Will Google and Linux make Microsoft yesterday's company

Stan Beer
Monday, 17 April 2006 15:13

Opinion and Analysis

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Back in the mid 1980s, it would have been hard to imagine anyone breaking the IT market dominance of the mighty IBM. Big Blue was seven times as big as the number two player. Then along came Microsoft, changed the rules of the game and usurped the throne. Now along comes Google and the open source movement and the rules have changed again. In an era of open source, web services, wireless connnectivity and converged communications, can Microsoft maintain its market grip going forward?

On paper, you would have to say that Microsoft appears unassailable. Any company, and especially a software company, that can make a net profit of US$12.25 billion on turnover of US$39.79 billion, as Microsoft did in 2005, deserves respect as a business entity. From its hareholders' point of view, Microsoft also delivered spectacular earnings growth for the year of just under 50%. However, revenue grew by a  far more modest 8%. The previous year, revenue grew by more than 14%. For the first quarter of fiscal year 2006, revenue grew by 6%, while arnings, if you factor in settlements with RealNetworks and Novell which happened in the first quarters of the respective years, was about 9.6%.

The obvious trend is that growth is slowing for the software giant.

The financial comparison with Google is interesting to say the least. For its fiscal year 2005, Google generated just under US$6.14 billion revenue, almost exclusively through advertising, representing growth of 93% on 2004. Net income of more than US$1.465 billion, represented growth of 267% on the previous year. It is true that both revenue and earnings growth are also slowing at Google. Revenue growth in 2004 was 118% and earnings growth was 277% on the previous year. However, the figures speak for themselves. Google is a high growth company; Microsoft is a mature company with slowing single digit revenue growth.

In order to reinvigorate itself, Microsoft needs to bring new product to market and, indeed, this is exactly what it intends to do in early 2007 with its new Vista operating system and Office 2007 office productivity suite. However, the question remains whether the market will be particularly interested in paying the money to upgrade to the new products. Obviously, Vista will be an easier sell for Microsoft. It will no doubt stitch up deals with all of the major notebook and desktop vendors to sell most of their products with Vista pre-installed. Office 2007, however, is going to be a much tougher challenge and that's a major problem for Microsoft because Office generates about one third of the company's revenues.

The fact is most people no longer want to pay for Office and they no longer have to. An open source version called Open Office.org, which runs on Windows and is virtually interchangeable with Microsoft Office can be downloaded for free. Microsoft can claim that their current product is more advanced and that their new product will be even more advanced again but, for the ordinary office or home user, that will mean nothing if they can have something that does the same job in essentially the same way for free.

As for the operating system, Microsoft can breathe a little easier for the moment because, despite the best efforts of the open source community, with Novell leading the charge, Linux for the desktop is not quite there yet. Novell believes that by the end of June its Suse Linux Enterprise Desktop (SLED) will be ready to make the long awaited breakthrough. However, a cursory look at the beta version shows that, although SLED looks like it is going to be a great operating system there is still much work to be done before migration from Windows becomes a painless task for most ordinary users.

That said, however, there is still 8 months for the open source community to help make the SLED project a success. Already, Microsoft can kiss much of the second and third world countries goodbye - they would prefer not to pay for software if they don't have to. That includes the emerging giants China and India by the way. In addition, the government, education and corporate sector will be taking a long hard look at migrating to Vista and doing their sums in comparison to an open source migration.

Meanwhile, Google is powering along at a great rate of knots unconcerned with matters related to operating systems. It doesn't really care whether the operating system is Windows, Linux, Mac OSX or Solaris. It delivers its advertising funded services via web browsers. It has cornered the search market, making Microsoft an also ran. It is rapidly overtaking Microsoft's share of the webmail space. It has now commenced an attack on Microsoft's heartland, the desktop, with its new Google Calendar service a direct challenger to Outlook. Last month, it bought the browser-based wordprocessing tool Writely. Google has no problem raising the cash to make further purchases that will eat into Microsoft's market and will no doubt do so

The problem for Microsoft is the same one that faces all mature companies when a new nimble challenge comes to fore. Mcrosoft is saddled with its legacy systems. It has a legacy revenue model built around selling commodity software. If it wants to match Google in the web services space, then it risks sabotaging its legacy revenue stream.Regardless of all the above, there is not one shred of doubt that the Microsoft brains trust has not examined every one of the points mentioned and no doubt many more emerging threats. In the past, the giant software company has always risen to the occasion and pulled out a trump card or two. It remains to be seen whether it has yet another card to play.