Around the time of the release of Windows 95, Microsoft discreetly sold a small subsidiary that made its packaging. A decade ago that decision seemed to fit with the progression of computing and the nascent internet. Although people all over the world stood in long lines to be the first to buy boxed and shrink-wrapped copies of Microsoft’s latest operating system, it was thought that such products would in future be delivered direct to their computers over high-speed networks.
On January 30th Microsoft releases to consumers the newest version of its operating system, called Windows Vista. Although the company said on January 17th that it would make Vista available for sale and download online, most people will buy the upgrade in old-fashioned boxes, just as they did back in 1995. But this time, despite plenty of razzmatazz, few customers will be queuing up to buy a copy.
This reflects the way in which Microsoft’s dominance is slowly being eroded. Who produces the plumbing for a personal computer matters a lot less than it did in 1995. More PCs now talk to one another using open standards rather than proprietary ones. Many services and some programs are accessed online. People watch videos on YouTube, share photos on Flickr, check their e-mail and even work on files and spreadsheets, all using software that is based on the internet.
These changes are bad for Microsoft. Vista is being released with Office 2007, an update to its universally employed suite of word-processing, spreadsheet and other applications. Windows and Office are the backbone of the company. They represent nearly 60% of sales and 80-90% of its profits, estimates Directions on Microsoft, an independent research firm. Close to 1 billion PCs are now in use and because Windows and Office sit on nearly all of them, the programs are the inescapable tithe on belonging to the information society.
The question for Microsoft is whether it can continue to collect these dues. Vista took five years and $6 billion to develop. Some 8,000 people worked on it. Yet it is two years late. A corporate version was released in November — just before the holidays when few firms would install it. This gave Microsoft the chance to complete small bits of ancillary code to make it run smoothly. Most users are expected not to bother upgrading, but to acquire Vista only when they buy a new computer. With hindsight, the release of Vista may mark the moment when Microsoft’s Windows and Office are seen as having reached the zenith of their supremacy.
Toppling the Software Babel
Computing has changed radically since Microsoft rose to prominence 25 years ago with its operating system for IBM’s personal computer. Microsoft unified standards, which made life easier for users and software writers. Both Windows and Office were employed by software developers as platforms for their own applications, nudging Microsoft further towards ubiquity. Now three trends are changing this.
First is the rise of open-source software. The code for this is written largely by volunteers rather than a single company. The programs are usually free to use and open to continual enhancements. Companies ranging from start-ups to giants like IBM commercialise open-source software by selling services that support it.
As a collaborative venture, open-source can speed up development, make it easier to add features and save users money. The most popular web-server software, Apache, is open-source. So too is the Linux operating system, which is also widely used on servers. Firefox was unknown a few years ago, but now more than one in ten people use it instead of Microsoft’s Internet Explorer.
The disadvantage of open-source is that some tedious bits of software development may not get much attention and programs end up a bit geeky. OpenOffice, an open-source version of Microsoft’s Office, has been slow to catch on. Versions of Linux for PCs are still cumbersome. But, as Firefox shows, that could change.
The second trend confronting Microsoft comes from online applications and the rise of software as a service. The birth of the PC liberated users from their “dumb terminals” linked to giant mainframe computers. As a stand-alone device, the PC ran on its own software and networking was not important. Today the opposite is true.
More of the things that people want to do with computers now use the internet rather than a hard drive as a source of applications or to store data. So amorphous is the internet that many in the industry refer to it as “the cloud”. Beside e-mail, photograph archiving and music storage, Google and others offer free online word-processing and spreadsheet applications.
Clouds in the Sky
For years Microsoft’s Windows logo often appeared against a blue sky with cottony clouds. But the cloud has become one of the company’s biggest threats. The operating system matters less when programs can be provided online. Moreover, online software can be delivered to customers more cheaply, there is immediate feedback from users and applications can continually be improved. Those are big advantages over software sold in a box, one version at a time.
In the past Microsoft tied its operating system and applications together by “commingling” the code (and ran afoul of antitrust authorities for doing so). The rise of online applications threatens the primacy of Windows because the network becomes the platform for the software. It does not mean PC operating systems are unnecessary, just that it is increasingly the cloud, and not the PC, that is the launch pad for computing.
This suggests new ways to sell software. Instead of charging for each shrink-wrapped box, firms can sell programs as a service, collecting monthly payments, or giving them away and earning money from advertisements.
The third difficulty facing Windows and Office is security. Much of the justification for Vista among Microsoft’s managers was to improve security. Governments and large businesses had voiced concern about the omnipresence of Microsoft products and a rash of hacks and viruses that exploited holes in the firm’s software.
But there was a big problem. In the past, each new version of Windows was written on top of earlier ones. The code became gangly. It resembled sedimentary rock with the occasional fossil of a long-lost feature or inadvertent vulnerability.
Vista was meant to clean up all this debris. Its code was written from scratch — a large part of the reason for its delay. Yet plans for ambitious new features, such as a powerful way of searching the computer and a new method of storing and retrieving files, called WinFS, were cancelled in 2004 when it became apparent the technology was too difficult. Already behind schedule, Microsoft decided to rush out a release. In December, within days of Vista’s being made available to businesses, researchers identified security lapses — even though America’s National Security Agency helped to harden it. Are there other vulnerabilities? Nobody will know until Vista is more widely used.
No matter how many resources Microsoft pours into making its software secure, some flaws are inevitable. But the company has also been trying to make security a source of revenue. It established a system ensuring that security updates go only to legitimate buyers rather than those with pirated copies. Yet any insecure PC can harm everyone, because all are vulnerable to one Typhoid Mary.
Microsoft initially planned to prevent other firms’ security software from accessing the “kernel” of Vista, in effect the heart of the system. This could render rival products less effective. Although protecting the kernel from malicious code makes sense, some companies argued that it was yet another attempt by Microsoft to use its operating system as the ticket into another market, as it did with browsers and media players. After the European Union complained, Microsoft backed down and provided a form of access.
Although Microsoft is defending itself against some of the biggest trends in computing, it will not be unseated anytime soon. Indeed, the company has often said its biggest competitor is itself: previous versions of its products worked well enough, so many customers would not bother to upgrade to newer ones.
This time Microsoft has put aside any complacency. In the past 18 months the company has reorganised its divisions and put managers from a commercial background in charge instead of their technical colleagues. This counts as a big shift in what was always an engineering culture.
Bill Gates, who as chief software architect was in large part responsible for the earlier, failed vision of Vista, has given up his role. His successor is Ray Ozzie, a relative outsider who joined when Microsoft bought his company in 2005. Mr Ozzie is trying to “webify” Microsoft’s products. Greater discipline is expected too. Steve Ballmer, the chief executive, vows that there will be no more long delays between new product introductions.
A Little More Open
Microsoft is trying to turn threats into advantages. It has responded to the rise of open-source software with both accommodation and demonisation. Last year it struck a deal with an open-source software firm, Novell, to make both companies’ products work smoothly together. Microsoft lets big customers inspect its code, but the firm also raises questions about whether open-source programs infringe others’ intellectual property.
The company is moving into services with things like Office Live, a set of additional services to help small businesses set up websites, and Windows Live, which provides online features. Microsoft’s Hotmail, for example, has recently been rebranded as Windows Live Mail.
Company executives point to Windows Update, which sends updates over the internet, to suggest it has long been in the online-services business. The majority of large businesses buy Windows and Office as multi-year subscriptions with access to all upgrades and support. So Microsoft is at least taking steps in this direction. In the area of online computer games, its Xbox Live service has more than 5m subscribers, suggesting that the company is capable of supplying innovative services.
Chris Capossela, who manages Microsoft’s business-products group, believes the firm’s “unique” strength is that it straddles both the consumer and business markets at a time when innovations often start at home rather than in the office. Most of the company’s competitors, be they Google or Apple on the consumer side, or IBM and Oracle in business, concentrate on only one market.
Microsoft has been written off before, but always remained on an upward trajectory. Its persistence has eventually paid off in some new markets, such as SQL database software and server software, where it started from behind. Its software for mobile devices is also starting to gain traction. Still, in recent years its share price has been steady while the market grew (see chart).
The diffident adolescent that tested the pride and patience of regulators is changing as another generation of employees contribute their ideas. Around 60% of Microsoft’s 70,000 employees have been with the company for fewer than six years. For them the past is old history. They joined after the company was found guilty in 2000 of anti-competitive practices and ordered to be split. This was overturned on appeal and a settlement was later reached.
Yet as the importance of the PC operating system declines, it shifts the potential chokehold of computing to the software on the network servers. Here Microsoft is making big strides — and it is where European regulators are concentrating their attention to ensure the company discloses details of its code so that rival products can work alongside it.
Some observers suggest that Vista and Office 2007 will be the last monolithic software releases — a sort of hangover from the great age of PC computing. Vista should be easier to update online. Nevertheless, Microsoft plans to retain Big-Bang moments to help with its marketing. “We want to have signature events where we can rally the entire industry to what we are doing,” says Mr Capossela.
It is probably impossible to find a pair of products with franchises as lucrative as Windows and Office. Much of Microsoft’s activities over the past decade can be seen in the context of trying to diversify away from them. The firm has extended its software into other devices, like television set-top boxes and mobile phones, created (and later sold) web businesses in travel and media, and moved into new areas. It even launched devices, including the Xbox and its Zune media player — which, despite trailing Apple’s iPod, introduced innovations like sharing music wirelessly.
Windows and Office go together like salt and pepper. The question now is whether there will be a decoupling. That could happen if consumers buying a new computer take Windows Vista but decline to buy Office 2007, because they can get similar applications elsewhere, even free. The next step might be for computer-makers to start pushing PCs with Linux rather than Windows installed on them.
Some big companies do have the wealth and talent to remain competitive even as their industry lurches from one incarnation to the next — IBM has done it before, moving from hardware to services. Now its old partner probably has to do the same. The primacy of Windows and Office is waning, even if Microsoft’s immediate power is not. “Icebergs melt”, as one Silicon Valley veteran notes. “But they melt extremely slowly.”