Microsoft isn't going anywhere. The company's wide mix of software will help it stay relevant to businesses and consumers for many years to come. But the rise of mobile devices and companies like Google, Apple and Amazon has come at Microsoft's expense. Although Microsoft revenue is still growing, the days when a single company controls the user interface of nearly every personal computer are long gone and may never return.
For all its success as the world's biggest maker of PC operating systems and office programs, Microsoft's position as the dominant provider of software to consumers is at risk.
Microsoft is still a giant, with $70 billion in annual revenue and an amazing 11 products that earn at least $1 billion a year. But it faces challenges in search, Web browsing, mobile devices, Web server software, and even the desktop operating system market.
In this article, we will examine what we think are Microsoft's five biggest weaknesses, a list we came up with in conjunction with the analyst firm Directions on Microsoft.
Let's start with the easy one. If you use the word "Google" as a verb, you know how far Microsoft's own Bing search engine has to travel before it can be called a success. Microsoft's earnings reports break the business down into five product divisions, and the Online Services Division powered by Bing and MSN is the only one that consistently loses money, including $2.6 billion lost over the past 12 months.
Bing, which also powers Yahoo and offers a fancy iPad app, often gets high marks in studies that rate the effectiveness of search engines, yet Google captures about two-thirds of U.S. market share and more than80% of the global market.
Microsoft rarely masks its hatred of all things Google, which makes most of its money on search advertising while investing in other products that eat into Microsoft market share, like Chrome and Android.
But with Bing, "They're so far behind, it's a long slog," says Wes Miller, a former Microsoft Windows program manager who is now research vice president at Directions on Microsoft. "People innately think of Google for search. How do you replace Kleenex? They're going to have to keep burning money for the foreseeable future until they can come up with something that out-Googles Google."
Microsoft's response: "This is a long-term game for Bing," Microsoft said via email. "Bing continues to be focused on creating a great consumer experience, solid execution and steady market share growth. The most recent comScore market share report shows that Bing is continuing to make gains in the U.S., reaching 14.4 percent explicit core search share in June. Overall, Bing increased market share by more than 50 percent since launch."
Once upon a time, Microsoft's Internet Explorer commanded greater than 90% market share, dominating the Web browser market as much as Windows dominates PCs today. The Microsoft monopoly earned itself antitrust penalties by beating Netscape into submission, but it wasn't until the rise of Mozilla's Firefox (a descendant of Netscape) and Google's Chrome that the monopoly would be broken.
Nowadays, Microsoft loses browser share almost every single month, dropping to 52.71% in total number of users, according to Net Applications, and to 42.45% in total page views, according to StatCounter. The discrepancy between numbers of users and amount of usage suggests that the Web's heaviest users are the ones who replace the default Internet Explorer with Firefox and Chrome.
In other words, Microsoft says Google's Chrome and Mozilla's Firefox are hobbled because they run across Windows, Mac, Linux and older, less capable versions of Windows such as XP. Microsoft wants you to believe that unless you buy a new version of Windows, you won't get the best browsing experience.
- Mobile phones and tablets
Microsoft CEO Steve Ballmer famously laughed at Apple's iPhone in 2007, saying, "It's the most expensive phone in the world and it doesn't appeal to business customers because it doesn't have a keyboard, which means it's not a very good email machine. ... We have great Windows Mobile devices in the market today. I look at that and say I like our strategy, I like it a lot. We're selling millions and millions and millions of phones a year. Apple is selling zero phones a year."
Windows Phone 7 has posted strong customer satisfaction ratings, but it doesn't have all that many customers. It turns out Windows phone Q2 sales dropped from 3 million last year to 1.7 million this year, making the device even less popular than Bada, a smartphone operating system developed on the side by Samsung, which puts most of its mobile efforts into Google's Android.
Things look even worse in the tablet market, which is utterly dominated by Apple's iPad. Windows 7 tablets aren't optimized for touch screens, and Windows 8 won't be out until sometime next year.
"The question, again, is Nokia Windows Phone 7's white knight?" Miller says. "I think Nokia makes some brilliant hardware, but I'm not sure it's really enough to pull consumers in."
Microsoft's response: Microsoft declined to comment about Windows 8, and did not answer questions about Windows Phone 7 market share or the application development issue. Instead, Microsoft released this statement:
"*IDC has forecasted that Windows Phone will be the number two operating system worldwide by 2015. (IDC, March 2011)
*The Samsung Focus running Windows Phone 7 was voted the favorite AT&T smartphone in PC Mag's Readers Choice Awards. 'The Samsung phones had better reliability and call quality and were also noted as being the best for gaming: Windows Phone 7 devices come with Microsoft's excellent Xbox Live.' (PCMAG.com)
*There are more than 45,000 registered Windows Phone developers.
*Customers have access to nearly 30,000 apps and games on Windows Phone Marketplace, with an average of 100 added each day."
- The desktop
Arguing that Windows is a weakness takes some work. Really, it is a potential weakness, but an important one because it is also Microsoft's greatest strength. The 80% to 90% market share Windows holds on desktops and laptops is the reason Microsoft has direct access to most of the personal computing users on Earth, so even small percentage drops in sales are problematic. Windows 7 has sold more than 400 million copies, but revenue declined 2% in the fiscal year that ended June 30.
While Windows 8 would be optimized for both PCs and tablets, Microsoft is holding off on any big announcements regarding the next OS until the BUILD conference in mid-September.
Innovation is happening in cloud computing, and smartphones and tablets. With Microsoft struggling to gain any foothold in mobile devices, the biggest immediate danger to the Windows franchise is that smartphone and tablet buyers will delay the purchases of their next PCs.
"All the competitors would like to have you think that next year Microsoft hits the wall and the PC business is cut in half," Gillen says. "That is not what's going to happen. What is happening is we have a proliferation of other devices that are competing with Windows for mindshare. But at the end of the day, users, especially business users, need PCs."
Microsoft's challenge was underscored by HP's decision to try to sell its PC business. HP is the No. 1 seller of Windows PCs, but Miller says "the tablet effect is real," driving down PC sales even though there is really only one successful tablet, namely the iPad. If Android tablets ever take off,Microsoft could be in a lot of trouble.
Microsoft's response: Microsoft declined to answer Network World's questions about Windows 8, but we expect to learn more at BUILD, and we'll learn a lot more next year when Windows 8-powered devices start shipping. For now, Microsoft has set up a blog called "Building Windows 8" to discuss progress.
"Windows 8 reimagines Windows," writes Windows President Steven Sinofsky. Robust USB 3.0 support and better file management are on the way, the blog promises.
- Web servers
Just as Windows client software dominates the desktop, Windows server software makes big bucks in the enterprise IT market. IDC numbers from the second quarter of 2011 show that Windows Server accounted for "45.5% of overall quarterly factory revenue and 71.0% of all quarterly server shipments." The rest goes to Unix, mainframes, Linux and other platforms.
Microsoft's real server struggle is in the Web server space. Although Microsoft's IIS Web server software that's used with Windows powers more than 60 million websites, that only accounts for 16.8% of the market, which is dominated by the free software Apache, according to Netcraft.
Also according to Netcraft, nine of the 10 most reliable hosting companies run Linux or FreeBSD, with just one using Windows. Surveys by W3Techs show Linux and other Unix-like OSs account for 64% of websites.
These numbers wouldn't include private intranets, but the fast-growing world of the public Web is one where Microsoft would like a stronger foothold. Few people actually use Linux desktops, but Linux enthusiasts will tell you that when you point your browser to Google or Facebook, you're using a Linux-powered service.
Microsoft's Web server problems date to the early 2000s when security holes gave the company's technology a bad reputation, Gillen says.
The technology has improved, but Linux and Apache are free, and therefore hard to beat.
"I think they've got the technology there, they're marketing it pretty well," Miller says. "The [Microsoft] server guys are running on all cylinders and understand how these things are working."
Office 365, released this year, brings Microsoft's Exchange, SharePoint, Lync and Office to the cloud, and has been well received, an important step in Microsoft's competition against Google Apps. Perhaps just as important to Microsoft's long-term success is Windows Azure, a service that lets developers build Web applications and host them in Microsoft data centers.
At the recent LinuxCon conference, open source advocates said the next innovative Internet businesses along the lines of Google or Facebook will almost certainly be built on Linux.
Still, Azure alone would have to be a giant hit to eliminate Microsoft's Web server worries. Azure attracted just 31,000 customers who built 5,000 applications in its first year of existence.
"Public Web servers are a very important dimension for Microsoft to be successful in," Gillen says. "If they can't win there, that does suggest there is a good opportunity for cloud to land on Linux as well."