We did a story a couple of weeks ago examining the near or long-term possibility of any competitor loosening Microsoft's stranglehold on the enterprise messaging-collaboration market. The consensus among users and analysts was: if anyone does, it won't be anytime soon.
Microsoft clawed its way past Lotus Notes a few years ago with aggressive pricing, a strong reseller network and reacting quicker to the market's preference for Internet-based solutions than did Lotus. Since then it has successfully fended off the Web-based offerings of billion-dollar competitors such as Google, Oracle and Cisco.
They have won the battle, but can they win the war?
Dana Gardner, Principal Analyst with Interarbor Solutions, Inc.
With unchallenged control of the desktop, thanks to Windows and Office, and now with tight grip on messaging-collaboration infrastructure, thanks to Exchange and SharePoint, Microsoft is moving its software monopoly up the corporate ladder. The arrival of Office 365 later this year hardly figures to erode Microsoft's position in that market -- unless it arrives significantly flawed.
Despite this building power and influence, critics still predict doom is right around the corner in the form of a new competitor or some technology shift Microsoft has lagged behind on. Most recently, a few have even called for the removal of Steve Ballmer, who has overseen the company's steady revenue and earnings rise the last several years, in hopes a successor would inspire more innovation.
But this time, there could be some legitimate concern for the company's longer-term prospects. Talking with Dana Gardner, Principal Analyst with Interarbor Solutions, Inc., he said that while Microsoft's core messaging-collaboration products are still raking in lavish profits, the services and functions those products offer are commodities. And we know what happens to earnings generated by commodities that hang around too long.
"Things like Exchange and AD are cemented into place in corporations, but the margins for those commoditized services are going nowhere but down. Microsoft will retain the position of these platforms, but their ability to monetize them through direct licensing will be greatly diminished. They have won the battle but can they win the war," Gardner said.
And the war, Gardner believes, is all about who can make the most money.
The danger with an aging set of commodities is that you lose the multiplier effect across a whole set of products. For instance, every time Microsoft sells an Exchange seat, it automatically generates additional revenues for licensed copies of Windows and Office on the desktop, as well as for other infrastructure pieces like Active Directory and SharePoint. Some analysts will tell you for every $1 spent on an application, $4 or $5 is spent on infrastructure products.
But Microsoft is facing a wrenching changeover from a CAPEX business with its multiplier effect on multiple infrastructure pieces to a lower margin, OPEX business where the infrastructure costs are baked into the apps' costs.
"Microsoft has this wonderful money-making machine, but that machine isn't going to get the same oxygen because the margins won't be as fat. Microsoft also needs to create new revenue streams based on their core products," Gardner said.
What figures to hasten these eroding margins is that some major competitors, most notably Google, give away its messaging-collaboration products such as Google Apps, Google Calendar and Gmail. The fact that messaging-collaboration products are given away as throw-ins does nothing for the image of the category. Eventually, users will expect all such products to be free.
Reinventing its messaging-collaboration products for the cloud won't help fatten Microsoft's earnings much either, because commodities on the ground, without significant value add, are commodities in the cloud.
So what's a $67 billion company with established monopolies in multiple markets to do? Getting rid of Steve Ballmer in favor of a more innovative CEO probably isn't the answer. But Microsoft will have to get more inventive about generating revenue streams from new products and services before time and competitors take their toll on its profit-generating products. Otherwise, it will become a static utility company watching faster -- moving competitors pass it by.
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