In-Depth

Microsoft vs. the World: Can Microsoft Knock Out Its 6 Biggest Rivals?

Once the undisputed champ of IT, Microsoft is now the underdog in many segments, and many are wondering if Redmond still has the mettle to fight its way back.

PunchingUp

Kevin Turner paced the stage like an animal in a large circular cage.

Introduced for his Microsoft 2011 Worldwide Partner Conference (WPC) keynote as "chief compete officer," a play on his actual title of Microsoft chief operating officer, Turner proceeded to eviscerate Microsoft's competition with words.

Coming in for a dose of Turner's trademark, country-tinged zingers were Google Inc., Salesforce.com Inc., Oracle Corp., VMware Inc., Apple Inc. and Cisco Systems Inc. The crowd of Microsoft partners packed into the Los Angeles Staples Center in mid-July ate up the performance. Capturing the mood, Arterian CEO Jamison West tweeted from the seats: "Kevin Turner has a career in comedy if Microsoft doesn't work out."

Beneath the laughter, though, lurked a question. Tough talk aside, will any of Microsoft's efforts against Turner's -- and Microsoft's -- chosen competitive targets succeed?

***

Not so long ago, Microsoft's dominance in technology markets seemed semi-permanent.

"Competition is always a fantastic thing, and the computer industry is intensely competitive. Whether it's Google or Apple or free software, we've got some fantastic competitors and it keeps us on our toes," Bill Gates told ABC anchor Peter Jennings in a February 2005 interview. At the time, the comment seemed to be more of an attempt to calm antitrust regulators than to describe reality.

The next year came the inaugural Millward Brown BrandZ list of the 100 most valuable global brands. Microsoft earned the No. 1 rating worldwide with an estimated brand value of $62 billion. Microsoft's closest peers were non-technology companies such as GE and Coca-Cola. Google and IBM Corp. had little more than half of Microsoft's brand value, with Apple far back at $16 billion. Millward Brown certainly had the impression that Microsoft's brand value had nowhere to go but up. The company gave Microsoft a "brand voltage" score -- an indicator of how likely the brand is to gain market share -- of an impressive eight out of 10.

But it turned out that the brand voltage belonged to other tech companies. Microsoft dropped behind Google in 2007 and stayed at No. 2 for three years. In 2010, Microsoft fell to fourth, with IBM and Apple taking second and third place behind Google. This year, Apple is first with an estimated brand value of $153 billion, Google is second at $111 billion and IBM is third at $101 billion. Microsoft sits in fifth place at $78 billion, and is behind a non-technology company (McDonald's) for the first time.

In 2005, as Microsoft looked out across the competitive landscape, it was as if the company sat on top of an upside-down cereal bowl, with its competitors mostly scrabbling to climb up the outside of the bowl from the rim. In 2011, it's like the bowl has been inverted. Microsoft is still in the middle, but looking upward at competitors on the rim in many directions.

Maybe Gates really was worried about Google, Apple and free software in 2005.

***

Still, Microsoft has plenty of strengths. The company enjoys a dominant market position in PC OSes, (paid) server OSes, corporate e-mail and desktop-productivity applications. Other advantages include a strong -- if eroding -- position in Web browsers; heavily-funded footholds -- some shaky, some firmer -- in search, virtualization, tablets, CRM and smartphones; and a considerable pile of uncommitted cash.

It was with those advantages behind him that Turner used his WPC keynote to punch upward at all of Microsoft's competitors. Turner's one-liners provide a useful roadmap of the competitors that Microsoft views as most strategic as Redmond tries to fight its way into various markets. Following is a Turner-ism about each competitor, what we'll call a "KT Bombshell" (KT is Turner's nickname inside Microsoft), followed by some context about Microsoft's prospects in each area.

Apple Inc.
KT Bombshell: "That should tell all of you a lot about the importance of having a great OS. Even the Apple franchise stores think so." (Said in reference to a picture of an Apple Authorized Reseller in Latin America selling Windows 7 on Apple hardware.)

For more than a decade, Microsoft had Apple in a competitive box. The Cupertino, Calif.-based company had a small but very loyal base of users and held a single-digit share of the all-important PC OS market.

Obviously, all that's changed, and the company represents a serious challenge to Microsoft on several fronts. Apple hasn't so much eaten away at Microsoft's PC OS share -- although it's done that a little -- as it has redefined how people interact with technology. In other words, Apple hasn't made Microsoft's PC share smaller so much as the company's iPhone, iPad and the clones those two products inspired have made the PC itself a smaller share of the user experience.

The most striking evidence of Apple's new market power came in late July when both Apple and Microsoft released their earnings. Apple's quarterly revenues were $28.57 billion with a net profit of $7.31 billion. Microsoft had quarterly revenues of $17.37 billion and a net income of $5.87 billion. Microsoft's revenue growth was solid at 8 percent year-over-year. Apple's revenue growth was 10 times Microsoft's at 81 percent.

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Remarkably, Windows revenue fell 1 percent compared to the year-ago quarter. As for the iPad, a product many observers didn't think there would be a market for, Apple sold 9.25 million units in the quarter -- a 183 percent increase in units over the previous year. Apple COO Tim Cook was quoted as telling analysts in the earnings call, "It's clear that some customers chose to purchase an iPad instead of a new Mac, but what really excites us is more customers chose to buy an iPad than a Windows PC."

At the same time, Apple sold 20 million iPhones in the quarter. Microsoft Windows Phone 7? Microsoft isn't saying, although Microsoft CEO Steve Ballmer got the biggest laugh of WPC during his keynote when he joked, "Phones, we've gone from very small to very small, but it's been a heck of a year."

Apple's quarterly revenue from the iPhone was reported at $13.3 billion, a figure that includes hardware. Meanwhile, Seattle Post Intelligencer eagle-eyed blogger Nick Eaton dug through Microsoft's 10-K filing to determine that the absolute maximum revenue Microsoft could've made from Windows Phone 7 since the October 2010 launch was $613 million for the year. The actual revenues were surely much less because Windows Mobile, Zune, Surface and other product revenues were packed into that figure.

Turner did have more substantive points to make than his line about the Latin American Apple reseller.

"Let's talk about [Apple's] ecosystem and what is it. They're a tremendous competitor. This is my best description of their ecosystem. They have five different platforms, from the TV to the iPod Touch to the iPhone to the iPad, certainly to their Mac platform. And they run, horizontally, iTunes across that. And they have some ecosystem divides within those five platforms. And it's your guess as good as mine on whether they'll ever unify Mac and iOS. I don't know that," Turner said.

He went on to describe how the Windows strategy is significantly different. "Our future at Microsoft is the ability to unify the ecosystems and the user experiences. It's the ability to enhance those ecosystems with great cloud services," Turner said.

Microsoft has talked up the benefits of a unified ecosystem ever since it started putting Windows on servers, phones and purpose-built tablets.

What's really new is what this argument comes in service of. In the past, the argument was rather baldly in the service of Windows everywhere. Whether or not the traditional Windows interface met the need of the device (such as a phone), it met Microsoft's need to have its OS on all devices to support Microsoft's own business goals.

Now, with the "Windows 8" previews of early June, the re-imagined Windows looks like it will actually meet the needs of tablet users, the Windows Phone 7 and "Mango" interfaces arguably meet the needs of phone users, and the strongly hinted-at Windows 7 legacy option within Windows 8 would meet the needs of mouse-and-keyboard PC users even as the more tablet-like aspects make it intriguing for next-generation PC form factors.

Rather than a unified interface to meet Microsoft's own needs, it's a varied interface to meet actual users' needs. Suddenly, the idea that a common architecture would also support development across different platforms is more compelling, as well. For example, the fact that the version of Internet Explorer 9 on Mango will be the same as the one on the PC will make things easier on Web developers.

Losing badly in the new categories of mobile computing devices to Apple and Google appears to have focused Microsoft's collective mind on real users' needs. The big question is whether there's time left for Microsoft to make an impression or if the world has settled into a two-platform mindset, with Apple and Google as the winners and the rest as also-rans.

Next page: Microsoft vs. Google and Salesforce.com

Google Inc.
KT Bombshell: "This is a company that has a mission statement that they have to remind themselves not to do evil, right?"

When it comes to competitors driving Microsoft executives crazy, Google seems to be the poster child. It was a Microsoft employee going to Google that prompted the infamous alleged Ballmer chair-throwing incident (the employee described the incident in a court deposition; Ballmer denied that it happened).

Like Apple, Google is a serious competitor to Microsoft across a broad spectrum. In smartphones, Google has been more of an obstacle to Microsoft than Apple because both Microsoft and Google share the business model of providing a software platform for hardware providers.

Microsoft has been trying to gain ground against Google for years in the search market. According to Turner, the company is having some success.

"We're going to keep putting the pressure on in the search space. Look at this, last three years, 142 percent," Turner said pointing to a slide showing the progress of Bing in search share against Google. "We were left for dead, ladies and gentlemen, three years ago in the search space, and look at where we've come -- almost 27 points of combined share in just three years."

Turner promised partners that Microsoft would continue to grow and that partners should evangelize Bing to help.

Some others voices in the industry aren't willing to concede that Microsoft is making meaningful progress. In a Reuters op-ed syndicated in The New York Times later in July, Robert Cyran and Martin Hutchinson argued that Microsoft should sell Bing.

"Bing is the industry's distant No. 2 after Google. It has become a distraction for the software giant -- one that costs shareholders dearly. The division that houses Bing lost $2.6 billion in the latest fiscal year. Facebook, or even Apple, might make a better home for Bing. A sale would be a boon for Microsoft's investors," the authors argued. They speculated that the Microsoft Bing unit would be worth $11 billion in a sale.

One area where Microsoft's efforts against Google have more industry credibility is in cloud-based productivity applications. With Office 365 out the door to compete against Google Apps, Microsoft is leveraging its desktop-productivity dominance to strengthen its position in the cloud.

In fact, Turner's best one-liner against Google applied to that area alone: "Office 365, ladies and gentlemen, is nothing but a Google butt-kicker. That's all it is."

Ballmer also allowed himself a bit of competitive hyperbole around Office 365 at WPC. "Any place we engage, or a partner engages with Office 365, we win. The very few reference customers the other guys have, we didn't engage," Ballmer said. It's a nice sound byte, but difficult to check as the choice of the term "Office 365," which has only been available since late June, gives Ballmer a lot of wiggle room on what engagements are included. Does this count the Business Productivity Online Suite? Does it count on-premises Office versus in-the-cloud Google deals?

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Even as Microsoft punches up at Google in many markets, Redmond may have more going for it than its inherent advantages of Office productivity, server OS and PC OS dominance. Google is beginning to experience the growing pains of a dominating technology company. The company's technologies are coming under patent fire (from Microsoft, which is arguably earning more from Android-related IP legal settlements with handset makers than it is from Windows Phone 7 sales), and the company's long-running success in search is attracting the attention of antitrust regulators.

Back at WPC, Turner dropped four bombshells against other competitors that are more commonly considered single-market-segment adversaries to Microsoft.

Salesforce.com
KT Bombshell: "Now we've got this humongous pacifier to stick in the mouth of [Salesforce.com CEO] Marc Benioff called Dynamics CRM Online."

The process of making Dynamics CRM an online-first product has been gradual for Microsoft, but Redmond is done. The latest version, Dynamics CRM Online 2011, actually was available online first and on-premises second.

With that bit of prioritization out of the way, Microsoft is now turning to its mid-90s playbook -- match competitors on features and beat them on price.

"Look at the price delta that we've got here and where we're going, 44 bucks versus 65 bucks," Turner said. Showing a slide for a 250-seat Dynamics CRM deal, Turner added, "A Microsoft Dynamics partner earns almost 53 grand. The Salesforce.com partner earns about 20 grand. Love that, absolutely love that. And, unlike Salesforce, we continue to pay margins on annuity deals."

Next page: Microsoft vs. Oracle, VMware and Cisco

Oracle Corp.
KT Bombshell: "To really talk to a customer about whether they should bet on Oracle, let's just take a look at the cast of characters and you make the call. I don't even know what to say." (Said in reference to a slide displaying photos of Oracle Chairman and CEO Larry Ellison, President Mark Hurd and President/CFO Safra Catz.)

The SQL Server team at Microsoft has been employing the same line of attack -- lower cost and gradual feature parity -- against Oracle in the database market for more than a decade. The approach hasn't come close to driving Oracle out of business, but Oracle's classic counterpunch that Microsoft wasn't ready for the enterprise has lost its sting. The general knock on Microsoft these days is not that the company isn't enterprise-grade -- Redmond is broadly acknowledged as an enterprise leader. Rather, Microsoft is said to be tone-deaf with consumers.

VMware Inc.
KT Bombshell: "We've caught VMware flatfooted, because they're fighting the economics of the cloud."

Microsoft's approach to virtualization has come out of the same playbook as CRM and databases: make an argument that you're undercutting the competition on price and point to progress toward feature parity. The process has been drawn out in virtualization against VMware, but Microsoft has kept at a strategy that bundled the price of virtualization technology into the base server OS cost. It's a good strategy if you have 76 percent of the server OS market share, a figure Ballmer cited for Windows in his keynote.

Ballmer2

"The more VMs [virtual machines] you have, the more our savings goes up, because at Microsoft, anything beyond six VMs is free," Turner said, in expanding on why VMware is flatfooted on the economics of the cloud.

While the math may not add up as well when customers' Linux-based servers are taken into account, Microsoft executives were actually introducing a twist this year -- pulling System Center and Active Directory into a private cloud story.

Ballmer said the approach goes beyond competition with VMware to make Microsoft more strategic for customers than Oracle, Google and Amazon.

"In the last 12 months ... we really stitched together now a much more coherent and complete public cloud and private cloud story with System Center, with Visual Studio, with Active Directory, a common platform and a common infrastructure that lets you move things. Start them in the private cloud, move them into the public cloud, extend an application that's running on-premises with new capabilities that are running on Azure, and do that with a simplicity that really makes sense," Ballmer said. "In this world, things will move to the public cloud, but line-of-business applications will move at a much more measured pace to the cloud than most other aspects of the infrastructure."

Cisco Systems Inc.
KT Bombshell: "Think about all the years that Cisco's been milking those high margins, 75, 85 percent margins on that unified communications product."

Turner didn't tear into Cisco with the same relish he reserved for Microsoft's other competitors. The argument with Cisco almost seemed like a way to talk about Microsoft Lync, one of the opportunities that Microsoft is currently most excited about.

"I have yet to demo [Lync] and not see customers light up like you're showing them Kinect in a retail mall. It's a lot of fun to show that product," he said.

For Turner, other Microsoft executives and many partners, Lync presents a brand-new opportunity to take instant messaging, VoIP and integrated e-mail to mid-market and small enterprise customers who could never afford sophisticated unified communications products in the past.

***

At WPC, Turner cemented his reputation as one of the wisecracking firebrands of the tech industry, in the ranks of Ellison and Benioff. The case he was aiming for, however, was that Microsoft's hundreds of thousands of partners should throw in with Microsoft, even in markets where Microsoft is far behind.

In each market that Turner highlighted, Microsoft certainly has a chance, and the company will probably fight its way to being, at least, more competitive in several of them. Whether Microsoft succeeds as a company in each market or not, partners will have opportunities in those high-focus areas to make good money -- all while helping their customers.

For example, Microsoft launched an incentive program in July that pays solution providers up to 20 percent margins on net-new Lync licenses, and recurring promotions have kept margins high for Microsoft Dynamics CRM Online sales. In all, Microsoft is vowing to invest $5.8 billion in the channel this fiscal year, with much of that earmarked for incentives in its most strategic market segments.

The deeper case for partners to stick with Microsoft through tough fights ahead, though, came in an expression of appreciation, and understanding, from Ballmer. "You're involved, you care, you spend time and energy studying and understanding what we're up to," Ballmer said. "You take the time to translate these technologies into the solutions that really change people's lives, and yet you are independent business people who are coming to work every day cheering for us, but also understanding that you need to consider alternatives. So, you're pushing us, pushing us, pushing us, pushing us to improve our performance."

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