What Is Microsoft Afraid Of?

According to Joel Spolsky, barriers to entry are an important part of how well a particular software maker's application does in the market.  When he worked in the Excel group at Microsoft, they found that they had to be able to read files prepared with Lotus 1-2-3, the market leader.  However, that was not enough—they found that they had to be able to fully read and write Lotus file formats, even if they gave Windows away free or paid to have Excel pre-installed on computers.

Think of these barriers as an obstacle course that people have to run before you can count them as your customers. If you start out with a field of 1000 runners, about half of them will trip on the tires; half of the survivors won’t be strong enough to jump the wall; half of those survivors will fall off the rope ladder into the mud, and so on, until only 1 or 2 people actually overcome all the hurdles. With 8 or 9 barriers, everybody will have one non-negotiable deal killer.

He uses a little table to demonstrate this.  In order to succeed in the marketplace, they had to overcome these things.  He then shows how they did overcome the barriers.

This is similar to the place where WordPerfect finds itself today.  Except for certain market niches (such as legal documents), WP has no traction in the marketplace.  Where they were once a strong second, they have fallen to the place where they pay to have their software pre-installed on PCs, but the buyers still wind up buying Microsoft's office suite and not using WP.  They are really not a threat any more, and over time, except for those certain niches, they are likely to decline even further.  Only WP is more like Spolsky's experience with Juno.

So now that Microsoft's office suite is dominant, their strategy is to increase the barriers to switching.  As shown in their latest 10-Q, the two business segments for operating systems and the segment that contains the office software are profitable, but their other segments are not.  They have to stay ahead.

In that position, do you want just about anyone to be able to write competing office applications that read and write the same file formats?  Of course not.  For one thing, competitors will not have the big user interface change, so organizations could save retraining costs, a major sum, if they changed to a competitor's products instead.  

Government agencies desire "open", XML-based file formats, but Microsoft cannot afford to drop those barriers that keep people from switching.  What can they do?  How about trying to push through a competing standard, but one that competitors cannot really implement well—fill the spec with obscure references and specify that the format is protected by patents and copyrights, some of which you never explicitly say that competitors are free to utilize.

Most competitors closely approximate the same functionality as Microsoft Office.  However, the other products tend to have lower prices.  What does Microsoft fear?  They fear that if they face competition without the barriers, they could only stay in the game by slashing prices.  They fear that their office suite would go down in flames (about 50% of operating income), and that Windows client operating systems (about 58% of operating income according to the 10-Q) would then become unnecessary.  Note that because other units are operating at a loss, these two units' results add up to more than 100%.

Client consists of premium edition operating systems, including Windows XP Professional, Media Center Edition, Tablet PC Edition, and standard Windows operating systems, including Windows XP Home. Premium offerings are Windows operating systems sold at a premium above Windows XP Home. Client revenue growth correlates with the growth of purchases of PCs from OEMs that pre-install versions of Windows operating systems because the OEM channel accounts for over 80% of total Client revenue.

Microsoft Business Division (“MBD”) consists of programs, servers, services, and solutions designed to increase personal, team, and organization productivity. MBD includes the Microsoft Office System, Microsoft Dynamics, and the Microsoft Partner Program. MBD also includes the Small and Mid-market Solutions & Partners (“SMS&P”) organization, which focuses on helping Microsoft, its customers, and industry partners in the small and mid-market customer segments. Our Office System products represent over 90% of Microsoft Business Division revenues and include Microsoft Office, Microsoft Exchange Server and CALs, Microsoft Project, Microsoft Visio, Microsoft Office Communications Server, Sharepoint Portal Server and CALs, Microsoft LiveMeeting, and One Note.

For further information, take a look at Rob Weir's piece.