November 1, 2005 4:00 AM PST

Google chase could trip up Microsoft

Microsoft has talked about accelerating its business by offering services, but some analysts worry its race to compete with Google and others could leave Microsoft's very profitable business model in the dust.

Tuesday morning, Microsoft Chairman Bill Gates and services chief Ray Ozzie are expected to outline the company's new push to offer myriad online services on top of its existing software lineup.

Analysts say the move is probably necessary to help the company compete with rivals that threaten to offer online equivalents to some of Microsoft's cash cows, like Office. However, depending on how far Microsoft takes the strategy, it could also put the company in competition with its existing--and already lucrative--way of doing business.

"It's not so much about how you're going to beat Google," said Gartner research fellow Tom Bittman. "It's more about how you are going to beat the Google model. Microsoft is going to be forced to compete with Google, forced to compete with its own business model."

Bittman and others fear that any online offerings from Microsoft could potentially cannibalize sales of the company's shrink-wrapped software, like Windows and Office, which make up the bulk of the company's profits.

Historically, most of Microsoft's services have come from its MSN unit, which has been largely consumer-focused. But Microsoft sees a clear opportunity to offer online tools to businesses as well.

"For enterprises, I think we've just barely scratched the surface about which systems brought into the cloud in some way, shape or form," Ozzie said at a technology conference last week.

Ozzie was put in charge of Microsoft's services push as part of a major reorganization of the company that took place in September.

In a September interview, Gates suggested that while many companies may continue to buy server-based software, some of those same software capabilities could also be delivered through services. Gates pointed to some of the early work the company has done with hosted versions of its Exchange e-mail software and its SharePoint portal software.

But, he said, most of the services that Microsoft has offered on its own have been rather basic--and often free--products.

"Our services have started out as very inexpensive but not feature-rich," Gates said. "Our servers are very feature-rich. So as we bring these things together, we give you the richness and also the choice of having it as server or as a service."

While Bittman believes Microsoft needs to do this, he questions whether the software maker can profitably make the switch.

"Can high-volume, high-margin software compete against high-volume, low-margin advertising?" he said. "It's the clash of two models."

But Microsoft sees services as a way to address two key challenges: One is to compete with Google and other online rivals like But the other, also important role that online services can play, is to offer a means of updating software more quickly than Microsoft can do with its traditional packaged software.

"We need to have service offerings associated with each of our products that allow us to feed innovations that are appropriate to the market on, let's just call it a six-, probably more realistically a nine-month cycle," Microsoft CEO Steve Ballmer said at October's Gartner Symposium/IT Expo.

The services push has been brewing for some time. At July's financial analyst meeting, several of Microsoft's individual business unit leaders discussed opportunities for services in their areas.

Eric Rudder, then head of Microsoft's server and tools business, pointed to the company's acquisition of FrontBridge as an example of how the company can sell services that are built on top of existing software--in that case Exchange. With FrontBridge, corporate e-mail is delivered to an intermediate server, which can strip out viruses, archive messages, and manage compliance issues.

"I think Microsoft can win, but in the end it means Microsoft loses, unless there is some other magic there we don't see."
--Tom Bittman, research fellow, Gartner

"So the opportunity to add value with services--not necessarily replacing the server, but complementary value streams--is quite significant, and I think you'll see us first grow in that area with Exchange," Rudder said. "But we're looking at how to complement hosted services to all of the server businesses."

Jeff Raikes, who leads the information-worker business, which includes Office, did not go into detail, but said services would be increasingly important as Microsoft attacks a bigger part of the business software market.

"Those show very little revenue now as a percentage of the overall IW business, but we see them as big opportunities," he said.

Even Windows is gaining a services component, of sorts. As part of its effort to combat piracy, Microsoft last year kicked off the Windows Genuine Advantage program, in which the company requires that any customer who wants access to most Windows downloads to prove that copy of Windows is legitimate. As part of that effort, the company has slightly expanded the range of online freebies that one can get as part of a Windows purchase.

The company also has looked at services for new markets, such as antivirus software, where the company is testing its OneCare program. The program is expected to become a paid

CONTINUED: Bringing partners into the mix…
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Google chase could trip up Microsoft
At least the software released by Google is done right the first time, and there are no weekly patches or updates for it. :)
<a class="jive-link-external" href="" target="_newWindow"></a>
Posted by Roman12 (214 comments )
Reply Link Flag
You have it backward
1. Service model allows MSFT (and Google does this too) even more frequently w/o having to tell you.

2. Service model will be even more profitable for MSFT. Look at the gross margin of Google vs MSFT; and think of all places because of piracy where MSFT doesn't get paid today. The services action is going to be in small and lower-middle size businesses -- not an area where MSFT dominates today.
Posted by Yumla (5 comments )
Link Flag
Microsoft/Google competition is great for consumers
I am reminded of a quote "In a fight between a grizzly bear and an alligator, the terrain determines the winner". Meaning, each company has its strength and position in the market. The company that crosses over to fight on the others turf is likely to lose...but probably not die. These giants are too strong and too smart to battle to the death over any one market. It will be a battle for first place versus second place, with each making money in its own way.

The competition will be interesting. Each company will strive to protect its base products and revenue streams while innovating with new products and business models. The parrying back and forth will be a battle of strategic business decisions and technical brilliance.

I wrote a blog about this today. See this for the full story <a class="jive-link-external" href="" target="_newWindow"></a>
Posted by Don_Dodge (64 comments )
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What a slant--worried?
Why are these analysts "worried"? Do they have a stake in MS continuing to make huge profits? Do they own MS stock? Does the author own MS stock?

Furthermore, it's not MS' "race to compete with Google" that will obsolete the profitable MS business model. The Internet and open source software have already obsoleted the MS model. MS can change its model or get left in the dust. The article makes it sound as though there is a third option: MS can stick to its shrinkwrap and expensive licenses, and continue to make big bucks. The article makes it sound like MS is on some foolhardy mission to cut its profits just so it can compete with Google.

The MS era is over, whether MS tries to compete or not. The article looks like it was written by an MS sympathizer who's so sad to see those massive profits become history.
Posted by (10 comments )
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I'm pretty sure
Analysts "worry" about these sort of things, because if any company (regardless of the industry) that was the size of Microsoft screwed themselves with a new business strategy it would have a detrimental impact on the economy.

I know it is fun to play dress up and pretend sometimes but there is no global conspiracy here. --For the simple fact that no one at the top cares about the people at the bottom.
Posted by Bob Brinkman (556 comments )
Link Flag
And Google's foray into
TV, Books, Open Office, Magazine advertisements, Wi-Fi, etc. appears fine to analysts! Pulleese.
Posted by (42 comments )
Reply Link Flag
Services aren't always free.
Just because some services can be delivered via advertising supported activity doesn't mean that all things should be. If I'm paying employees to work on documents I don't want them clicking on ads while there working. Also, what about security? availability? What about data interopability? Also, office can be customized via automation. And if you want a cheap spreadsheet, etc. just buy MS works. The bottom line is small businesses need productive employess and that doesn't always come from the lowest priced solution.
Posted by (4 comments )
Reply Link Flag
Selling services that should be free?
If MS wants to get into the service business, thats all well and good. But a service "for keeping Windows machines healthy and virus-free" sounds more like a protection racket than anything good.

There's no way MS should make their customers pay extra because they are unable or unwilling to fix problems in their software.

Besides if this "service" becomes a profit center, what would be their incentive to fix anything?
Posted by rcrusoe (1305 comments )
Reply Link Flag
Not to worry.
M$ is yet to flourish in any endeavor where it could not use it's monopoly position to crush the opposition. The truth is, M$ (like ATT) simply cannot survive in a market where it has real competition.
Posted by Mister C (423 comments )
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M$ flourish?
Are we talking about the same Microsoft? I remember them wiping the floor with Netscape and convincing Palm (another recognized leader in an area m$ had no previous expertise) that they should run windows on their next device.

On the contrary, given that track record, I almost expect a "powered by MSN search!" button on googles homepage within 3-5 years.
Posted by CaughtThinking (5 comments )
Link Flag
Microsoft and Google don running shoes.
Interested to see if Dr. Spencer Johnson's "Who Moved My Cheese" lessons apply to these moguls.
Posted by hokuwho? (5 comments )
Reply Link Flag
Microsoft dont lead
Ain't MS just good at chaising others?
Posted by kentsin (2 comments )
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