February 19, 2003 12:59 PM PST

Critics cite weak spots at Microsoft

A Merrill Lynch analyst on Wednesday voiced concerns about Microsoft's response to the growing popularity of open-source software, echoing statements made by a former Microsoft executive last week.

Steven Milunovich, in a note published Wednesday,


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wrote that Microsoft is still having difficulty reconciling its overwhelming clout in the PC software market with the growing popularity of open-source software such as Linux and OpenOffice.

And despite the Redmond, Wash., company's efforts to meld Internet-aware features into its Windows and Office products, the company hasn't fully taken advantage of the Internet, Milunovich wrote. "These issues are symptomatic, in our view, of Microsoft's PC heritage and underscore the difficulty of a leopard changing its spots."

The analyst's comments dovetailed with statements made last week by David Stutz, who as a Microsoft executive worked on the software maker's Shared Source program. The program, which constitutes Microsoft's response to the open-source movement, allows customers limited access to the source code, or underlying instructions, for products like Windows and Office.

Stutz, who recently left Microsoft, posted to the Web what he termed a "sanitized" version of his resignation letter, in which he criticized the software maker's continued reliance on a PC-centered business model. Stutz also warned of the threat to Microsoft from open-source software development.

"One-size-fits-all, one-app-is-all-you-need...has turned out to be an imperfect strategy for the long haul," Stutz wrote. Yet Microsoft continues to bundle more features into its software, even as customers seek to "accelerate the divergence of the open-source platform."

"There is false hope in Redmond that these outmoded approaches to software integration will attract and keep international markets, governments, academics, and most importantly, innovators, safely within the Microsoft sphere of influence," he added. "But they won't."

The threat to Microsoft's business from open-source software has been an ongoing worry for the company.

A year ago, the company launched its Shared Source program, opening limited third-party access to its source code; some customers had had access to the code as much as a year earlier. More recently, Microsoft responded to governmental calls for more use of open-source software by offering to share Windows source code with them.

"Bleak" prospects
But Stutz sees these programs as mere breakwaters that likely will not hold back the swelling tide of open-source enthusiasm. Part of the problem, he said, is Microsoft's sacrificing innovation for the sake of holding on to the PC model.

"If the PC is all that the future holds, then growth prospects are bleak," he wrote in the resignation letter posted last week.

Stutz likened Microsoft's PC client business to that of automobile manufacturers, railroads and telecommunications companies, which struggled as their infrastructure businesses matured. These efforts to hold onto the PC-focused model could doom the company, like others before it, he concluded.

"I've spent a lot of time during the last few years participating in damage control of various sorts, and I respect the need for serious adult supervision," he reminisced. "Recovering from current external perceptions of Microsoft as a paranoid, untrustworthy, greedy, petty, and politically inept organization will take years."

Far worse, he concluded that Microsoft is turning into a "place where creative managers and accountants, rather than visionaries, will call the shots."

Milunovich took an even harsher view, questioning whether Microsoft was truly innovative. "It's not surprising that a technical person would make this observation," he wrote in his research note. "Microsoft has innovated little, however, and owes its success to luck--IBM handing over the PC OS--and managerial excellence in our view. Still, we agree that Microsoft must notch up the innovation component to do well in new areas."

Microsoft must find a way to handle the threat, otherwise the company faces "the erosion of the economic value of software being caused by the open-source software movement," Stutz concluded. He predicted that businesses increasingly would not need to buy full-blown software packages like Office or Windows, when smaller open-source programs would do the same job at a lower price.

During Microsoft's most recent quarter, Windows and Office accounted for nearly all of the company's profits, according to a recent filing with the Securities and Exchange Commission.

"As the quality of this (open-source) software improves, there will be less and less reason to pay for core software-only assets that have become stylized categories over the years," such as Windows and Office, Stutz wrote.

As Microsoft moves forward, it must worry less about looking over its shoulder at competitors and protecting the aging PC-centric model, Stutz concluded. Customers want diversity, something that open source offers.

"Open-source software is as large and powerful a wave as the Internet was, and is rapidly accreting into a legitimate alternative to Windows," Stutz warned. "It can and should be harnessed."

 

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