Microsoft's Corporate Strategy: Software AND Service

Steve Berkowitz, Microsoft (MSFT) VP in charge of Windows Live and other next-generation Microsoft services efforts, keynoted Wednesday morning at Search Engine Strategies 2007, New York City (the conference runs through Friday April 13 at the Hilton on 53rd at 6th and will visit a city near you as well). Berkowitz repeated an earlier message he had made to the financial community about “software AND service,” as opposed to software as a service (SaaS). That’s a distinction I do not like and one I don’t believe either he or Ray Ozzie really believe in. But it is the corporate strategy for at least a while longer, a protective fallback that may become a self-fulfilling prophecy.

Berkowitz also spoke about the challenge I have discussed often, on my own site and here at Seeking Alpha, about Microsoft being both the technology provider and the service provider. His approach to that challenge is to think of his group as acting as one of the best and most innovative users of underlying Microsoft technologies (like any other ISV or ISP), having no special advantage by being part of the same corporation. That way when he gets to run his business like the services and advertising companies he competes with. And then when he gets some sort of inside-baseball advantage, such as seeing into the “corporate vault” as he called Microsoft labs, it’s just a bonus.

One of the most interesting exchanges came when conference chairman Danny Sullivan asked him to compare and contrast Microsoft, Google (GOOG) and Yahoo (YHOO) in terms of its search services. Of course he was careful not to name the other guys in his answer but implicitly he set up an interesting juxtaposition of the three in terms of their strengths:

• All three have great partner communities and wide, broad audiences
• All three have great technologies
• All three can afford to invest in their research/development backbones
• Microsoft and Google also have the necessary wherewithal to invest in the infrastructure that will be needed for the next generation of services
• Only Microsoft has the diversity of business models (i.e., not just an advertising model like Google) and breadth of search-sidebar technologies to really give the next generation “consumer” the total experience

I liked his analysis of the challenge; it makes a good way to look at the three companies as IT investment opportunities as well.

Comments

[Malkiel]

I'm pretty skeptical that people are going to partake of all these web-based services they want to offer. People will put up with the lack of security and privacy if they're offered something for free, but these guys think they're going to charge subscriptions for them--not going to happen. It will take a decade of profound and sincere and very public devotion to user rights and privacy and security to erase the contemptuous public attitude which Google and Microsoft have shown toward them in the last 10 years. Ultimately, local software mediating web access will remain the model for many years to come.

Getting subscribers to trust a web-based provider is something a small, disciplined start-up is more likely to monetize than the giants, who have already built up negative reputations that will be hard to live down.

[Brian Croner]

That's exactly right. I'll add that Microsoft and Google already are exhibiting red-flag signs of incompetence. Their business decisions are punchy at best. They obviously don't study the financial markets for what they are. In order to make money, you MUST study the financial markets of the world. That's not talking lip to become a corporate hireling because you know somebody, make a powerpoint presentation, and wait for the applause. A sound market monetization model is not provided by a university education, because if they could do it themselves, the professors wouldn't subvert their pay levels to that of education. To market a successful business, you must be savvy about the industry. To market a cash cow, you must know the consequences of market forces to a level of disgust at others' failures. Steve Balmer of Microsoft knows how to make a cash cow under consideration of market forces.

Secondly, it's obvious their best programmers are out of practice. They've been walking around with the "I'm a billionaire stud" gait and unless you have eidetic memory, you get rusty in programming and have to really pick it up again. They resort to the business competence of an acquisition-orchestrat... CEO, who doesn't know the nuances of proprietary-dependent software tools when involving money matters in that module's marketability to various venues, such as the upcoming multi-trillion dollar cell phone video industry.

You gotta know how to develop it, and you gotta know how to serve it. My bet is Microsoft just steals their software, and they always have. My bet also is nobody there can program. That's why they hire Indians to do it. My bet is Google is desperate, punchy, and wondering how to tackle their rivals in Wikisearch while at the same time trying to figure out how to cover up their failed purchase of Youtube.com. Just buying that thing shows they don't know the financial markets. They're really scared. I know I'd be if I lipped my way into a position of consequence after lipping my way through college to get my lipmaster degree. You can't do it, so find somebody else who can. Your only options are those firms available for sale. Many firms are crap and they are built with the primary intent of a sale (like VideoEgg, I'm guessing). They never made things to last or be worthy of an internationally-compet... market. They just made things appealing in a way that might sell, and not much lies behind the decor. These guys are just sitting ducks.