Why Free Software Is Such A Big Deal

People have come to expect certain types of software to be free - like browsers. In fact, that's how Netscape started, making its software available for nothing. Eventually Microsoft beat them back with its own browser, Internet Explorer. But interestingly, the free browser wars are not over, according to a story in Computerworld quoting a Net Applications' study:

Mozilla Corp.'s Firefox browser is on pace to hit the 20% market-share mark next month, a Web metrics company said today. Firefox boosted its share by 0.6% in May, accounting for 18.4% of the browsers used during the month and putting it within shouting distance of a major milestone, according to Net Applications Inc. "Firefox is trending to hit 20% market share sometime in July," said Vince Vizzaccaro, the company's executive vice president of marketing, in an e-mail.

This is fascinating, not because someone other than Microsoft can give software away, but because in doing so, a company can take so much market share. It's another sign that the Redmond-based corporation needs significant change and some direction that stresses real invention.

Paying For Free Software

Something I didn't touch upon in my post yesterday about Microsoft and Yahoo (actually the adaptation of a story I had translated for Newsweek Japan, which periodically asks me to write about the high tech industry) is the cost effectiveness of the investment. Instead of something over $44 billion for Yahoo, I thought that Microsoft could have a different strategy. Put aside $500 million, which is practically a drop in the bucket for them (even cheaper than EU fines for unfair competition). The company would host a contest, looking for the hundred best and most interesting ideas for future web businesses.

The winners would get $5 million, some as a monetary price, and the remaining as seed money. That way, Microsoft would, for relative chump change, become a super-charged venture capitalist working on a scale that, for most, would be completely inconceivable. Out of 100 ideas, if they have smart people doing the picking, I'd guess that it would be safe to figure that five might wildly succeed, to create markets that might be worth $10 billion each. That is, I think that the law of large numbers, with some intelligence stacking the deck, is bound to turn up at least that number of winners. Over the period of a few years, that $500 million investment turns into $50 billion of businesses in which Microsoft has majority ownership. Now that would be a way to stop following others and take a commanding lead.

So I was a bit surprised this morning to get my daily mailing from Slashdot and learn that Google, while not doing exactly that, is in a similar space, at least. In the Google Summer of Code, the company pulls together 1,500 college students, 2,000 mentors, and gives each student (each winner had to fill out an application and compete for the spot) $4,500 to fund an open software project, and offers each mentor $500 for participation. The students have to license their code to the mentors.

Will Microsoft take my advice? Are you kidding? They won't even read it or hear of it. However, if they don't learn that innovation has to be about business practices, and not software, they'll be going nowhere new fast.

Microsoft Selling Against Microsoft

I've mentioned a number of times before how the lack of sales velocity for Vista could hurt Microsoft, whose business is held up by the twin pillars of Windows and Office. According to a link on Slashdot.org, Microsoft has tried advising IT managers how to make a case for upgrading from XP to Vista.

Given the claims that Microsoft made when XP first came out (disclosure - I happily use XP), about the robust security, selling on the strength of improved security - no, really, we mean it this time - is probably not the most convincing argument that the company could make. If it didn't deliver with XP, when it claimed that it did, why would anyone believe that it would this time? Wouldn't there be another argument for a future version that the previous versions were inadequate and there was no good way to patch them to get up to snuff? And the argument of having to upgrade "to match the capabilities of their competitors" is the same tired hog wash that the software industry (including analysts) have been peddling for years. Software doesn't make the product or the company. At best it's a tool. At worst, an expensive excuse. According to this PC World article, Microsoft is also claiming that Vista is cheaper than XP when run on mobile PCs (read as laptops) by some $606 less a year:

Peculiarly, the study actually was based on XP usage and extrapolations based on Vista capabilities because there was not a substantial base of Vista clients in use yet when the study was done early in 2007. Now, the installed base of Vista is 60 million PCs, Microsoft said.

I wonder if Microsoft actually included the upgrade costs - including new hardware - as so many of the early users had already paid for the upgrades under a site license agreement, and so would not have shelled out additional money. Whatever the case, it's not a good sign when company has to use fear, uncertainty, and doubt - the great software FUD - against its own products because so few people want the new one.

SAP, Market Expansion, and the Eradication of Value?

The Wall Street Journal had a story on Wednesday about SAP placing strategic bets on "simplified and cheaper business software aimed at small and midsize companies." The story went on to discuss how the company's move into Web-based software was a "product of necessity." That is no surprise to anyone who has watched the high-tech market for longer than three or four years. Actually, I remember writing about this trend some years ago.

SAP's reason is an encapsulation of a problem facing all businesses. No matter how large markets are, they ultimately remain finite in size. Enterprise software companies have come up against this with significant force, because high tech is a sector in which investors get drunk on the prospects of growth.

You can only grow so far, and eventually you have to wonder whether settling for solid profitable operation over the years should be enough. Companies often try to cheat the limits through acquisition, but I've wondered whether this isn't largely a form of business delusion. More and more acquisitions turn into more and more sales, and more earnings, but do the returns per dollar of stock invested really improve? Say that you own shares of companies A and B, both of roughly equal size, and then A buys B. You'll get a bit of a premium on the B shares, but what happens after? A's price goes down some, and eventually recovers. So you've gone from two companies with earnings to one company with earnings, and yet you don't get anything close to the combination of the stock prices. If you've been getting a dividend, it's probably not going to rise precipitously. The acquiring company will claim that the purchase is necessary to stay competitive, but the chances of the results not providing the expected financial returns is, from the research I've seen, upwards of at least 70 percent. Could you reasonably say that the entire M&A game is often a mechanism to remove shareholder value?

It's a Case of Out with the New, In with the Old at Microsoft

An article in Computerworld (though it comes via PC World) says that Microsoft will see increased Windows XP sales in 2008 than in 2007, even though Vista is available:

During a conference call with analysts following the earnings results release Thursday afternoon, Chief Financial Officer Chris Liddell said the company has changed its fiscal year 2008 forecast from an 85/15 split in sales between Vista and XP to a 78/22 split. Windows XP sales will, in other words, be nearly 50 percent higher in the next 12 months than Microsoft had estimated earlier.

Alright, so it's not that Vista is going away, or even that it's selling less than XP. But this really is an astounding situation for the company. It's continuing to set aside revenue into the "unearned income" category for the year because of "undelivered elements." That translates into having to ship unannounced upgrades and enhancements to Vista. Another way of saying that, I think, is that Vista has too many problems and gaps, which shouldn't surprise if you've followed stories about the product, or even know someone who has shifted to it.

Microsoft is planning to stop selling XP to resellers and retailers after the end of next January. What does this all say about Vista specifically, and the software business in general? The industry is on a painful tredmill. They sell products, which probably don't really need to be replaced for years, and then keep adding new features that few people ask for and create new file formats to make older versions obsolete. This is why Microsoft and other companies are trying to push software as a service - not because it's good for customers, but because they're trying to get themselves out of the pricing jam they've been in for a good 20 years and get people locked into a leasing model. There you know customers will be regularly paying money.

Microsoft Yodels Yahoo

(The following is a story of mine running translated right now in Newsweek Japan)

It only took one initial report a little over a week ago about potential merger talks between Microsoft and Yahoo to generate some of the biggest buzz the online industry has seen. Even as further stories suggested that the two companies were actually considering a strategic online partnership, interest was still intense because of one word: Google.

The search engine company has competed online with Yahoo and Microsoft and thrashed them both, becoming the premier destination for finding information and delivering ads. And so Yahoo and Microsoft hope that somehow the combination of the former’s audience – the top ranking web destination according to site ranking service Alexa.com, with visits from more than 25 percent of all global Internet users – and the latter’s technology leadership might let them compete more effectively.

Were this any other industry, the combined forces would be powerful: almost $51 billion in 2006 revenue and well over 80,000 employees. However, on the Internet, size isn’t enough. Customers must identify a company and its site as the preferred spot to get something done, whether to keep in contact with friends, share video, get news, or look for some piece of information. Lack that connection with people, and your business is bound for bad times. Microsoft and Yahoo is just one example in the online industry of how companies are trying to use alliances to gain a spot in the hearts of customers – though it’s not clear that the approach will often work.

Finding examples of corporations that are using acquisitions for greater customer contact is easy. For example, Yahoo bought the popular photo sharing site Flickr (recently closing its own service, Yahoo Photos, because so few people used it). News Corp acquired personal networking destination MySpace as part of Fox Interactive Media, the Internet division the company created in 2005. “That’s working out quite well,” says a top venture capitalist Todd Dagres of Spark Capital. “MySpace already had presence in the online world that Fox didn’t.”

The difference between these acquisitions and a possible Microsoft-Yahoo marriage is that they were targeted at popular but still niche properties that had enthusiastic customer bases. Amalgamating more broadly based companies, however, is too unfocused. Unless companies can catch the eye of the public, they will remain stuck where they are as their competitors blow past them.

Google is a danger to Microsoft and Yahoo because it competes with them in the vital areas of search engine services and online advertising, being far more successful at both. According to NielsenNetRatings, Google’s share of U.S. searches in March was 53.7 percent, while Yahoo had 21.8 percent, and Microsoft, 10.1 percent. So Google brings more people in who want information.

Then it delivers small ads whose content matches the search terms that users choose. The result is advertisements that people often actually want to read – and many advertisers willing to pay lots of money to Google. According to Karsten Weide, program director of digital media and entertainment at market researcher IDC, Yahoo was the online advertising leader until 2005, when Google blew past them. Last year, according to research firm eMarketer, Yahoo had 15% of U.S. paid search advertising, compared to Google’s 58.7%, and next year it projects Google as taking over three-quarters. “It’s dominant already and growing so fast that it will be difficult for the other players to catch up,” he says.

That spells trouble for the other two. According to Yahoo’s 2006 annual report, 88 percent of the company’s revenue came from advertisers. And while 80 percent of Microsoft’s income is from selling copies of Windows and Office product families, the company sees its economic future elsewhere because the old software lines are now mature businesses that are unlikely to offer high rates of business growth. Before becoming vice president of media development at PodTech.net, Robert Scoble was a Microsoft developer who also wrote a popular blog about the company. He remembers upper management stressing two years ago “that the growth of the company will come from advertising, not from selling another copy of Windows or another copy of Office.”

Yet Microsoft’s online advertising revenues have been flat at about $2.3 billion for the last four years while the industry has grown at an annual rate of over 30 percent, according to Weide. That means the company has faced a constantly declining market share. “I’m at a loss,” he says. “How do you pull zero percent in a growth climate like that? It’s an accomplishment in itself.”

The problem is that bigger is not necessarily better on the Internet. The attitude comes from an old strategy of traditional industries. By acquiring other businesses, a company could create economies of scale, driving down manufacturing and distribution costs and pressuring competitors. On the Internet, though, a small and reasonably funded company can quickly reach millions of consumers: look at MySpace or YouTube.

Microsoft’s difficulty is that it understands selling packaged software, not the media world of online, so it tries to copy someone else’s success. According to Scoble, Microsoft is preoccupied with FOG – fear of Google. “Microsoft has some technologies that are really good, but they’re in clone world right now,” Scoble says. “They’re trying to clone everything that Google is doing.” For example, Microsoft is emphasizing online ad sales and even giving away use of software business applications on its Live.com site. Unfortunately the drive to copy another means that the company remains reactive to the Internet and not developing the new services that will catapult it to the lead among consumers.

Yahoo has a grasp of media, but can’t force how consumers will react. Look at its acquisition of photo sharing service Flickr. That step was necessary because Yahoo’s own photo sharing service, Yahoo Photos, simply never caught on with users. “Now you’re going to bring that together with a behemoth like Microsoft and be able to operate in a nimble and innovate way in an industry that really thrives on rapid [change]?” asks Willan Johnson, formerly a vice president at Yahoo and now general manager of SupplyFrame.com. “Many have speculated that if that deal went through, you’d want to buy Google stock.”

In the view of Kim Caughey, a senior investment analyst at Fort Pitt Capital Group, the combined entity would have a hard time hiring the “cool people … to continually create new products to drive people to your web sites and capture eyeballs.” They would find a large-scale company a bad fit. “If they have a really great idea, venture capital will give them money,” she says.

Smaller entrepreneurial divisions might do the trick, but large companies typically don’t have interest in such endeavors because the returns are too small. Scoble found this when he worked at Microsoft and in 2005 urged management to consider purchasing such companies as MySpace, Flickr, or Internet phone service Skype when they were much smaller and less expensive to acquire. “I was telling them to pay attention to something that hadn’t yet sold for $20 million,” he remembers. “I asked, ‘Why aren’t you doing things in this market?’ and the answer was, ‘We’re too busy … running multi-billion dollar businesses.’” By the time large companies see the value, it’s often too late to acquire the truly innovative businesses that are now literally worth billions of dollars.

There still might be sense in a close alliance between Microsoft and Yahoo, even if not for an online consumer market. Caughey says there might be natural synergy for corporate customers – an integration of Microsoft’s commanding presence on desktops with Yahoo’s search technology. The two could become a way to pull together data scattered throughout a large company in the form of word processing documents, spreadsheets, and other files – an area that has caught Google’s eye. Or Yahoo and Microsoft could develop software and systems that would allow others to create the next big thing for consumers. Maybe even Google developers could give the products a test. They probably wouldn’t have to search too hard to find them.

Blackberry Outages and R.I.M. Points the Finger

R.I.M. has finally blamed insufficiently tested software on the Blackberry outage that cause such executive outrage. You'd think that the managers would have been happy to have a short period in which they didn't have to jump through hoops. But the story may be a bit more complex. I heard an albeit second-hand explanation/rumor that R.I.M was warned the that software wasn't ready to go live, but that no one listened.