What the Economic Crisis Means to Microsoft
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News Analysis. There is a silver lining: cloud computing. |
Long term, Microsoft can only benefit from the economic crisis sweeping the globe. But short term, there will be loads of pain, particularly for sales in high-growth emerging markets. Matters would be different had Microsoft bought Yahoo during late first quarter. The company would have:
- Hugely overpaid for Yahoo
- Taken on burdensome debt
- Been weighted down by integration costs and logistics
Instead, Microsoft is flush with cash and in better position to batten down for tough times ahead. Last week, Chief Financial Officer Chris Liddell said that Microsoft is undertaking measures that will save $500 million.
Perhaps ironically, the economy will do for Microsoft what it couldn't competitively: Eliminate troublesome Web 2.0 platform companies. Free, ad-support services already are among the economic crisis's early high-tech victims. Across Silicon Valley, startups are laying off employees as they seek to reduce their cash burn-through. With credit tight and some venture capitalists more cautious, funding is going to be a problem for many startups that might otherwise have caused Microsoft competitive problems.
Even established competitors such as Google are looking at trouble ahead. Google shares closed at $339.29 on Friday. A year ago next week, Google shares topped $700. Falling fortunes mean Google shouldn't be as aggressive with new Web product development. That said, last week Google delivered solid third-quarter earnings, with income up 26 percent and solid advertising forecast despite the recession. But once unreachable Google is now visible in the distance. Nobody runs a marathon like Microsoft. Google, you've been warned.
Looking into my crystal ball, here's what I see—assuming that world economies go into modest to deep recession:
Consolidation is inevitable. There will be fewer high-tech companies whenever the recession ends. Many startups will fail or be purchased—and even some established companies, too. Some survivors:
- Amazon: The long tail will just grow longer as consumers spend more online to spend less. Also, Amazon is well-positioned to extend cloud computing services. Watch for Amazon to become one of the engines powering smaller businesses' online operations.
- Apple: Those costly company retail stores could prove to be big liabilities in a protracted downturn. That said, Apple has established broader retail presence on a scale of Microsoft or Sony. There are now 30,000 distribution points for iPhone, and Apple is expanding them. Watch for Apple to push harder into consumer electronics, as it seeks to establish iPhone and the App Store as next-generation computing platforms.
- Google: Many companies will reduce advertising budgets during the downturn, with the most pain coming to old, or older, media outlets. Wall Street analyst forecasts put U.S. ad spending down between 3 percent and 7 percent in 2009; those are adjusted, post-mid-September estimates. Local spending will decline most. Cable TV and online ad spending are expected to increase. Mobile advertising also is expected to increase, but that's from a smaller base. Google benefits because of its huge search market share, over 60 percent in most geographies and in mobile. But its platform's appeal will diminish as more ad dollars go to Google and less to its affiliates and other partners.
- Hewlett-Packard: There is strength in diversity. HP has a hugely diverse product portfolio, broad-and-deep enterprise services and consulting, strong retail and channel distribution and, next to Apple and Nokia, some of the best high-tech marketing on the planet.
- Microsoft: Microsoft has two desktop monopolies, $13 billion in unrecognized unearned revenue, the most popular developer tools on the planet, and new cloud computing platforms or services. The economic blight will kill many trees in the forest. Microsoft will replace them.
Some more established companies for which I expect modest trouble (or more): Facebook, Dell, eBay, Research In Motion, Nokia, Sun and Yahoo among many, many others. Companies with weakest cash positions will be most vulnerable in the downturn. Companies with the most cash will be able to buy smaller companies on the cheap—those that don't go out of business. Consolidation will reduce the number of companies offering free, ad-supported products or services that compete with the Microsoft desktop software.
Amazon and Microsoft will seed the cloud. Microsoft couldn't be bringing its cloud services to market at a better time. For many cash-strapped businesses, hosted versions of Exchange, SharePoint and other Microsoft server software will be hugely appealing, particularly when reducing staff and management costs. SQL Server Services, like Amazon's EC2 or S3, will let smaller companies compete on the Web without having to build out infrastructure.
Tomorrow, at Microsoft's Professional Developer Conference, Ray Ozzie, chief software architect, is expected to finally unveil Microsoft's broader Web services platform. I believe that Microsoft will apply to the cloud the same vision it did to the PC. If so, Microsoft will deliver something truly market changing at an unexpectedly right time. With DOS, and later Windows, Microsoft sought to bring the informational power of the mainframe—and more—to the masses at lower cost. The PC was the base platform. Microsoft's approach to the server cloud should be the same: to make the PC's informational power available to more people, on more devices, more cheaply. The Internet server/data center is the platform.
Enterprises will spurn open-source alternatives for commercial software. Contrary to popular convention, businesses won't rush to free software as the economic crisis tightens spending. Open source is a great IT side-project experiment when times are easy, but tried, true and supported commercial software matters more when times are tough. Do you really think the head office would fire somebody for buying software from Adobe, Microsoft or Oracle? The more plug-and-play the packaged software, the better.
Open source will contribute more to commercial software development. While IT organizations may shy away from building out huge portions of their infrastructure with open-source software, commercial developers will further embrace the community—even Microsoft. Already, plenty of commercial developers extend their products' capabilities thanks to open source.
The open-source community's influence and contribution should increase as major commercial developers cut back budgets. Google's timing for making Android open source couldn't be much better. But looked at another way, the community will likely diminish, unless buoyed by laid-off developers. Spare time devoted to open-source projects is fine when you've got the spare time. Layoffs and developers' concerns about keeping their jobs will make more people more busy doing work that pays.
Who knows, maybe consolidation won't stop with companies but extend to open-source and commercial software development. I expect Microsoft will further loosen its licensing programs to further embrace open-source development. The company is never going to broadly adopt the GPL. But there could be a point where Microsoft loosens licensing terms such that they are close enough to GPL, particularly as IT organizations look for ways to solve problems even cheaper.
Emerging economies will be no refuge. Contrary to what I blogged just a few weeks ago, emerging markets won't much help Microsoft. That's because quite suddenly the U.S. economic crisis has spread from mature to emerging markets. Among the problems:
- No credit. The credit crunch's impact is much greater than just technology. What happens when there is no iron ore and other raw materials to manufacture physical goods? In many emerging markets, just like here, somebody borrows something to buy the products. No credit, no technology purchase.
- Weakening currencies. The dollar and yen are doing surprisingly well, while outside Western Europe the banking crisis is battering many other currencies, reducing their spending power and stability. Banking and currency problems and the broader economic crisis have spread to Eastern Europe and parts of Asia. Oil-cash rich Russia is Eastern Europe's major exception.
- Tightening budgets. Many businesses and public institutions will be forced to make do with what technology that have.
On the upside, Microsoft should be able to do better with cloud computing services in many emerging markets. The downside: Software piracy surely will increase in some geographies.
Free will no longer be the place to be. At least, this will be true for many businesses. If nothing else, there is psychological safety in paying for something—that somebody will support the product or service and stand by it over time. No responsible IT organization is going to rely on free, ad-supported services during a downturn, particularly from startups that might or might not be around in a year or two.
Confidence is one reason many startups will fail or be sold off cheap during the downturn. Businesses will buy from more established technology companies, even if it means paying more. Free can't beat fear and the uncertainty about startups' future. Same applies to many established tech suppliers with weak balance sheets.
In place of free, subscriptions or subscriptionlike purchasing will appeal to many businesses. Right now, companies that bought Software Assurance from Microsoft are looking fine. They've already paid for or budgeted for the next software version—and Microsoft will let them convert that contract to hosted services, too.
Microsoft and its partners are going to see some short-term sales weakness—and matters would be bleaker long term if not for Microsoft's push into cloud computing. Some bastards have all the luck.
[Please send your tips or rumors to watchtips at live.com].
Comments (9)
@ Readers,
Well, well, well. Joe got it right, open-source. Joe knows where the train is headed... it's easy to see, just look at the tracks.
Allow me to inject by parenthesis:
"Enterprises will spurn open-sources alternatives to commercial software. Contrary to popular convention, businesses won't rush to free software as economic crisis tightens spending. Open source is a great IT side-project experiment (a workaround to spite Windows and MSFT's monopolistic framework) when times are easy, but tried, true and supported commercial software matters more when times are tough (which is why Linux leaders are trying frantically to unify all the distros - not gonna happen - too many independent nerds). Do you really think the head office would fire somebody for buying software from Adobe, Microsoft or Oracle (nope)? The more plug and play the packaged software, the better.(yep - just imagine how happy they will be when they don't even have to plug... just play)
Open source will contribute more to commercial software development. While IT organizations may shy away from building out huge portions of their infrastructure with open-source software, commercial developers will further embrace the community—even Microsoft. (thus the war between proprietary and open-source is over - open-source will be building software for proprietors) Already plenty of commercial developers extend their products' capabilities thanks to open source (yep - the amoeba and its pseudopods).
The open-source community's influence and contribution should increase as major commercial developers cut back budgets (but it won't because software on the cloud will be virtually free anyway - who's going to quibble about pennies of difference?). Google's timing for making Android open source couldn't be much better. But looked at another way, the community will likely diminish, unless buoyed by laid-off developers (who work for the joy of creating software...for nothing). Spare time devoted to open-source projects is fine when you've got the spare time. Lay-offs and developers' concerns about keeping their jobs will make more people more busy doing work that pays (yeah - the old "maintenance thing...like "eating").
Who knows, maybe consolidation won't stop with companies but extend to open-source and commercial software development (Microsoft-Novell / IBM-RedHat get used to it). I expect Microsoft will further loosen its licensing programs to further embrace open-source development (the amoeba opens its maw). The company is never going to broadly adopt the GPL. But there could be a point where Microsoft loosens licensing terms such that they are close enough to GPL, particularly as IT organizations look for ways to solve problems even cheaper (close enough. close enough. heh heh heh. GULP). "
end Joe's excerpted comments
----------------
IB + RedHat
+
Microsoft + Novell
=
rapid absorption
The commercial-community is the model put forth by the cloud intrinsically. And open-source has been frantically flogging the poor Linux horsie as fast as that transformation can go. Too late.
Sure, Linux will have a place... as a free OS to reside on desktops and laptops in order to run webOS and webApps. That is, until the first are-metal kernels delivered by web show up. Then, the Linux horsie is a dead artifact... except (but I'll tell you about that part in a couple years).
Don't you realize the giants knew all this was headed to this point? It's easy to act stupid when you know what the future will be. To paraphrase Sun Tzu: "When smart, act stupid. When stupid, act smart."
Do you think they're stupid? Really? Not with all that that money. It's hard to be stupid when you have enough money to buy smart advice.
Now, if all you freebie advocates had been truly smart, you could have made an alliance with someone who would have lead you out of the woods.
But noooooo.... you had to be smart asses and jackasses and fools.
So be it. Good riddance. Go get a job stocking shelves int eh brick and mortar world.
Posted by portuno_diamo | October 26, 2008 5:19 PM
"Banking and currency problems and the broader economic crisis have spread to eastern Europe and parts of Asia. Oil-cash rich Russia is Eastern Europe's major exception"
Russia is an exception to the crisis. Riight.
Russia is totally dependent on oil and external financing. Banks there are already collapsing.
Look what happens with Russia when oil price continues to fall.
Posted by ei9 | October 26, 2008 6:57 PM
Hi Benton, here we go again eh?
Try to keep it mature/polite this time, and Ill respond to you. What I intend to do is to pick your sentences separately and comment on them individually.
Before we go on, lets stress that unless Benton is trying to imply that Joe is some omnipresent being who is able to exist in the future as well as the present, then Joe's posts are PREDICTIONS, well reasoned predictions, but nothing more than his opinions.
Benton said "The commercial-community is the model put forth by the cloud intrinsically. And open-source has been frantically flogging the poor Linux horsie as fast as that transformation can go. Too late."
- Ok Benton, the Linux and indeed open source community have been going for a LONG time, people will always want to be creative, and live by the ethos of free and open software. The platform its run on is completely irrelevant. We all know MS's opinion of being creative, just look at the Xbox360, MS loves you to be creative and code your own work, for a price though. It will cost if you want to distribute your xbox works through its live arcade.
The poor linux horsie you refer to is running this site, and lets look at the latest MS innovations, Silverlight? MSlive? WM? Vista? Im not sure what MS is flogging but its not even a dead horse.
Benton said "Don't you realize the giants knew all this was headed to this point? " Yep MS has proved its well ahead of the game by failing so miserably at the points above (and many more). If MS said today was Sunday, I would have to double check.
Benton said "Do you think they're stupid? Really? Not with all that that money." - I think MS's last "comedy" advertising campaign (that they dropped) proved with all that money they are stupid. Wasnt it you Benton who mocked products with celebrity endorsements?(in an earlier thread)
Benton said "But noooooo.... you had to be smart asses and jackasses and fools. " - Whats so foolish about having a free and functional operating system and utilities? I can perform any task I wish at the moment, and better still Im not tied into any company nor do I have to pay any licensing fees. Is that foolish?
You may also want to call the Brazilians foolish as well, another country to adopt open source in the mainstream. (as well as Russia and I believe Italy)
Benton said "Go get a job stocking shelves int eh brick and mortar world."
And Benton, Ive repeatedly told you that the vast majority of open source users have no financial interest in promoting anything. If for a minute you are right and MS take over the world tomorrow, it will make no difference to me whatsoever. Sure Ill have to start buying MS apps instead of using open source, but that will be the extent of the impact it has on my life. That is why you will never swallow up or get rid of open source, there are always coders/creative types that want to provide alternatives to products for free and want to involve other like minded people and unlike you they are not cringing everytime their treasured MS shares drop a cent (or pence, depending on where you are from)
While you are plotting all these "end of open source", "you will be assimilated" predictions, Bill Gatetus of Borg must have noticed the revolt that is occurring over at Novell support base, due to its involvement with the Borg. People power is a very strong force (unless you live in a dictatorship) and I think you're starting to see that the more agressive the approach taken by MS, the more aggressive "fight back".
MS cant even stop the millions of users pirating their own goods through bittorrent on their own platform.
Posted by Goblin | October 26, 2008 7:00 PM
Joe,
You are brilliant as usual. Software Assurance used to look like a cross to bear, and now it's looking like the safe, smart play. I bet a lot of CTOs who followed the conventional strategy rather than betting on SaaS and open source are feeling pretty good about themselves.
Michael
Posted by Michael Hickins | October 26, 2008 7:09 PM
I'm also feeling pretty good about myself and my company for saving around $100,000 in license fees and getting what so far looks to be better, more reliable software in the process.
Posted by Jack | October 26, 2008 10:27 PM
Joe says;
"Enterprises will spurn open-source alternatives for commercial software. Contrary to popular convention, businesses won't rush to free software as the economic crisis tightens spending. Open source is a great IT side-project experiment when times are easy, but tried, true and supported commercial software matters more when times are tough. Do you really think the head office would fire somebody for buying software from Adobe, Microsoft or Oracle?"
----------------------------------------------------
If things get bad enough Joe, I do expect people would get fired, yes. And watching the news, its mostly gloomly, it might very well get that bad.
Secondly, enterprises will be looking to cut expenses, and the best place to do that is to stop buying MS Office and use OpenOffice or another free alternative. Linux is also looking better for businesses and home users, another way to cut costs, and get away from the malware problems of Microsoft. Also, with Windows Seven coming out, and another round of the expensive Windows upgrade tredmill, now every two years running. These Windows upgrade cycles every two years, will be major expenses for businesses and users. Isn't it time to get the Micro$oft Monkey Boy off your back and out of your wallet, and switch to Linux and OpenOffice?
www.distrowatch.com Linux, it will set you free
chips recommends, Mepis, PCLinuxOS, Mint, and Sidux
Posted by chips b malroy | October 27, 2008 1:13 AM
@Chips + Everyone
Hi Chips, agree completely with you (except my recommendations differ to yours!)
Ubuntu (great all rounder), Fedora and if youre short on specs then Puppy or NimbleX 2008.
Posted by Goblin | October 27, 2008 4:58 AM
What is the most creative way to merge the Linux platform.
Simple embrace and extend. MS developed the method. Don't fight with the different Distributions or parties that want to keep on fighting. Release something that runs no matter what. This is embrace and its part of Linux Standard Base 4.0 due in November. Along the way it also supports the idea of independence that a application maker does not have to care about distributions. If the so call nerds want independence give them independence.
Now Linux Standard Base after that is extend.
Linux game by the time Windows 7 gets here will be complete different. Most people miss that LSB 4.0 is testing against commercial compliers. Even worse a few of these compliers runs rings around MSVC and GCC in performance.
The Linux game will no longer be a pure open source game. Interesting to see what companies take up the options.
Posted by oiaohm | October 27, 2008 10:06 AM
funny to see that a lot of people just don't get it. transforming your business to open source in this time? not a good idea. Moving away from Office that is integrated in Business Intelligence and collaboration software just sae a couple of dollars on licensing? not a good idea.
Focussing on licensing in stead of what is really important: enabling your workforce to communicate and collaborate more effectively to enhance sales is something that I read here a lot.
Sometimes I just wish I could meet some of you in a sales proces. It would be my easiest sell ever :-)
Posted by Hugo Leijtens | October 28, 2008 11:57 AM