Microsoft is in trouble, and they know it.

This thought has been percolating in my head for a while now, and their most recent actions (in the timeframe of years) only seem to reinforce that idea.

This isn’t the ramble of a hater; I don’t think Microsoft is going to crash because they suck, or write terrible software, or anything like that. There is plenty of history to show that mediocre software can sell fine.

No, the problem, I think, is that Microsoft has run out of ideas. They have tremendous resources, lots of smart people, and lots of good ideas, but somehow that never translates into anything concrete. They are surviving on Windows and Office, with developer tools forming a distant third, but I think they know that story is rapidly coming to a close.

No, Linux isn’t going to take over the desktop, but the very existence of Linux shows us that operating systems are not worth $350 (See Vista Ultimate). In fact what Linux shows us is that over time the operating system will become free. Not today or next year, but within 10 years every copy of Windows will drop to $5, I believe. It isn’t even because Linux is forcing price concessions, it’s because dropping PC prices forces all components, including software, to fall in price. A $2,000 PC can easily support a $99 OS. A $200 PC can probably only support a $5 OS. The fact is that every year PCs are getting cheaper, and the operating system has to keep up. To be fair, Microsoft will make up in volume what they lose in margin, however I think a comparison to Intel is appropriate here.

Approximately 80% of all computers capable of running Windows ships with an Intel processor. Look at Intel’s revenue in 2006: $35b. Compare that with Microsoft’s 2006 revenue: $44b. Yes, Intel also sells NICs, chipsets, FLASH, and Microsoft sells Office, Visual Studio, advertisements, and games. The values are only roughly comparable. However, it seems incongruous that Microsoft is earning more per PC than Intel. Then when you look at their yearly revenue for the past several years and you will see that both grow at roughly 11% to 12% a year, which corresponds neatly to PC growth these past several years. Both companies are strongly tied to PC sales.

So what, you ask? I’ll let Microsoft’s actions speak for themselves now. They have asked their investors to have faith in Microsoft’s Zune, XBox, and Live initiatives. Or put another way, that Microsoft’s future lay in markets dominated by Apple, Sony (soon Nintendo), and Google. A lot of people scoff because Apple or Google is so insignificant in size compared to Microsoft. The surprise is when you look at the relative growth of each company:
Old locks might develop mechanical snags anytime hence they are brand levitra online quite worried about their sexual life and relationship as well. Include this great carbohydrate in the daily food. cheap viagra no prescription Around 50% prices for viagra of men after the age of 50 years. Infertility – An Overview: no prescription cialis If you and your partner as well.
Apple’s revenue growth between 2005-2006 was $5.4b, Microsoft’s was $4.5b, and Google’s was 4.5b. Microsoft has already released that their revenue grew by $6.9b this year, a nice healthy increase, but I’m sure management is still worried that Apple and Google will continue to eclipse them.

So what is happening? Apple, Sony, and Google have tapped into revenue streams that Microsoft has missed; consumer electronics, video games, and advertisement, and Microsoft is desperate to diversify into these markets to blunt the continued slowing PC growth. Worldwide growth of PCs is still strong, still healthy, but again falling PC prices and rampant piracy means that Microsoft doesn’t have as strong a presence as they want.

However, and this is why Microsoft is in trouble, unlike their past battles with Netscape, Apple, or Palm, Google, Nintendo, and Apple have shown no signs of faltering. Microsoft only has sold 1m Zunes since release, compared to nearly 40m iPods (which is about 2.5%, more or less Apple’s PC market share worldwide). Microsoft only has 13% Live market share, which would be a great number except that Microsoft is third, behind Yahoo! at 19% and Google at over 60%. Then there is the console battle; Microsoft originally targeted Sony’s PS2 and PS3 and lost sight of Nintendo, who’s Wii seems to be on target to become number one.

So can Microsoft recover? I think so, but they have to stop putting the cart in front of the horse. Stop thinking about ad revenue and instead create the best online service possible, stop thinking about game licenses and price points and create the most incredibly fun games possible, stop thinking about music and video licenses, DRM and media formats, and create the most incredibly desirable consumer electronics possible.

The rest will come, I think, if Microsoft can focus on making the best product possible instead of a +1 product; Live is Google+1, Zune is iPod+1, and the XBox is a Playstation+1.