Microsoft has sales of nearly $70 billion a year, annual profits approaching $20 billion, nearly $60 billion in cash, and is still growing sales around 10% per year.
But somehow, many people in Silicon Valley are convinced that Microsoft is going to collapse. Soon. Like in the next few years.
This seems crazy.
But we’ve heard variations of this argument enough times, from enough serious and intelligent people — partners at big name VC firms, experienced executives, hungry startup CEOs, and startup gurus — that we thought it was worth a serious look.
Here’s the nightmare scenario that could keep Steve Ballmer and his minions awake at night — and keep him working long hours during the day to prevent it.
This is already well underway -- as of Apple's last earnings report, sales of the iPad were equivalent to about 13% of the PC market, and research firm Canalys says that Apple will become the number one personal computer vendor next year if you count tablets as PCs.
This is a tectonic shift. Microsoft has had more than 90% market share on personal computer operating systems for almost two decades. And Windows is still Microsoft's biggest and most profitable product, with about $13 billion in profit on almost $20 billion in sales per year.
Once consumers start leaving....
Enterprises could follow consumers away from the Windows platform.
A few years ago, employees began swapping out their corporate approved smartphones for iPhones and Android phones. IT departments had no choice but to support them. Now the consumerization trend is continuing with the iPad, particularly among executives and workers in the financial services industry.
But Microsoft isn't going to just stand back and let this happen without a fight....
Ballmer has called Windows 8 the company's most important bet ever. It is slated to launch next year with a nifty touch interface that PC makers can use to build tablets.
But it could be too little, too late. As Robert Scoble eloquently argued earlier this month, Windows 8 is only a tablet on the surface -- there's no guarantee that app makers will jump on board to create great touch-enabled apps as they have for the iPad. Meanwhile, Office has been available on Microsoft tablets for almost a decade, and it didn't help those tablets sell (plus, it's not even clear that the next version of Office will be fully revamped for touch).
Plus, Microsoft's PC partners simply might not be able to make the kind of tablet hardware that captures users' attentions and wallets as the iPad has done.
There's another possible problem with Windows 8, too....
Windows 8 threatens to make Microsoft's most loyal developers less relevant.
But for the last decade, Microsoft has pushed its own proprietary developer platforms like .NET and Silverlight.
These millions of loyal developers have already been grumbling about Windows 8, and while Microsoft tried to calm their fears at its BUILD conference this fall, the trend is clear. With eroding Windows market share and a watery commitment from Microsoft, why should developers bet their careers on Microsoft's platforms?
But at least Microsoft is fighting back in mobile....
Windows Phone has been stubbornly stuck at less than 2% global market share for its first year on the market. Microsoft and Nokia are betting that a new version of the OS, attractive new hardware, and a huge marketing push are going to change that in 2012. RIM's collapse could also help, as disaffected BlackBerry users swap out for a new platform.
But Windows Phone still lacks the long tail apps that have made the iPhone so popular. Carriers and handset makers are happy with Android, which offers infinite customizability at zero cost. Most important, success breeds success -- developers, carriers, and handset makers tend to focus on the platforms that are already popular, which makes them better (more apps, more hardware choices, quicker advances), which makes them more popular. As the makers of competing desktop operating systems learned in the 1990s, it's very hard to break in.
Two years from now, it's very possible that Windows Phone will still have less than 10% of the smartphone market.
Suddenly, all the dominoes are in place for a lot of bad things to start happening....
For the last year, Office and related business apps have been driving Microsoft's growth. Office alone probably accounts for about $15 billion in sales every year.
But Office runs only on Microsoft platforms and the Mac. As employees start to do more and more work from non-Windows smartphones and iPads, companies may start to question why they're still buying Office for every employee and upgrading it every two or three releases.
This is already happening in a lot of smaller businesses and Silicon Valley startups. But at some point, big companies and government agencies could make the same decision and cut Office from their huge multiyear licence agreements.
Office pulls through a lot of other products, so what happens to them?
As IT departments move away from Windows and Office, they would have less reason to adopt Microsoft technologies on the back end like Exchange Server for email, SharePoint Server for collaboration, Lync for videoconferencing and real-time communication, and Dynamics for CRM and accounting.
Office 365 offers many benefits of the cloud, but it still generally requires Office licenses -- for instance, you need Outlook to get the most out of Exchange Online.
Meanwhile, there's a swarm of competitors building cloud-based solutions that are cheaper to buy up front, easier to deploy, and work across multiple platforms. These competitors include established names (Google, Salesforce) and a group of fast-growing and well-funded startups (Box.net, Yammer, Workday, Jive Software, and many more). As IT departments take a serious look at their Microsoft contracts, they could give their blessing to these competitors instead.
Exchange, SharePoint, and Dynamics all bring in more than $1 billion per year, and Lync is Microsoft's fastest growing business application. Plus, they pull through a lot of other Microsoft products....
For the last decade, Microsoft's fastest growing business segment has been Server & Tools, which consists mostly of Windows Server (which is probably around $6 billion in annual sales) and SQL Server (probably between $3 billion and 4$ billion).
A lot of these sales come because Microsoft business apps -- Exchange, SharePoint, and Dynamics -- require these products. But as companies stop buying these apps, they will have less reason to buy the Microsoft platform products that run them, and the System centre ($1 billion+) products used to manage them.
And remember all those loyal .NET developers who started to get angry when Windows 8 made them less relevant? They would now be building corporate apps on alternate Web-based platforms, and stitching together cloud-based services from competitors. That hurts Windows Server, SQL Server, and Visual Studio (another $1 billion+ business).
But at least Microsoft still has the living room, right?
9. The Xbox was never going to make up the slack, and Microsoft can no longer afford to keep investing in it.
The Xbox business is pretty impressive -- it showed that Microsoft was able to enter a new area and build a profitable multibillion dollar business and new consumer brand in less than a decade. It also showed some real innovation with Kinect and Xbox Live, both of which are years ahead of the competition.
But today, it earns less than $1.5 billion on sales of less than $9 billion. That's not enough to make up for the erosion of Office, Windows, and all those other multibillion dollar profitable businesses.
Meanwhile, the Xbox faces a threat from other living room initiatives like Google TV and whatever Apple is planning, and mobile gaming is taking a lot of time that used to be devoted to consoles. With Microsoft's core businesses under assault, Microsoft would no longer be able to devote the time and attention necessary to fight back these threats.
Microsoft has the strongest profit margins in the tech industry, and a lot of room for error.
But if all of its businesses lose share at the same time just as the economy sinks into another big recession, Microsoft could suddenly face its big bad quarter, just like IBM did in the early 1990s.
Ballmer would be forced into early retirement and spend the rest of his days being frustrated on the golf course.
Non-core businesses like the Xbox and Bing would be shut down or jettisoned. The new management would focus on maintaining whatever Windows market share is left, porting Office to the iPad and other mobile devices, and building a big direct sales force and consulting business to try and revitalize Microsoft in the enterprise. With luck, Microsoft would stay in business, but as a shadow of its former self.
Fortunately for Microsoft, none of this is going to happen.
Windows 8 will reassert the dominance of the Windows PC. Office and other business products will remain corporate necessities, and developers will never be able to ignore Microsoft. Windows Phone will become a viable third mobile platform, the Xbox will continue to dominate the living room, and new products will surprise the pundits who thought Microsoft couldn't innovate. Even Bing will finally make a profit someday.
Or maybe Steve Ballmer is still asleep and dreaming....
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