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Predictions on the Future of Microsoft and the Internet

August 5, 2009

The last 30 days have seen major announcements by both Microsoft/Yahoo and Google and the battle for dominance seems to be heating up. So is either announcement really a game changer?

Microsoft and Yahoo announced a 10-year alliance in web search but as far as I can tell nobody really cares about Microsoft or Yahoo search engines as long as they continue to return some kind of search results when you enter a keyword. I think if their users really cared about cutting-edge search technology (or were even aware of it) they would already be using something else. More likely the deal will create a single competitor for Google to focus on in the search market. Like other mergers (while not an official merger it is a merger of search technology) this will give some users who have resisted making the jump to Google a good opportunity to make a switch. Expect Google to pick up another 3-4 points of market share pretty immediately if Microsoft and Yahoo get overly cozy and make the technology transition too obvious or annoying for users. Also expect some short term improvement in aggregate revenues, as advertisers are able to place more ads with less effort. In many cases, smaller advertisers usually prefer to only run on Yahoo and Google.

One side-effect of the deal that I haven’t seen considered is that Microsoft may be able to strong-arm Yahoo into a full sale since they now control a high percentage of Yahoo’s revenue through their latest agreement.

Google’s announcement that they will be creating an operating system is interesting but in itself not particularly exciting either. What’s more important than the sheer announcement of a new OS is the fact that a viable alternative OS is even possible. This is a significant paradigm shift that will likely play a major role in our computing future. As Google points out, “the operating systems that browsers run on were designed in an era where there was no web.”

Google is paying attention and taking notes:

We hear a lot from our users and their message is clear — computers need to get better. People want to get to their email instantly, without wasting time waiting for their computers to boot and browsers to start up… Even more importantly, they don’t want to spend hours configuring their computers to work with every new piece of hardware, or have to worry about constant software updates.

Many corporate users are heavily dependent upon custom applications that are written for Windows in much the same way that you still see the occasional green-screen application managing some unique function for government or retail. The shift that has happened recently is that software as a service or SaaS has gained significant strength. Salesforce, Basecamp, Google Doc’s, and a host of other truly great online software applications have given momentum in a trend which will underscore the first viable threat to Microsoft that I’ve ever seen. People buy computers and operating systems for what they can do, not for the operating system itself. If users can do what they want to do without Windows (or rely upon any particular OS) then they will.

Microsoft’s dominance is still largely dependent on the Windows client operating system (not including server revenue). In their most recent quarter Windows client operating system revenue was more than 23% of gross revenue and has probably been higher in previous quarters when overall performance was better. Closely linked to the 23% is all of the server and software revenue that is generated as a direct result of the client OS’ dominance.

Judging from Bill Gates reaction to the news, Microsoft thinks it’s just business as usual although I’m not sure they can really do much in response. With a fundamental shift in computing underway they could start moving their applications online, but that will only hasten the demise of Windows. If Microsoft follows its current course and doubles-down on its investments in installed software vs. SaaS here is the way the future looks:

  • Corporate Users — Will continue using Microsoft until their custom applications are ported to the Internet or rewritten as SaaS applications. Corporations can save obscene amounts of money within their computing environments without distributed application computing using Microsoft. Once a few leading companies embrace the new paradigm the others will quickly fall like dominoes.
  • Personal Users (not gamers) — As long as the new operating systems can play music, manage photos and browse the web the low price and ease of use will attract users. Most users young and old spend the majority of their time on the Internet and if they aren’t actually on the Internet they are probably doing things that could easily move to the Internet (such as personal finance apps, local email, photos, etc). Of course there is always the Mac as an option for power users which many people argue is better for personal users of all types anyway.
  • Gamers — There are already specialized platforms for game playing such as Xbox and Wii. Once lightweight low-horsepower systems become the norm, gamers are likely to continue moving toward these offerings.
  • Graphics/Design/Engineering — The Mac is a better platform for these applications and their users already. Remaining holdouts will see more pressure to move to Mac.

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