Why I wouldn't bet against Microsoft in the software-as-service market
"Battle not with monsters lest you become one."
Friedrich Nietzsche
Last week, I shared with you some portions of an internal memo written to Microsoft developers by Ray Ozzie regarding how the company needs to change in order to survive - and, potentially, thrive - in the emerging era of software-as-a-service (SaaS). If you missed that and would like to read what is purported to be the full text of the memo, along with a related note from founder Bill Gates, you can click here.
There's no doubt that Microsoft is a laggard in this market - and for good reason. Why would it want to threaten its amazingly lucrative packaged software business? But we need to put the SaaS swirl in perspective. Much of the noise around this SaaS stuff is being driven by speculation about Google's plans, which really aren't very clear at this point. Will the company ultimately assault Microsoft more directly at the consumer or corporate desktop? Who knows? Your guess is as good as mine.
The din is also driven by SaaS success stories like salesforce.com - and CEO Marc Benioff certainly knows how to make noise. In fact, one of the more entertaining things of late has been to read the official statements Benioff releases in the wake of some Microsoft announcement. You can get a sample by Benioff's shtick by going to http://www.salesforce.com and clicking on the video of his recent CNBC interview about "What's Microsoft so Afraid of?" Salesforce.com certainly is an emerging superstar. But keep in mind that it will end the year at roughly $310 million in revenue - donut money compared to Microsoft's nearly $40 billion.
SaaS is a force to be reckoned with. But here's why I wouldn't bet against Microsoft as this trend gathers steam.
1. Microsoft has navigated major transformations in the past, around such market upheavals as the emergence of the graphical user interface, the Internet and security. It's a big ship, but it can turn. Gates hates to lose and it's dangerous to test his will. (Now, some of you will no doubt say he plays dirty. I won't argue. But that isn't my point here.)
2. Microsoft has a strong network of partners who have a very strong vested interest in the success of its current and evolving business model. Systems makers make real money selling Microsoft products. There's a whole ecosystem of developers built around Microsoft platforms. Salesforce.com is trying to build a network of service providers but it's a fledgling attempt. And who's Google got, Sun?
3. Customers - whether they are enterprises or consumers - need and want support. Does Google really want to build support centers to handle all the calls from all those confused customers? Microsoft has invested billions here and it won't be easy for anyone to match that.
4. Microsoft has MSN, a platform from which to launch service-based offerings, and it is looking to strengthen the portal through partnerships, perhaps even with AOL. Google's a great site, but it's not designed as a portal for consumers or businesses.
5. Microsoft - and others - can negate a lot of Google's weapons. Google doesn't have an unassailable market position by any stretch of the imagination. The company reaps billions from its innovative online advertising systems, but if - while Google dabbles hither and yon - someone comes up with a better system, the company's market position, cash flow and cash hoard could be severely dinged. Other competitors will get better even at basic search, stealing traffic and ad dollars away.
6. Microsoft can buy whatever it needs. How about a spare billion and a half for salesforce.com? Or any other interesting SaaS provider in key markets, like SMB. In any battle, it pays to be able to afford the newest weapons.
7. Microsoft knows who uses its products. Google doesn't. That provides the Redmond team with a lot of leveraging in bringing new things to market. Microsoft can reach out directly to via Windows Update or MSN or many other means. Google only knows that you want to learn more about Britney Spears and that you clicked on an ad for enhancement products.
There's no doubt the SaaS model represents a tricky transition for Microsoft. The company can't afford to move too slowly or too quickly. Lots of smaller SaaS providers will chew on its hems and publicly berate the company. But I believe Microsoft is clear-headed about where it has to go and I wouldn't lie down in the path of that steamroller.
What do you think? Drop me a note here on the strengths and weakenesses of Microsoft in the fight ahead.
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Comments
Good job on your assessment of Microsoft's potential role in the SaaS business. I agree w/all your points, although I think Microsoft will face a very bumpy road achieving its SaaS objectives, as it has w/MSN. But, Microsoft's challenges will be even greater in the SaaS arena because it disrupts every aspect of the company's software business, from the software architecture to the licensing/revenue structure.
Posted by: Jeff Kaplan on November 21, 2005 08:35 AM
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