Microsoft’s withdrawal from its bid for Yahoo! has hardly clarified the the tech landscape. In fact it has made the shape of the industry far more uncertain, as Microsoft mulls moves to shore up its future.
Microsoft is one of the most financially successful companies on the planet. It anticipates operating income this year of over $26 billion, maintaining strong growth from the last few years (just $9 billion in 2004), making it arguably stronger than other highly profitable companies in financial services and oil, which have more inconsistent incomes. However their success is founded on operating systems and client-installed office productivity software. Online services account for around 5% of their revenues, and entertainment 12%. There is no question that their core revenue is under attack. The summary of the challenge is “lower cost alternatives”, including online software and services, and open source.
So what will Microsoft do? The latest rumor is that Microsoft intends to buy Yahoo!’s search business, then buy Facebook for $15 to $20 billion. This is highly credible, though gossip is rife. Unquestionably this would give Microsoft a very strong position, both in the online advertising business, and also in leveraging what is now the dominant social network platform. In addition, the total price would be less than what Microsoft was prepared to pay for Yahoo! as a whole, keeping some of its financial powder dry.
The big question is what Microsoft would do with these assets, if this plan succeeded. The search business is relatively straightforward, with a variety of proven advertising-based ways to monetize. Social networks are very different, with business models yet to be established. So all of this relates strongly to the moves by Google, Facebook, and MySpace to provide (or not) openness to their users’ data. Robert Scoble believes that Microsoft will keep Facebook closed. Umair Haque agrees, but thinks this strategy will be disastrous.
The first step is to see if Microsoft makes these acquisitions, and then what it does with them. Certainly Microsoft’s history indicates that it is unlikely to fully embrace the current shift to openness in the social network space. If so then, Facebook could turn out to be a very poor acquisition, with users rapidly shifting their relationships to new spaces. More likely Microsoft would play an edge game, opening out a little, but as little as they can without disenfranchising users. It will be a tough game to play given the pace of change and the rapid availability of alternatives.
The other piece of the puzzle is the future of their software business. As I’ve written before, I believe that the current situation will result in an acceleration of the shift to online software. Microsoft recognizes that the shift is next-to-inevitable, and rather than trying to hold back the tide, is going to embrace this. Microsoft’s head of office products said in an interview today that companies will embrace cloud computing, and that half of Microsoft Exchange mailboxes will be hosted by Microsoft. Microsoft is already aggressively offering these hosted services to clients, and actively wants them to shift from running their own servers.
In other words Microsoft intends to transcend the pain and hassle of selling upgrades to their clients with every release, and instead charge them annual fees, creating consistent revenue. Look to see a strong shift in Microsoft’s offerings and what they sell their corporate clients, starting now.