microsoft wrote for that OS, became the de-facto standard. Compatibility with Windows became the key to success. Microsoft has effectively leveraged their control of the OS for years, as is well-documented. All the mobile devices and cloud-computing tools raise the level of abstraction past the operating system. So to play in that realm, Microsoft has a huge problem of shifting their approach to development and design. They have some of the world's best developers and a strong commitment to basic research in the Microsoft Fellows program, but the design basis of their revenue stream is a huge problem. Computer are becoming appliances embedded in the devices around you, not things that sit on your desktop. Apple's BSD core inside OS X and Google's Linux heritage lend themselves well to the world of embedded computing appliances. And for desktop sales in the developing world, buyers are very sensitive to the price of the computer, which complicates Microsoft's licensing revenue stream from with manufacturers. All this said, when Microsoft realized the Internet was the key to future, Bill Gates did an amazing job of re-orienting the company to adapt. But Bill has moved on to philanthropy…
I do not believe that any of the responses have dealt with the substance of the article. It is not about cloud computing, industry trends, Microsoft’s attempts to diversify, or the changes that they implemented to rewrite all of their software. It is about whether they can rewire their organization after two decades of huge monopoly profits.
There is a lot of research on the subject. The odds for Microsoft are not good. This is a topic where I know the research well. The best of the genre is Danny Miller’s “The Icarus Paradox: How Exceptional Companies Bring About Their Own Downfall.” We know that year after year of success build stronger and stronger immune systems in these companies. These immune systems eventually fight all foreign bodies – even good ideas. Then when an industry transformation comes along, the company is fat, has many bad habits and does not listen to new ideas. This is the scenario followed by IBM pre-1995, Xerox, Polaroid, Kodak, DEC, Data General, Olivetti to name a few.
But General Motors fits the Microsoft situation better than the others. GM had a market share of over 60% when my dad worked for them. That share was a little over 20% when they went into bankruptcy in 2009. How could that happen? Some comments said it was the UAW. That is an excuse. A company gets the union that it deserves. Besides, when Toyota ran the GM joint venture in California with a UAW workforce, it was successful. When Saturn created a new company and a new relationship with the UAW, it was initially successful. The GM immune system rejected any new ideas from these successes.
Other commentators said, “…GM was simply building bad cars with [too] many people.” How naïve can we get? Why does a leadership allow the building of bad cars with too many people to go on for years? If Jack Welch had been there, that would not have happened. He learned to deal with the United Electrical Workers (UEW) as he transformed GE several times. Instead, GM has appointed one visionless finance guy after another as CEO. The 15,000 to 20,000 people below the leadership became the most change resistant group of middle managers to be found anywhere.
The scenario of a couple more decades of high profits and gradual loss of market share means that Microsoft could repeat the GM experience. But Ballmer could follow in the footsteps of Jack Welch at GE or A.G. Lafley at Procter & Gamble. They led transformations of very successful companies. But they are the exceptions.
You have to actually go out of your way to not use Microsoft software. And guess what? Mote and more people are doing that every month. Just like going out of your way to pay for a foreign car.
Microsoft is primarily a software company and as such their competition is neither Google nor Apple.
Someone should mention that to Steve Ballmer, then.
The article author seems to have a good high-level view of industry trends and interactions. Many of the commenters, do not.
Give me a break, get your webmaster to redo your comment page so the first comment appear first and not last, likewise you don't read a book from the last page to the first.
If I were to go through the first paragraph and substitute GOOG for MSFT, it would read as comfortably.
Microsoft is primarily a software company and as such their competition is neither Google nor Apple.
Interesting comparison. However, I would agree with John (Canton, MI) that the comparison doesn't quite fit the situation. Microsoft has generally shown itself to be very flexible, innovative, and adaptable to change. A lot of the posts on here suggest that Microsoft is relying on a monopoly, rather than innovation and flexibility, to sell products. However, Todd (Ft. Lauderdale, FL) seems to offer the only really valid criticism so far – Microsoft has entered some competitive markets too late, found themselves behind, and lost money because of it. This shows that they are willing to take risks and it goes against the idea that they are monolithic, infelxible, unfairly profitable and profit by relying on monopolistic power and user lock-in.
Microsoft faces fierce competition on all fronts. They are constantly watching Apple, Google, Linux distributors, Oracle/Sun, Mozilla (Firefox), etc. With that, they are very aware that they need to keep adapting in order to stay competitive.
I also don't agree with the author's suggestion that cloud computing will ultimately hurt Windows. Galbraith asks, "As Microsoft adapts to [cloud computing], will it promote cloud computing or protect Windows?"
Cloud computing and Windows desktop PC's doesn't have to be an either-or scenario. It will more likely just offer additional possibilities for network computing. With the increase in mobile devices, acting as thin clients, desktop usage has not declined. Most users are getting BOTH instead of one or the other.
The one case in which cloud computing likely will replace machines is when organizations move their server-hosted applications and data-storage into the cloud. This might require a reallocation of resources, but certainly doesn't threaten the PC operating system market.
There are many comparisons that could be made and all would have some similarities, As the tech industry develops and evolves much more quickly than many other sectors it might be worth looking at what happens to Microsoft in the future and then making comparisons to other companies, it took GM many years to reach its highs and find its lows – Microsoft is still relatively young, see where it is in another 10 years. The big things in tech always seem to be revolutionary rather than evolutionary and Microsoft has not been good at that since their initial releases.
I've always considered Microsoft to be the McDonald's of software—good enough for the masses but not particularly satisfying.
This is one of the few articles I've seen that makes sense in a long time.
Unfortunately for MS, even if Apple or Google succeed, they will not notice. Apple success is in the mobile space (iPhone/iPod), Google is in search/advertising and soon cloud services. Neither of those are on the desktop arena, where MS is focused.
If you look at the trend of operating system market share, MS is loosing share very slowly. Even if Apple was incredibly successful, it won't gain more than 2 percent points in 2010, my prediction is that it will get about 6% by the end of 2010, and perhaps 10% by 2011. Which to MS eyes will be a great success. Only loosing 2 to 4% market a year. Nothing to worry about. The next version of windows will surely reverse that trend…
In the mean time, the mobile market will be owned by other companies, it will become more and more relevant, and Windows 8 will again be a huge success (90% market share, in a market condemned to oblivion). By 2020, MS will have imploded.
Great reading
Brian, if you are aware to a way to run windows software without an underlying Microsoft OS, then give me the ticker so I can invest. Wine under Linux? I love Linux and have used it for many years including windows programs under wine. But it is not for production use, not even close and never will be. Windows is a moving target. Anything else you are thinking of (virtual servers?) has a complete licensed windows OS underneath. "The cloud" is niche market and will not displace any meaningful desktops. If it does it will be something like Citrx (underlying windows OS). There is just too much legacy code that is too expensive to rewrite.
Microsoft has never been a leading innovator. They copy and buy, not invent. But through (past) marketing and various tactics they have truly become a monopoly that can not be broken by the market any time soon. MS broke IBM's virtual PC monopoly by coming in the back door and getting bundled with IBM products. MS will not let this happen to themselves.
Consumers may go the way of Apple or the cloud but I am doubtful it will happen in the next 5-10 years.
If we have some major financial boom where everyone is making money hand over fist then all bets are off, I just don't see it happening.
That explains why there is so much trouble with the u-verse box & system. My bank put in new windows based ATM's a few years ago. They were all replaced within 3 months. Constant crashes, eating cards, etc.
I have 5 macs, some 5 years old. None have EVER crashed. All run Leopard. My old printers work fine with all of them. Try installing vista or 7 on a windows 98 machine (I installed 10.5 on a 10.3 machine).
MSFT lost me 5 yrs ago, just like GM did years ago.
GM and Microsoft are alike… they are both high-centered on a rock, spinning their wheels, and going nowhere. That rock is innovation they cannot see from the driver's seat. They need to get out and take a look from a different vantage point.
Microsoft's challenges have less to do with cloud computing and more to do with priorities, focus and what it sees as an acceptable way for the company to compete.
MS has a tendency to pursue [large] markets with very strong competitors. That is not a problem. The problem is that they can lose an inordinate amount of money over a long period of time doing this. For example msn search/Live Search/Bing vs. Google, Xbox vs. Sony's Playstation and Nintendo, Playsforsure/Zune vs. Apple's iPod.
Microsoft's internet division continues to lose money and the division with the Xbox and Zune have since the Xbox's introduction in 2001 reported over 6 billion dollars in losses (fiscal 2002-2007). In fiscal 2008 that division reported 325 million in profit and 5 million in fiscal 2009.
The problem is not simply the size of some of these losses. In the world of business, things can shift quickly. This is doubly so in technology. By the time Microsoft thinks it's found financial footing against these competitors, the market may have moved in another direction.
With the Xbox 360 MS looked to have Sony's Playstation on the ropes, but then Nintendo took the market in another direction and raked in profits while MS and Sony's products burned cash. Now Microsoft again has to invest in overcoming a strong competitor. Hopefully for its shareholders MS can do so while making a profit. (Incidentally Sony is looking resurgent again as Nintendo cools.)
The situation is similar when it comes to competing with Apple's iPod. After playsforsure did not succeed MS launched the Zune in November of 2006. Two months later Apple unveiled the iPhone, then in September/October they released the first iPod touch. The Zune HD was released two years later for the holiday season of 2009 to strong reviews but the market had moved on. While people are still buying stand alone portable media players the growth area is for portable devices that have apps like the iPod touch. At this writing there are over 100,000 apps available for the iPhone/iPod touch platform.
The massive iron here is that Microsoft has a decade long head start over apple in the handheld space. Windows CE/Pocket PC/Windows Mobile is a platform that MS has been developing and marketing since the 1990s. But due to a lack of focus and vision they now trail Apple and RIM and also have to contend with Google's free Android and Palm's new WebOS.
Microsoft has not only squandered its lead here, but also with digital media distribution (iTunes) by allowing a once dominant Windows Media player to be sidelined by a more focused and agile Apple. The situation is arguably worse when it comes to web browsers and the cloud computing that they facilitate. Microsoft's once overwhelming marketshare could have been used to build the future of the web, but again MS squandered the lead.
Microsoft's problems have nothing to do with specific technologies, products or markets, but everything to do with leadership.
Two obversations:
1. The rise of the cloud marks an important milestone in evolution of computing, just GUIs, Client-Server, and the web were important milestones. Each of these evolutionary phases required Microsoft to change, and the ability to re-make themselves is one of the company's core competencies (via self-criticism and continuous improvement). In fact, Microsoft has already announced that *all* of it's enterprise software products will be available as installed software or subscription from the cloud (over time), and it has moved agressively and successfully to deliver the first and second steps on that path. So, change is required, the company is good at change, and it's actually showing evidence of changing. For these reasons, I think Toyota would be a better comparison (IBM is more like GM). The risk to Microsoft is also similar to the one Toyota has faced – they have grown their employee base very rapidly… now that Microsoft is 90,000+ people can it continue to maintain it's historical cultural behaviors of embracing change and continuous improvement?
2. The cloud will not totally replace the computing paradigms that came before it. With each evolutionary change in computing models, this has never happened. Mainframes aren't dominant the way the used to be, but they are still around. Instead, the cloud, servers, and a wide arragy of computing devices will all work together to make new, better experiences possible for users. Google, Apple, IBM, Microsoft, everyone basically agrees on this… but Microsoft is the best positioned to make good on this vision.
For example, Microsoft software runs PCs, sure, but also SmartPhones, Picture frames, Ford SYNC in-car systems, AT&T UVerse cable boxes, industrial equipment, etc, etc. Server software continues to grow, and in the cloud, services like SharePoint Online, Office Web Apps, Bing, and Windows Azure are emerging, as well.
MSN; a loser, due to neglect. Zune; huh? Mobile OS; NOT likely. Outside the OS and Office – the 2 GO TOGETHER – MSFT is in decline. Ballsup just mimics Gates, so there is NO FRESH VISION of the CHANGING future, just the past… but the EU, and half-heartedly, our Justice Dept toadies, won't let that happen again. Without FRESH BLOOD at the top, and a BOLD FOCUSED CONSUMER-DRIVEN, MSFT will NEVER again experience it's predatory Golden Days.
This article is an insult to GM. GM had many innovations, that they didn't just buy from other companies and market as their own. They had great designs, etc… they didn't spend most of their effort trying to rip off people and force them into using their brand.
BTW, Jeff, Windows software doesn't just run in Windows. Technology improves, you really ought to keep up with that if you are going to comment on it.
Probably a better comparison would be Microsoft and Sears. Sears has been known to be innovators throughout most of their first 100 years, then they stopped. The problem with Sears was that their managers were afraid to be disruptive. The attitude throughout the company was "if it ain't broke, don't fix it." Sears simply lost being the retailer to the consumer. Microsoft not only has no concern for the consumer, they no longer have a focus. Microsoft has Google-envy because it makes them sick that Google stole their "send me money" business plan.
Anyone that has used multiple desktop platforms can see that MSFT has been a copier rather than an innovator for a long time. I see no reason for them to suddenly morph into a progressive cutting edge development company. Their research and Development is tied up in blocking viruses and fixing problems with an old inflexible platform. However, they have made a lot of money for a long time doing exactly that. The question is not will they transform themselves, but can the company still make money by selling mediocrity. I think they can, but this certainly is not a growth market anymore for them, like it is for their competitors.
hmm…bad cars with to many people, how about bad software with to many people. What other piece of electronics do you have in your house that takes 2 or 3 minutes to come on when you push the on button and 5 minutes to turn off? If Microsoft really had the talent and forsight to think outside the box there is no telling what kind of an operating system that could have designed. Instead they spend year adding more complications to existing spaghetti code. It is just a matter of time till somebody comes out with something better.
Karl wrote: "this is not worth reading.
Bad comparisment! GM was simply building bad cars with to many people."
MSFT is a lumbering dinosaur with no vision and no innovation who builds bad software with too many people. When is the last time MSFT developed anything worth noting? Their business model reminds me of the russian pole vaulter who used to raise the bar a millimeter at a time in order to set a new world record as many times as possible. He pulled this off countless times during his career to keep himself in the limelight. MSFT is doing the same thing. Improve your product just a tad with each new release to keep the customer paying, and paying, and paying.
I have been thinking the same. Microsoft is out of touch and arrogant, just like GM. People are flocking to Apple (just like Honda & Toyota). New windows 7 ad has young lady stating that she wants a computer that won't crash & be full of bugs. GM used the line "the car you knew America could build" over and over. Both are admitting prior products were garbage. Of coursr, the new products also were garbage. Microsoft is doomed and nothing will change that. Natural selection also exists in the business world.
Bad analogy. How would GM be doing if virtually all of the gas stations only had fuel that worked in GM cars. This is the type of monopoly Microsoft has. If you wanted a better analogy you would compare Microsoft to a monopoly oil company and apple and Google to alternative energy companies. There may be some long term possibility that the alternate could become the standard, but not likely in my lifetime.
People who invest in Google are truly clueless in my opinion. For most people Google is a free product. Free products have no brand loyalty. ask myspace.
It's a bit easier for Microsoft
1. No union interference.
2. It's easier to lock your customer into a software system than into a car. Unlike a car, the longer you have your software, the tougher it is to leave it
3. It will take longer to distribute their cash balance than it took GM because they don't care about widows, orphans or anybody else.
Poor research into business and industry trends and what Microsoft is doing t maintain leadership. "The worst thing that could happen is a success with Windows 7". Such statements are just to add spice to the article but any one with common sense knows that Windows 7, as a core product, needs to succeed for Microsoft to succeed.
Somewhat untimely evaluation. Microsoft has been the GM of software for at least 10 years. They have been more "copiers" than innovators for quite a while. GM and Microsoft are like the proverbial large old tree. They die a slow death, and it takes a long time to see what is happening. Long and slow…….
this article seems to assume that there haven't been tremendous changes at Microsoft over the past few years. A huge cloud push for the Enterprise, the first gaming platform to push online as an experience/marketplace, a diverse business, not only focussed on the desktop but committed to online, search, gaming, enterprise servers, cloud computing… seems the author here needs to do a little more research.
Everyone seems to be think that cloud computing and personal computers are an either-or scenario. The fact is that creating home videos, taking pictures and editing them, creating good quality documents, are all better performed by a desktop software, atleast in the near future. I believe that Microsoft will not abandon its desktops and office products, just as much as Adobe will not abandon its photoshop just because the latest buzzword is the cloud.
Never seen such a heaping garbage can full of trash. (I'm begging you to mess up big time so you can see your faults, clean house, and be so much better for it!) Yeah, let's follow that advice and 10 years from now we can expect to be back where we are today! Hmmm let me think….NOT!