The Microsoft Invincibility Myth

According to proponents of this myth, Microsoft's expertise in building software platforms ensures that everything that Microsoft does will turn to gold. This supposed invincibility is used to prove how Microsoft will eventually dominate all new markets, from online music stores to the iPod, and how advances by Linux and Apple's Mac OS X will never make any significant impact on PC desktops. They're wrong, here's why.

Why the Myth was Woven

This myth is important foundation holding up the PC world. PC makers rely on Microsoft to supply them with software, and Microsoft relies on PC makers to sell it for them. If Microsoft lost its invincibility, the PC platform would be torn in different directions, and face competition from alternative platforms.

Another reason behind the Microsoft Invincibility Myth is that, in order to keep their jobs, lazy tech industry analysts desperately need simple and obvious ideas to repeat, so their observations sound profound in retrospect. If the world fails to follow their expectations, their prognostications become worthless.

Preaching Microsoft's invincibly has been working for them for many years. In fact, their preaching has helped discourage competition, which serves to keep them employed as mouthpieces for Microsoft and its strategies.

Unraveled with Extreme Prejudice

Microsoft does have a history of entering markets late, but then successfully taking over and cleaning up:

• Microsoft's Windows 95 arrived ten years late, but then took over the graphic desktop OS consumer market;
• Microsoft's Windows NT decimated the entrenched UNIX workstation market and destroyed OS/2;
• Microsoft's Office apps killed several entrenched products, including Lotus 123 and WordPerfect;
• Microsoft's Internet Explorer dethroned web browser pioneer Netscape.

What tech industry analysts often fail to consider is that Microsoft's successes are limited only to software sales, and they have historically competed on price, not performance. Both of those strategies are in trouble.

The Windows Price Paradox

Price is a strong motivator in sales. Free software advocates like to suggest that the success of Linux is based largely in consumer's desires for freedom; in reality however, most of the interest in Linux results from the fact that it is free.

If Linux had been sold at a minimum price, it too would have been left behind, just like OS/2, NeXTSTEP, BeOS, and the other PC operating systems that could not develop traction in the marketplace at any reasonable price. Also, Linux has only really found success in servers; on the desktop, Linux has seen very limited adoption, despite its being offered for free. Why are alternatives to Windows so difficult to sell?

Because they are competing against an established product that appears to cost nothing. Microsoft has been able to effectively compete on price, while paradoxically charging more than anyone else in the PC industry for an operating system. They accomplished this by bundling Windows sales with all new PCs. Manufacturers that bought copies of Windows, such as Dell, HP, and IBM, simply passed the cost on to consumers in a way that made Windows to appear to be free.

Microsoft signed exclusive OEM licensing contracts with them to effectively deny anyone else the ability to bundle their OS with new hardware sales. Window's competitors had to sell their alternatives as retail products. Consumers don't like to pay for software. They really only want to pay for hardware, and like the idea that software has no cost.

By hiding their software and its price tag within OEM hardware sales, Microsoft built themselves a revenue lock on PCs. They weren't competing on the merit of their product, they merely strangled what appeared to be a free market by denying entry to any competition, and then enjoyed high margin software revenue that was automatically generated with every new PC sold.

It's important to understand that Microsoft's success with Windows does not mean the company knows how to compete in a free market. Further, their revenue lock strategy won't work against the iPod, as I'll show later.

Windows PCs vs. Workstations

While bundled pricing allowed Microsoft to kill off any upstart OS competitors in the PC world, Microsoft was also competing on price in markets outside the PC world: UNIX workstations and Mac desktops. PCs offered lower quality hardware at a significantly lower price than either UNIX vendors or Apple could. The economy of scale of the PC market enabled prices to fall at a much faster rate than the smaller markets represented by Apple or the higher end workstation vendors like Sun or Silicon Graphics.

Windows was in many cases not cheaper than alternative operating systems, but appeared to be cheaper overall because the price was hidden within cheaper hardware. This allowed Microsoft to leverage their PC monopoly to take on other competitors, and compete on price without actually discounting anything. PC hardware makers supplied all the real competition against workstation vendors. Microsoft simply sat back and enjoyed its automatic revenues.

Price Competition with Office & IE

Microsoft also effectively competed in price, without discounting much, in selling Office. By bundling a range of applications together, they could compete against the single price of individual offerings from competitors. They also leveraged their Windows platform monopoly to sell their complementary Office product.

Microsoft could similarly bundle products into Windows at no cost to drive out competition. Netscape was only able to compete by aligning themselves with Linux as a free software project. Even for free, Firefox is fighting for a significant share of the Windows browser market.

Even without passing judgement on Microsoft's business strategies and practices, it is clear that the company's software successes are directly tied to their ability to undercut competitors' pricing without actually lowering prices.

The problem with trying to play this strategy against modern threats from Linux, open source, and Apple's iTMS, iPod, and Mac OS X, is that there is no price to undercut. I'll explain more about why that's the case with the iPod in my next article.

Threatened at home

Linux and open source attack Windows in a direction it has never faced before: price. You can't undersell free, so Microsoft has to create the suggestion that Windows saves users more money than Linux does, over and above the cost of Windows' licensing. That's a tough idea to sell. Open source is attacking not only Windows, but Microsoft's Office monopoly as well. Suddenly, Microsoft is losing at its own low cost game, and is being forced for the first time to justify and lower its own pricing.

At the same time, Apple has brought commercial competition to the world of PC operating systems, another factor Microsoft has never had to really face. The new Intel Macs have the same hardware pricing and performance as other PCs, but offer better firmware, and run an attractive operating system. Windows now has to compete directly with Mac OS X as a commercial product.

No wonder Microsoft expresses no interest in selling Windows for Intel Macs: they're scared to death of being forced to compete as a retail product instead of automatically being sold with every new PC.

If Microsoft were a lean, mean, fighting machine, they might stand a chance at fighting on two fronts. However, fifteen threat-free years of delivering crap at high profit margins has not resulted in a nimble, competitive company. It's also interesting to consider Microsoft's spectacular failure to profitably execute any strategies outside of Windows and Office.

Microsoft's Spectacular Failures

Tech analysts like to preach a Microsoft inspired gospel that insists the path to success comes only through establishing a software platform and broadly licensing it for use on other's hardware. Ideally, the strategy sells software at high profit margins, and distributes much of the the competitive risk to hardware developers.

Microsoft famously used this strategy to sell Windows on PCs, and analysts love to suggest that if Apple had licensed the Mac's System Software to run on PCs twenty years ago, they'd have become the world's Microsoft instead. However, this is not a reliable strategy, or an easy one to pull off. Microsoft has tried to parley their platform into other hardware markets, without notable success. Some of Microsoft's most outstanding failures:

• Microsoft's Windows Everywhere strategy tried to expand their software into office equipment;
• WinCE in the Sega Dreamcast was a failure;
• WinCE PDAs, tablets PCs, the Origami tablet/PDA are all unprofitable ventures;
• WinCE based SmartPhones own a tiny fraction of the small smartphone market;
• Microsoft abandoned its failed efforts in web enabled TV receivers and DVRs;
• Microsoft has lost billions of dollars in the Xbox game console and it remains unprofitable;
• Microsoft's attempts to own the music and media player world with WMA have been destroyed by the iPod.

Microsoft's success in retail products sales have been limited to mice and keyboards. The Xbox may have made a good games console, but it has been a huge financial loss for the company. It also signals a change in strategic direction, offering more proof that even Microsoft realizes the company is in trouble.

Rather than attempting to deliver a software platform, like Windows, Xbox is an attempt to build a hardware platform, like Apple's Mac and iPod. Microsoft did not assemble a range of Xbox manufacturers to build game consoles running their embedded operating system. Why not?

Because they realized, after considerable failure, that their success with Windows isn't going to play out again and again in new markets. It hasn't played out in any new markets. Meanwhile, Apple has maintained profitability in Mac hardware sales, and has created a new platform with the iPod.

The analysts were wrong: Apple shouldn't try to be a Microsoft; Microsoft wants to be like Apple.

More Nails in the Coffin

Microsoft is desperate to find new revenue sources. Sales of Windows PCs are growing annually at 10-15%, but Mac sales have been outpacing industry growth at nearly 40%, and expectations call for even faster growth in the future. Apple's growth comes out of the most profitable PC sector: home and professional users willing to pay for premium machines.

The leaves Microsoft with an increasingly unattractive market; the majority of desktop PCs are competing fiercely to deliver low prices. As PC prices drop below $500, it becomes increasingly difficult to hide a substantial Windows license fee in the mix. That means Microsoft will have to lower their prices or face the threat of losing those low end desktops to Linux.

Microsoft's empire is unraveling. Their bread and butter monopolies are under real attack for the first time, their prospects for new markets are spectacularly failing, and their entire business model of sneaking high price software sales into low cost hardware has grown obsolete. They are very much in the same position as American car makers in the late 70's, when easy profits dried up and stiff new competition from Japanese imports forced them to compete in ways they never imagined.

Coming up next: Why Microsoft's iPod Killer will do nothing of the sort.

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