The Real Danger to Microsoft

I've written extensively about the threat Google (GOOG) and Yahoo (YHOO) pose to Microsoft (MSFT). My premise is not that online advertising is the big concern, but that it's a revenue model that will provide initial profits to bankroll the development of internet-based alternatives to Microsoft's core business, namely the Windows and Office franchises.

The angle has been met with more skepticism than I expected. Based on what I'd heard through my circle of friends and contacts, I thought nearly everybody was rooting for a company to finally challenge Microsoft's iron grip on computing, and believed that Google and Yahoo were working on it.

Then came Microsoft's bid for Yahoo a couple of weeks ago. The press reported mostly what Microsoft stated as the reason for its interest in Yahoo: to create a stronger rival to Google's online advertising business. Here at The Kelly Letter, we never bought that idea.

Folks, Microsoft is in imminent danger. It's not worried about missing out on a big business opportunity (online ads); it's worried about remaining a necessary path to working with a computer (the OS and the productivity software). For the first time in its history, Microsoft is facing competition that has a chance to unseat it from the PC monopoly chair that it's occupied for so long.

I received a raft of email from people more computer savvy than I, suggesting that I stick to investing and leave the technology forecasting to others. "It's obvious from your summaries that you have no idea how the core parts of an operating system function," wrote one man.

He's right about my not knowing the guts of operating systems, but do I really need to know how they work to see an alternative way forming? Was it necessary to understand steam locomotion to notice that cars were becoming more popular than trains? Was it necessary to know how cassette tapes were made to see that CDs and DVDs and eventually MP3s would win out in the end? I don't think so.

Similarly, I may not know the process behind coding Windows Vista, Office, Yahoo Mail, or Google Docs. What I do know is that there are no more software stores where you buy computer software in a box, take it home, and install it from disks. Everything I get comes from the internet now, and it's probably the same for you. That's an actionable trend. As goes everything else digital, so will go operating systems and productivity software, and the same thing that happened to Egghead Software's profits could happen to Microsoft's.

Finally, I discovered that I'm not the only one who thinks the Microsoft bid for Yahoo is about more than ads. Rob Cox and Jeff Segal wrote at Breakingviews on Monday:

What if the deal isn't just about online advertising? What if at stake in the battle is the very survival of Microsoft's core software business? Microsoft would never admit that so much is on the line. But there is a case to be made that acquiring Yahoo would go beyond rectifying Microsoft's online business to strengthening the moat protecting its franchise on desktops around the world.

Google sees a future where customers bypass Microsoft to use applications, like spreadsheets and word processors, which it offers for free on Google Docs. So far, Google Docs hasn't dented Microsoft's desktop dominance. But its growth is impressive. In November, unique users of Google Docs surged to 1.6m from 600,000 in June, according to Compete.com. And Google says 2,000 new companies start using its Google Apps subscription-based business software each day.

-- full article

I think this view that the real reason for Microsoft's interest in Yahoo is the future of Windows and Office will gain popularity. As it does so, I expect people to conclude that Google has the upper hand because Microsoft will kill whatever progress Yahoo was making, leaving only Google as the alternative to Microsoft. More about that idea here.

If it comes down to who makes better online applications, Google or Microsoft, only a drunk would put his money on the latter.

Comments

[Dennis Byron (Research 2.0)]

Jason,

Except for your closing shot at drunks, your analysis is right on. That is, you have it right on the ad-revenue issue and Microsoft's real intentions. But you really don't understand "online applications."

Microsoft wants Yahoo to help it to go "live" faster, not for the ad revenue (see seekingalpha.com/artic...).

As I say in that post, " If it chooses to, Microsoft is able to change the user’s total information technology experience in a way no other software supplier can. Microsoft can combine the role of the user who is at once a consumer, an information worker, an individual looking for entertainment or personal information, and so forth." When I say "no other software supplier," that includes Google.

Speaking as someone who takes it one day a time, smart gamblers--whether addicts or not--don't drink and gamble at the same time. So don't bet against Microsoft just because some drinkers of the Google Kool-aid need to dry out.

[blah-blah]

Seems I was just a voice in the choir and it really appears you may be listening to us - thank you

A few points

'He's right about my not knowing the guts of operating systems, but do I really need to know how they work to see an alternative way forming?'

If you want to make an intelligent opinion, yes - wanting and being practical are not the same thing

and from Rob Cox and Jeff Segal

'So far, Google Docs hasn't dented Microsoft's desktop dominance. But its growth is impressive. In November, unique users of Google Docs surged to 1.6m from 600,000 in June, according to Compete.com. And Google says 2,000 new companies start using its Google Apps subscription-based business software each day.'

Sounds great except that Google's target companies are small and they don't often pay MS for the software they use anyways(buy one copy because they have to, use 8 times). Yes, I have personally seen small companies do this quite often. Small companies always skimp and save on IT(much to their detriment) so Google Apps are perfect for them.

Enterprises know quality software and hardware is cheap and well worth it, people and downtime are expensive.

You might find this hard to believe but MS has actually brought enterprise software costs down a lot everywhere they have competed(Databases are a great example, Network OS another).

[AdamC]

This is the very early days of cloud computing and the biggest losers are the IT guys who will fight claw and nails for MS because their jobs are at stake.
The spoils will go to the winners whoever it is...
And let the game begins...

[David H Dennis]

I like to have paper manuals for my software, so I will buy it from the Apple Retail Store, which still has boxed versions.

However, when I bought iWork, I ripped open the package, checked out the manual and typed in the serial number to activate the demo I had already downloaded.

I will be doing that with Aperture, too.

Guess it's time for a MacBook Air, if it only didn't have a tiny screen. I wonder what the new MacBook Pros will be like.

D