We continue to believe that the transition to “cloud computing” is a disruptive trend that will increasingly put legacy PC- and enterprise businesses like Microsoft (MSFT) and Oracle (ORCL) behind the eight ball.
We see this most strikingly in email, search, and office-productivity apps, in which companies and individuals are increasingly forgoing heavyweight PC-based applications for lightweight net-based ones. We also see it in enterprise software, where software as a service (SaaS) companies like Salesforce.com (CRM) and NetSuite (N) are stealing customers from traditional enterprise software vendors. And now, we think, we’re seeing it in the cloud “platform” services offered by Amazon (S3) (AMZN) and Google (App Engine) (GOOG).
We wil be the first to admit we are not experts in the technical details of this arena (at least I’ll be quick to admit it), so feel free to jump in. But once again it seems to us that Microsoft, especially, is behind the curve.
Mary Jo Foley at All About Microsoft says that Microsoft is “readying” a hosted cloud development platform, but she is sceptical they’ll be able to deliver it anytime soon (Why? Same reason other disrupted companies have had trouble–because they have legacy products to produce). If Microsoft is really “readying” such a service, in other words, it is probably in the same purgatory as the cloud Office platform (vapor-land), and it might remain there for years. Mary Jo can do a better job than I can of filling in the technical picture, but here’s the business challenge…
How Disruption Works
To understand why Google, Amazon web services, et al, are such a threat to Microsoft–and why Microsoft’s pooh-poohing of this threat is, at best, a smokescreen–you need to understand how technology disruption works.
Disruptive technologies do not destroy existing market leaders overnight. They do not get adopted by the entire market at the same time. They do not initially seem to be “better” products (in fact, in the early going, they are often distinctly “worse.”) They are not initially a viable option for mainstream users. They do not win head-to-head feature tests. Initially, they do not even seem to be a threat.
Disruptive technologies take advantage of a new manufacturing/business process or technology to provide a cheaper, more convenient, simpler solution that meets the needs of the low end of the market. Low-end users don’t need all the features in the Incumbent’s product, so they rapidly adopt the simpler solution. Meanwhile, the Incumbent canvasses its mainstream customers, reassures itself that they want the feature-rich products, and dismisses the Disruptor as a niche player in an undesirable market segment. The Incumbent may dabble with the new technology or process, but only in service of its existing business model.
Then the Disruptor improves its products, adding more features while keeping the convenience and low cost. Now the product appeals to more mainstream users, who adopt it not because it’s “better” but because it’s simpler and cheaper. Seeing this, the Incumbent continues adding ever more features and functionality to its core product to try to maintain its value proposition for higher end customers. And so on. Eventually, the Incumbent’s product overshoots the needs of the mass market, the Disruptor grabs the mainstream customers, and, lo and behold, the technology has been “disrupted.”
Why is this relevant to Google et al vs. Microsoft? Because this is exactly what is happening in the office application market (and, now, it seems to us, in the web services market).
Microsoft makes most of its money selling applications that Google now gives away for free (or nearly free)–applications that contain hundreds of features that the vast majority of customers will never use. Google’s web-based versions aren’t as feature rich as Microsoft Office, but they are simple, cheap, and convenient, and, for many users (SAI, for example), they get the job done.
For now, as Microsoft’s Jeff Raikes observed a few months ago in the New York Times, most mainstream customers still say they want what Microsoft is selling. For now. But some former Microsoft customers have made the switch and others are now considering it. And Google’s products are getting better all the time.
Importantly, the problem here is not Microsoft stupidity. If it were easy for incumbents to resist the onslaught of disruptive technologies, there wouldn’t be disruptive technologies. Jeff Raikes, Steve Ballmer & Co. have presumably read The Innovator’s Dilemma (Clayton Christensen’s book that analyses the phenomenon), and they almost certainly know what is going on. The question is what, if anything, they can do about it. (Topic of a future piece.)
Handcuffed by the awesome profitability of their existing products, Ballmer, Raikes & Co. are in a really tough spot. And if history is any guide, the Google threat will end badly for Microsoft.
See Also: Google Taking On Amazon With App Engine
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