Some thoughts following the Microsoft splash this week:
The big PR launch for Windows Live last Tuesday announced a set of web services initiatives. It probably drives a lot of Microsoft people crazy to have the technology and business resources that they do, and to have so little mindshare in the “web 2.0″ conversations that are going on. I haven’t read through or digested all the traffic in my feed reader, but it looks like a lot of people are unimpressed by the Microsoft pitch. Been there, done that. Which is true, as far as I can see. The more interesting question is whether this starts to change the flow of money and opportunities around developing for and with Microsoft products and technologies.
If I do a quick round of free association, I get something like this:
Microsoft:
- corporate desktop
- security update
- vista delayed
- who’s departed this week
Microsoft is a huge, wildly profitable company. It initially got there by being “good enough” to make a new class of applications and solution developers successful in addressing and building new markets using personal computers, doing things that previously required a minicomputer and an IT staff. Startup companies and individual developers that worked with Microsoft products made a lot of money, doing things that they couldn’t do before. All you needed was a PC and some relatively inexpensive development tools, and you could be off selling applications and utilties, or full business solutions built on packages like dBase or FoxPro.
Microsoft made a lot of money, but the software and solutions developers and other business partners and resellers also made a lot of money, and the customers got a new or cheaper capability than what they had before. Along the way, a huge and previously non-existent consumer market for IT equipment and services also emerged. Meanwhile, the market for expensive, low end minicomputers and applications disappeared (Wang, Data General, DEC Rainbow, HP 98xx) or moved on to engineering workstations (Sun, SGI, HP, DEC/MIPS) where they could still make money.
The current crop of lightweight web services and “web 2.0″ sites feels a little like the early days of PC software. In addition to recognizable software companies, individual developers would build yet-another-text editor or game and upload it to USENET or a BBS somewhere, finding an audience of tens or hundreds of people, occasionally breaking out into mass awareness. Bits and pieces are still around, like ZIP compression, but most of it has disappeared or been absorbed and consolidated into other software somewhere. I have a CD snapshot of the old SIMTEL archive from years ago that’s full of freeware and shareware applications that all had a modest following somewhere or another. Very few people made any money from that way. In the days before the internet, distribution of software was expensive, and payment meant writing and mailing a check, directly from the end user to the developer.
Google has become a huge, wildly profitable company so far by building a better search engine to draw in a large base of users, and using their platform to do a better job of matching relevant advertising to the content it’s indexing. Now, a small application can quickly find an audience by generating buzz on the blogging circuit, or through search engines, and receive two important kinds of feedback
- Usage data – what are the users doing and how is the application behaving
- Economic data (money) – which advertising sponsors and affiliates provide the best return
Google’s Adsense and other affiliate sales programs are effectively providing a form of micropayments that are providing incentives and funding for new content and applications, with no investment in direct sales or payment processing by the developers, and no committment from the individual end user.
It’s simply a lot easier for a small consumer targeted startup to come up with a near term path to profitability based on maximizing the number of possible clients (=cross platform, browser based), being able to scale out easily by adding more boxes (not hassling with tracking and paying for additional licenses), and with a short path to revenue (i.e. Adsense, affiliate sales). A developer who might have coded a shareware app in the 80’s can now build a comparable web site or service and find an audience, and actually make a little (or a lot of) money. Google makes a lot of money from paid search ($675MM from Adsense partner sites in 3Q05), but now some of that money is flowing to teams building interesting web applications and content.
In contrast, in the corporate environment (where it’s effectively all Microsoft desktops now), things are different. Most organizations won’t let individuals or departments randomly throw new applications onto the network and see what happens. This is a space that usually requires deep domain expertise, and/or C-level friends, in order to get close enough to the problems to do something about it. But the desktops all have browsers, and the IT managers don’t want to pay for any more Windows or Oracle licenses than they are forced to, so there’s some economic pressure to move away from Windows. But there’s also huge infrastructure pain, if your company is built on Exchange. There’s less impetus here for new features, the issue is to keep it secure, keep it running, and make it cost less. Network management, security, and application management are all doing OK in the enterprise, along with line-of-business systems, but these are really solutions and consulting businesses in the end. The fastest way to get “web 2.0″ into these environments is for Microsoft to build these capabilities into their products, preferably in as boring but useful a way as possible. Not a friendly place for trying out a whizzy new idea, and generally a hard place for a lightweight software project to crack.
On another front, Microsoft also has most of the consumer desktop market, but by default rather than by corporate policy. Mass market consumers are likely to use whatever came with their computer, which is usually Windows. They’re also much more likely to actually click on the advertisements. Jeremy Zawodny posted some data from his site showing that most of his search traffic comes from Google, but the highest conversion rates come from MSN and AOL. MSN users also turn out to be the most valuable on an individual basis, in terms of the effective CPM of those referrals on his site.
So let’s see:
- Many new application developers are following the shortest path to money, presently leading away from Microsoft and toward open source platforms, with revenue generation by integrating Google and other advertising and affiliate services
- Microsoft has access to corporate desktops, as well as mainstream consumer desktops, where it’s been increasingly difficult for independent software developers to make any money selling applications
- Microsoft is launching a lot of new me-too services in terms of technical capability, but which will have some uptake by default in the corporate and mass market
- Microsoft’s corporate users and MSN users are likely to be later adopters, but may be more likely to be paying customers for the services offered by advertisers.
- Microsoft could attract more new web service development if there were some technical or economic incentives to do so; at present it costs more to build a new service on Microsoft products, and there’s little alignment of financial incentives between Microsoft, prospective web application developers, and their common customers and partners.
Mike Arrington at TechCrunch has a great set of play-by-play notes from the presentation and a followup summary. He thinks the desktop gadgets and VOIP integration are exciting.
what really got me today was the Gadget extensibility and the full VOIP IM integration.
In the past, Microsoft grew and made a lot of money by helping a lot of other people make money. Today, the developers are following the money and heading elsewhere, mostly to Google. This could quickly change if Microsoft comes up with a way to steer some of their valuable customers and associated indirect revenue toward new web application developers. They are the incumbent, with huge market share and distribution reach. I don’t think they’ll ever have the “cool” factor of today’s web2.0 startups, and I don’t think they’ll regain the levels of market share they have had in the past with Windows, Office, and Internet Explorer. But they could be getting back in the game, and if they come up with a plan to make some real money for 3rd party web developers we’ll know they’re serious.
