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In victory, Microsoft morphs into IBM, and loses it

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Commentary Throughout the antitrust trial Microsoft executives have seen it as vitally important that they avoid the legal threat turning Microsoft into IBM. Big Blue itself faced a major antitrust action in the 80s, and although it eventually emerged relatively intact (apparently), it did so with a large gaggle of lawyers attached to it for ever more, and with a deep paranoia/paralysis engendered by fear of antitrust.

That of course is a matter of opinion, and although I personally do not believe it is entirely true, Microsoft and numbers of analysts believe that it is. IBM won the battle but lost the war, they reckon; fear of antitrust destroyed its ability to act, left it in thrall to the legal department, and lost it industry leadership. Which is a grisly fate that – however imaginary – Microsoft was determined not to share.

As the trial rolled on we saw many signs of this determination. IE became more thoroughly bolted into Windows, Media Player and Messenger were added to the pile as well, and the imperial standard was firmly planted in numerous prospective conquests. Given what the courts consistently said about the company's transgressions (for remember, it remains guilty as hell, despite being 'punished' by painless remedies), Microsoft appeared to have taken paralysis-avoidance to the point of taking the piss, and beyond.

But along the way it seems to me that Microsoft has set itself on the road to become the IBM of legend anyway. It has in the past few years unveiled many Ambitious Projects, it has loudly claimed to Bet the Company on several occasions but... What, in addition to preserving its franchise and maximising the revenue it can squeeze out of it, has it done? What brilliantly innovative new products has it produced? Which emerging markets has it conquered?

Item Microsoft's last major operating system revision was Windows 2000. Windows XP was essentially a point release to Windows 2000, with bells, whistles and extra chrome. It was not hard. Tablet PC Edition is more of the same, essentially a rev of Windows 2000 with tablet-features added in. Media Center? Even more of the same, to be marketed on the basis of the added chrome. While all (the word is something of an exaggeration) of this was happening, the ambitious stuff was cancelled or postponed. XP itself was a hastily-engaged stop-gap intended to do duty instead of the cancelled project that the OEMs had been expecting, and the trail of abandoned codenames now leads to the currently ambitious megaproject of Longhorn, somewhere in the middle distance. Or maybe to Palladium.

So in the OS arena Microsoft hasn't been doing much that's hard, and the really hard stuff is so far away that we can confidently expect it not to be doing much hard for some years to come.

Item The other leg of the franchise, Office, has been at a lucrative standstill for some years now. Microsoft has conspicuously failed to persuade large numbers of existing customers to upgrade, so having thoroughly conquered the market already it is faced with static revenue, even a decline. The 'rental' model which we recall Steve Ballmer setting great store by a couple of years back failed, and its test market in Australia was abandoned earlier this year. Alongside this Ballmer was promising that Microsoft would become a services company, but in reality, what has happened is that its attempts to make money from services have failed, and it has been driven back to the core franchises.

It is still trying to make money from services, of course, but based on track record so far it doesn't look promising. Microsoft makes money from the two core product lines it sells into the PC market, where it has a monopoly, and loses money, doesn't even just not make money, on its attempts to break out. The knock-on effect of the rental debacle, Licensing 6, is in itself instructive. People don't want rental, therefore introduce a licensing model to the core market, where customers don't have any real choice, which is in effect rental. It pays the bills, but it doesn't expand, it doesn't break out, it simply squeezes more money out of the franchise.

There's a happy antitrust coincidence here. One of the factors that has saved Microsoft is the US legal process' propensity to narrow and to define. By focussing on a 'relevant market' that consisted of the PC OS business, the OEM relationship and some old browser war that doesn't matter anything to anybody any more the courts ended up stopping Microsoft from repeating actions it would never in a million years have to repeat. But actually, the relevant market is where Microsoft really does live, and that market is reaching – perhaps has even passed – its limits. How much, actually, do we care that Microsoft has a lock on the PC market, and if we do care, for how much longer will we?

Item Millions of people are already walking around with pocket devices that do email, play games, do high speed connectivity (blockhead service providers permitting) keep their contacts, whatever. These are not Microsoft devices. Microsoft has responded with a tier 2/3 French manufacturer (remember that one?), a record-breaking ship-date-missing startup (can you forget that one?) and – phew – a real live launch a couple of weeks ago. It does not look good, but in mitigation Microsoft does look set to dominate the PDA market. Where sales are tallied in hundreds of thousands, while in the mobile phone market it is millions. So go figure.

Item Microsoft's bid for the home has not so far been crowned with success. Xbox sales were not as high as hoped, Sony proved a tougher opponent than anticipated. Mira seems not to be with us after all, and while with Media Center it's theoretically all to play for, The Register is of the view that the notion of a PC as the centre of home entertainment is utterly insane, and that this one will crash and burn this holiday season. That's worth noting too – Microsoft doesn't have to insist that the PC is the centre of everything, but it does, because it has become a corporate religion that this should be so. We build our own prisons.

So there we have it. Microsoft owns the PC market, but has not established a plausible story or a serious foothold in the market for devices we all carry about with us, the market where the technology becomes pervasive in our environment, yet somehow fades into the background, and the market where people pay for stuff delivered electronically. It's even a tad phobic about leaving go of the PC market. And it's worse than that.

Microsoft is not, actually, that secure in the market that it owns. It is pursuing a twin-track development where not much exciting happens with the products currently aimed at the core frachise, they just get retreaded regularly in the hope of a revenue injection, while development resources are expended over a protracted period on the more ambitious, long-range products. The latter may or may not turn out to be revolutionary and brilliant (on previous track record we have our doubts) by 2005, but what's happening in the meantime?

There is a huge, gaping hole in Microsoft's strategy, and that hole is there because the company thinks it can view its own product roadmaps in isolation from what is going on in the rest of the world. Do you not detect an IBM-like complacency here?

Linux distributions are becoming more competent, and the number of governments, government departments and major companies who've announced pilot schemes or wholesale deployments recently has been quite striking. This is not, we feel, the same as the 'whistling in the dark' Linux installations we've heard about over the past few years – this really could be serious.

The receptiveness of customers to Linux (which really has to be the only serious competitor) in the key Microsoft franchise areas is likely to be reinforced by that big gap in the Microsoft strategy. Microsoft might well turn out to be better at the big ideas by 2005, but if it doesn't have a business by then this isn't going to matter a great deal. In the interim, its coders will merely be minding the Windows machine, while its rivals out there in Open Source Outland do serious knitting on the products that can challenge it. They're not building the magic megamachine of the future, they're developing the existing platform, and they're doing it rather well.

Unless Microsoft stops snoozing complacently, takes the threat seriously, soft-pedals the hype and concentrates on seriously developing the products it makes money out of, the competition will overtake it and destroy it. And that is merely in the relevant market, the finite and ultimately declining one that should be paying the rent while the company reinvents itself.

That, incidentally, is what really happened to IBM. Sure, antitrust had an impact, but the real poison was that IBM ruled the world, thought it could decide what happened and when, and thought it could afford to expend its resources on long term projects that would be great, and good for us all, when they shipped. Because IBM ruled the world, the time these might take to ship wasn't a problem. We are IBM, we rule the world and make the rules, and it is unthinkable that we should be challenged. Remind you of anybody? ®

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