Trouble in Redmond paradise?

A little while ago I read an interesting article that suggested that Microsoft should give windows 7 away for free, which lead to a rather heated (technical) debate in the comments section. In this post I'm trying to make some sense of what's going on.

Industry analysis

First let's look at the industry Microsoft is in: the software industry. This industry has several big players in key segments. Some are more traditional (IBM, SAP, Microsoft, Apple) and some are relatively new (Yahoo, Google). Then there's a bunch of smaller companies who 've found a comfortable niche. Sounds like healthy competition. 

In the past Microsoft was definately a rule maker in this industry. However, with the rise Web this advantage slowly faded. First there was the infamous browser war, now there is the battle around search and advertisements. It also seems that the old growth strategy of buying companies doesn't seem to work anymore (the most prominent example, in my opinion, is the fact that Yahoo tried to rush into Google's arms to be able to stay away from Microsoft). 

Another interesting aspect is the fact that these days there is much more software to chose from, both for consumers and for firms. Microsoft made a smart move in the 1980's : ship as much new PC's with MS-DOS (later Windows). This gave them a huge market share and made it hard for competitors to get onto the desktop. Once you had windows, it was only a matter of time before you also started using Office (rather than good old WP). Some 20 years later, we do have a choice. The Mac seems more popular than ever (it's even considered to be a fashion accessory) and Linux is also growing on the desktop. Micorosft's Office suit is also available on the Mac, but OpenOffice is a true cross-platform office suit. Even more, it seems that cloud computing has the future which makes GoogleDocs an interesting contender.

Synergies

Let's look at this from another perspective. Ignoring some of its lesser activities (such as it's new initiative with respect to telephony), Microsoft seems to be in two businesses: the business of 

selling software licenses and the business relating to online activities (where the revenue model mostly hinges on selling advertisements). 

The figure shows some of the product offerings that go with each business. It seems that Microsoft is able to leverage considerable synergies at the resource base level (i.e., human capital!). To a lesser extent this also holds for its activity system and product offerings. An example of the latter is the fact that once you use Internet Explorer - the default browser on your freshly installed PC - it immediately prompts you with a question whether you would like to make MSN Live Search your default search provider.  These synergies are a good thing, they make life more pleasant as they account for a lot of added value.

Should windows 7 be free?

So far this post has been about Microsoft as a company. I will now circle back to the question of whether windows 7 should be free or not. Giving away Windows for free would be radical to say the least. After all, Microsoft has made a lot of money by selling licences for Windows (and other software) over the last decades. However, the present situation does call for drastic measures. Some facts:

• Microsoft is under heavy attack from all sides. It is still the dominant player in terms of desktop software, but that seems to be eroding slowly. Windows is being attacked by Apple and the Linux community, and the flagship Office suite is being attacked by Star Office, it's free sibbling Open Office and several cloud computing initiatives such as Google Docs.
• Microsoft has had a lousy reputation where it comes to the Web. Sure, Internet Explorer is pretty big (see the browser statistics pages by the W3C) its market share is decreasing steadily. Firefox/mozilla is a big competitor and Google's new browser (Chrome) is gaining market share slowly.
• Microsoft has fought many lawsuits over the last few years, many of which evolved around the question whether or not Microsoft is a monopolist and whether it can ship certain products together or not. Several (if not most) of these cases were lost. 
• Most companies don't like being locked into a single vender. Government's seem to like it even less as several have announced recently that they are migrating to an open source platform. Usually this follows the lines of migrating to an office suit that adopts a an open standard (e.g. ODF) followed by a subsequent switch to Linux. In the Netherlands, the reference architecture for government institutions (NORA) also favors open standards.

So yes, Microsoft is under attack. There is reason to be concerned. It seems that Microsoft is definately experiencing strategic drift; it is seems out of touch with demands by its markets. It's old revenue model of selling licences doesn't seem to work anymore so in my opinion the question for Microsoft boils down to competitive advantage. What is Microsoft good at, better than anyone else? And will this still work under the new rules of the game? I doubt it. Giving away windows 7 for free, and making money from advertisements, is definately a bald move. It implies that Microsoft is taking on Google head on. Risky, but interesting. As SteveBallmer has put it, Microsoft has reinvented itself many times before so there may be hope for the guys in Redmond yet.