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By Alex Salkever When Microsoft (MSFT
) announced earnings for its fiscal fourth quarter on July 22, the after-hours markets sent its stock down by 5% (see BW Online, 7/23/04, "Microsoft: Hot Results, Cool Outlook
"). Investors clearly had already finished celebrating the Colossus of Redmond's bold announcement two days earlier that it would issue a $3-per-share one-time dividend, part of a total $75 billion stock-buyback and dividend plan over the coming four years.
Why is the stock being punished? Because the market sees something different from the upbeat picture CEO Steve Ballmer painted on the day of the dividend announcement. It recognizes that Microsoft faces increasing competition in both PC operating systems and in desktop applications, the software giant's key product areas. And it's watching Microsoft's difficulties repeating in new global markets the dominance it has gained in America.
To make its way into developing countries, Microsoft is already finding it has to offer cut-rate pricing, and that has lots of the rest of the world wondering why they can't get similar deals. And a small but growing number of high-profile government and corporate customers overseas are flat-out ditching Windows or Microsoft's mainstay application, the Office productivity suite.
AID AN ARCHRIVAL? Here's a solution, a tad radical, perhaps, but one that Microsoft really ought to consider: How about selling a proprietary, low-cost version of Office designed for computers running the Linux operating system? As open-source software, Linux is free to anyone who wants to can download its source code and run it. While prepackaged versions sold by Red Hat (RHAT
) and others that are easy to use and offer support cost extra, in the realm of PC operating systems and desktop applications, Linux-based products cost much less than their Windows counterparts.
So, why would Microsoft threaten one of its biggest cash cows with a cheaper product? And why help its archrival operating system, which tech tracker IDC Corp. says has less than 1% of the corporate PC market? If Microsoft takes a hard took at what's already happening around the world, it'll see the answers.
In November, 2003, the government of Brazil ordered its agencies to use Linux and other open-source software as much as possible. A month later, Israel's Commerce Ministry announced a decision to migrate to OpenOffice, an open-source desktop suite that runs on Linux and Apple's (AAPL
) OS X system, as well as on Windows. The city governments of Paris and Munich both announced their intention to switch to Linux and open-source applications. In Peru, a state legislature nearly passed a law banning the use of proprietary software by government agencies. And the governments of China, Korea, and Japan have announced an alliance to promote open-source software.
FAT TARGETS. Two common threads run through these decisions. One is the relatively high price of Microsoft software. Office and Windows XP list at $400 or so for business users. Even though few customers pay the full ride, thanks to discounts for volume users in business and breaks for students, most still fork over at least $200 to $300 for Microsoft Windows or Office -- an expense most of the world simply can't afford.
The other thread is the concern about buying proprietary software to run critical government operations. That's particularly important in light of the spate of nasty worms and viruses that have assaulted Windows machines worldwide, forcing systems administrators to patch their networks and machines time and again in the past two months alone.
Microsoft needs to address these concerns head-on, the sooner the better.
BUILT-IN INERTIA. And here's something else it should consider: If Microsoft were to offer an Office for Linux product, it probably wouldn't have much affect on its U.S. software business for quite a while. In the U.S., the costs of Windows and Office are painful but still small items relative most corporate budgets. Even at a cost of $300, it's a pittance for a U.S. employer who pays more than that per employee for health insurance each month.
What's more, the overall costs and potential inconvenience inherent in switching to Linux are higher in the U.S. than in the rest of the world. Few companies would immediately ditch their Windows infrastructures and adopt Linux. After all, technology managers in the U.S. want, above all else, compatibility. With less reason to overcome the built-in inertia of the installed Microsoft software base, not many U.S. companies would likely switch their PC fleets to Linux just to buy Office for Linux.
They might consider it -- but only if those Linux PCs became completely interchangeable and compatible with their Windows counterparts. However, that scenario remains several years off.
GLOBAL OFFICE NETWORK. Building an Office for Linux might actually enhance Microsoft's hold on the productivity-software market over the long term. In fast-growing emerging markets, such as China and India, piracy of Microsoft products is so rampant that legitimate copies are the exception rather than the norm. And those markets have proven resistant to Microsoft's pricing strategies.
What Redmond is failing to take into account is the value of a global network of machines running Office on multiple platforms -- Windows, OS X, or Linux. Such a network of compatible software would give Redmond control over the formats for documents, e-mail, and spreadsheets on just about any kind of PC going. That's a far stronger position to hold in a corporate world where the operating system could well become a commodity used to sell services and support.
Witness Sun Microsystems' (SUNW
) bold plan to give away hardware and core operating systems to entice customers to pay $100 per employee for the use of and service for higher-level software that can run everything from mail servers to large corporate Web sites.
CAKE AND EAT IT. IBM (IBM
) also provides a useful model. Louis Gerstner, the former Big Blue CEO, effectively shifted its focus from selling increasingly commoditized hardware to a higher-margin business that emphasizes software customization, consulting, and cutting-edge hardware. Likewise, Sun CEO Scott McNealy is in the process of stepping up offerings of his Solaris operating system designed to run on dirt-cheap Intel (INTC
) boxes, even though they'll compete against Sun's high-end servers as well as machines that run Sun's own distribution of Linux.
In this world, Redmond could have its cake and eat it, too. It could continue selling high-priced Office software with all the bells and whistles to wealthy corporate customers. And it could sell a stripped-down version of Office for Linux targeted at emerging markets without immediately cannibalizing its lucrative corporate accounts.
Microsoft needs to confront the issue of Linux-based software at some point in the next few years, anyway. IBM is quietly running tens of thousands of PCs inside its vast global organization loaded with Office and Windows alternatives. No surprise, considering that Big Blue is the world's largest seller of Linux software and support.
When the world's largest and most respected IT consultancy draws a clear bead on your crown jewels, it's time to mount a bold counterattack. Outmanuevering IBM yet again would be a sweet victory for Microsoft -- and could significantly strengthen its hammerlock on the productivity-software market. Salkever is Technology editor for BusinessWeek Online