Question. What do you get when you help found a company at the precise time a new market sector emerges, are protected from competition allowing unbridled growth, and control the software mind-share of most of the western world?

Answer. A person with an unbalanced perception of the competitive open market.

For a whole generation (not a computer generation mind you, a human generation) Microsoft has been the company that has united the personal computer market. Apart from customers of smaller players like Apple Inc. and the Linux community, the world standardised on the Windows operating system(s). It was bound to happen. It needed to happen. Software manufacturers quickly rallied behind the ’one OS to rule them all’. The obvious benefit was that the manufacturers needed to produce just one version of a program and it ran on nearly everyone’s computers.

But there was a cost. Microsoft only grew to dominate the operating system market sector through the help of partners - partners it gladly cast aside as soon as possible (IBM and Apple were just the first of many). Eventually, partnering with Microsoft became synonymous with having a death wish for a company. By the late 1990s most companies feared Microsoft enough to avoid entering into direct competition and accept Microsoft takeover bids laying down.

Of course, a few software companies managed to keep turning a profit producing similar products and one even realised that the key to survival was to do exactly what other companies feared most – tackle Microsoft head on. Nearly extinguished in the mid 1990s, Apple received new management that brought life back to the company. It took a few years, but by 2005 Apple had a range of products that were all profitable. In 2007, the number of profitable products has increased and Apple has hit after hit on its hands.

Apple Inc. now knows exactly how to make products that meet customer needs – even needs that customers may not even realise they have! The Apple iPod was much more expensive than other MP3 players, but it was so much better they were happily snapped up (in their tens of millions; over 100 million to date) creating a new market.

The history of Microsoft is pretty amazing in its own way. How could a couple of guys that knew only just enough programming to get by, build a computer software company? Obviously, by using partners. Today, Microsoft has ‘outgrown’ those partners and determines its own direction. Of the handful of Microsoft founders, one remains at the helm as CEO – Steve Ballmer. Alongside friend and co-founder Bill Gates, Ballmer has presided over the phenomenal growth of his company from the start.

Of more interest though is what Ballmer hasn’t done. Supported by IBM in the 1980s, Microsoft was shielded from open competition so that its DOS (Disc Operating System) for personal computers could become the industry standard. Buying anything IBM related was a safe bet in the 1980s, so the Microsoft OS, which was funded by the IBM partnership, was readily accepted and quickly became the standard. Microsoft never had to wrest the market from other players as a) it was essentially a completely new market – especially the business sector, and b) few other companies challenged IBM’s wisdom of using Microsoft to power micro (now called personal) computers.

Once established as a cost effective (aka cheap) way of kitting out a computer, Microsoft DOS, then Windows, was unbeatable. Any related software market was easily attacked by powerful Microsoft. Of course, very few of these markets were mature, so as long as Microsoft wasn’t too late, they had every likelihood of dominating that sector. Examples of this include the web browser sector, the server sector, and the office software sector.

Once Microsoft was large enough, Ballmer and Gates illegally used the company’s operating system monopoly to prevent other software manufacturers from competing fairly (as convicted in the late 1990’s US Department of Justice trial). Microsoft is used to getting its way. Steve Ballmer is used to getting his way. The most important point though is that Microsoft has not grown through open competition, but through protection, initially by IBM then later by illegally using its own commercial monopoly.

Now though, the traditional markets Microsoft dominated have matured, opportunities for misusing its monopoly have dried up, and Microsoft is faced with two challenges. First is maintaining its current market dominance. The second is entering new markets.

The biggest concern for Microsoft is that its old arch-rival, Apple Inc. is back, and new rival Google, is receiving enormous attention. Read about Ballmer’s panic of loosing staff to Google here. Microsoft never offered great products; in fact they’ve never been better than good, more often mediocre, and too often rather bad. With maturing markets, customers are expecting better products than Microsoft is used to producing. Windows Vista is nowhere near as amazing as Microsoft claimed it would be for most of the last decade*. Internet Explorer is being dumped by users in the know for Firefox. Google is offering an increasingly large number of products that compete with Microsoft’s, and are free, as are many other Open-Sourced software products, like Apache (for Internet servers). Even worse, Apple is selling its highly polished Macintosh computers to largely ex-Microsoft Windows customers. To top it all off, new Macintosh computers can even run Windows perfectly – they’re practically the ultimate personal computer. Apple’s products are regarded as well-produced and sophisticated, yet easier to use than the competitions’.

While Microsoft doesn’t actually make phones, it does make the operating system for some. Although similar in appearance, Windows Mobile (aka Windows CE) is not the same operating system at all as the Windows on desktop computers. Despite its best efforts, only about 6% of smartphones sold each year are Windows Mobile based. The Linux and Symbian based phones have proven far better sellers (Figure 1).

Figure 1. Smartphone operating systems

Source: RoughlyDrafted.com

This is essentially because the market is exposed to open competition and people are choosing the better products. Microsoft has made a huge loss from Windows Mobile. In 2006 it recorded a paltry $2 million profit from the Mobile and Embedded Devices division – after a half billion-dollar loss for the preceding three years.

The major focus of Microsoft has always been the business sector. However Microsoft’s long standing dominance in business prevents serious growth there. The Home Entertainment Division is the main arm of Microsoft with growth potential, and is responsible for the Xbox and other similar hardware devices. So bad has the Home Entertainment Division of Microsoft fared however, that the boss has been sacked, yet still it can’t turn a profit. So how badly has the Home Entertainment Division performed? Over the last four years the division has lost a staggering five billion dollars. Even Microsoft can’t keep bleeding like that!

The Xbox and Xbox 360 have been massive money pits for Microsoft. The sales to date have been utterly dwarfed by sales of the Playstation 1 & 2 consoles from Sony (Figure 2.). Most recently Microsoft has realised that the portable MP3 (music) player market was growing and perhaps they should enter it. Initially, Microsoft just offered the Digital Rights Management (DRM) software for legalised music control, for other manufacturers to build products around (for a license fee). Partly because Microsoft’s DRM was so variable and restrictive, and partly because the integration of hardware and software from many companies was so poor, not to mention the variability of music quality, customers rejected Microsoft based products in favour of the iPod. Microsoft has now effectively cast aside its partnership with those companies to follow the product model of Apple Inc. (like it did with the Xbox), by building the software and hardware. This means Microsoft has also likely failed to recoup its costs from developing its old DRM software, and is marketing its own device with incompatible DRM software in direct competition to its earlier PlaysForSure partners. Interestingly, the Zune has not reduced the number of iPods sold, but has reduced the number of other brand MP3 players.

In typical cheap fashion, Microsoft simply repackaged an MP3 player from another manufacturer (the Toshiba Gigabeat) as its own, calling it the Zune. The Zune came with a buggy software package; both that on the MP3 player itself and the matching software for the computer. The online music store Microsoft built is a Mickey Mouse affair that makes buying music a complicated chore. Predicting that they could sell a trifling one million Zunes in six months, Microsoft hasn’t sold half that many in five months. It’s been a dismal failure. In the same timeframe Apple sold tens of millions more iPods.

So what has Steve Ballmer been doing all this time? A good question. He can’t seem to grow his company into new markets. Worse, whenever he tries on new markets, Microsoft products get utterly trounced by competitors. The miniature Microsoft computers like the Palm-Sized PC, the Pocket PC and Origami plus the Tablet PC, MSN TV, Windows CE/Mobile for smartphones, plus games consoles and portable music players have only succeeded in costing Microsoft billions in development costs without profit. Ballmer’s world isn’t making sense any more and he can’t just use the size of Microsoft to bash markets into submission like he used to.

New markets aren’t profitable for Microsoft. Instead they’re bleeding the company dry, as better products from other companies already exist. Old markets have matured and customers are increasingly looking for better products as well. In the operating system market, Apple’s OS is cheaper than Windows and Linux is free. Apple’s Macintosh computers are no longer pricey boutique machines, and are in effectively identical on the inside to other brand PCs, so they run Windows perfectly. Longtime Windows customers can take a punt on Apple, and still fall back to Microsoft’s Windows. Unsurprisingly, people rarely do fall back as they find Apple’s Mac OS X better than Windows.

New markets aren’t profitable for Microsoft. Instead they’re bleeding the company dry, as better products from other companies already exist. Old markets have matured and customers are increasingly looking for better products as well. In the operating system market, Apple’s OS is cheaper than Windows and Linux is free. Apple’s Macintosh computers are no longer pricey boutique machines, and are in effectively identical on the inside to other brand PCs, so they run Windows perfectly. Longtime Windows customers can take a punt on Apple, and still fall back to Microsoft’s Windows. Unsurprisingly, people rarely do fall back as they find Apple’s Mac OS X better than Windows.

The next round of intrigue is Apple’s iPhone (Figure 3.). This is a much-hyped smartphone that many predict will take the world by storm. Unlike Windows Mobile, the operating system on Apple’s phone is the same as on its personal computers. Mac OS X has a well-earned reputation as being very stable and flexible – neither of which is said of Windows Mobile.

Figure 3. Apple’s upcoming iPhone

And what has Steve Ballmer, president of the failed MSN TV, Pocket PC, Xbox, Zune and Windows Mobile company, got to say about it? The iPhone won’t succeed! Oddly, Ballmer claims that although Apple may make may a lot of money from it, the iPhone would not sell in appreciable numbers. Um, in what world does that make sense? Is he having a bet each way? Fascinatingly he recently claimed that Windows Mobile was highly successful. In fact, with only around four million smartphones running Windows Mobile sold per year (Figure 1), this is not the case. Microsoft expected to sell one million Zunes in the first six months. Sales have been nearly zero after the first three months (Microsoft also calls shipped Zunes ‘sold’ when in fact they’re still in warehouses or on shelves). Apple predicts it’s iPhone will sell 10 million in the first year. Many experts suspect this is a conservative estimate.

So what can we take from the CEO of a company that can’t compete against other companies’ products in the open market? We can safely assume that whatever Mr. Steve Ballmer says is probably the exact opposite of what will really happen. For the record, once the iPhone hits the streets, you can expect it to do the to the smartphone market what the iPod did to the MP3 player market. That is, at the least, take a truly significant piece of the pie.

Either Steve Ballmer hasn’t got a clue, or is so scared of Apple, that he uses every opportunity to run the company and its products down, in the sad hope that his comments will change the outcome of what is a forgone conclusion. Microsoft’s only real moneymaking products are in a few markets established twenty years ago, when Microsoft was protected from competition. Those two products are the Windows OS (and by extension the server products) and the Office suite of productivity applications. As alternative products gain traction, the relevance of Microsoft lessens. While hardly in the ‘poor-house’, Ballmer knows that Microsoft is under threat. It’s only a matter of a few years (five at the most) for Microsoft to loose its crown as the uncontested heavyweight of the desktop computer market. It will have to share the title with Apple, accompanied by strong support from Linux purveyors and the ever strengthening Open-Source community. It’s not a question of if, just when (and that, is soon).

*   Promoted Windows Vista features but dropped (some might turn up)

1. •Virtual Folders (automatic updating folders, as Mac OS X already has)
   

2. •Support for UEFI (Unified Extensible Firmware Interface - the mechanism to boot a computer, as Mac OS X already has)
   

3. •WinFS (a next-generation file system, after over 10 years of talk, and promises of later inclusion in Vista, the entire concept has now been scrapped)
   

4. •Large chunks of the NGSCB (Next-Generation Secure Computing Base aka Palladium)
   

5. •RSA SecureID support (dropped at the last minute)
   

6. •Vista was supposed to be written in C# and based in the .Net framework (MS still promotes these tools to others). Vista was in fact written in old fashioned C and C++.
   

7. •Windows PowerShell (aka Monad - currently still in development for Vista)