As any one who has substantial technology investments in the stock market knows, IT spending has followed the dot.com bubble burst and is in the doldrums. North American shipments of PCs and servers were down by 5 per cent in 2001 and it looks like this year will barely scratch out 1- to 2-per-cent growth.
The basic problem is that processing power is quickly approaching the point where it's an almost free resource as Moore's Law continues to deliver a doubling in computing power every 18 months; and millions of design engineers go out and translate that into better hardware, devices, storage capacity, and communication hardware.
But who needs it ? Nobody right now, because only the most ambitious of graphics, simulation, analysis, voice and handwriting programs and/or interfaces can hope to swallow sizable chunks of the power of a $2,000 computer. So for most users, corporate and home, why upgrade?
As a result, companies as diverse as AMD, Adobe, Cisco, Corel, Intel, Oracle, Sun, and the other big names of the computing revolution have seen their stocks crater in the past two years. Everybody is affected by the following major trends:
1)PC and Server market saturation are being reached as the power and reliability of existing software and hardware does not justify two- to four-year update cycles, because people and conversion costs are now the critical factors in the upgrade equation;
2)Software innovation is slowing down with no new killer application in the IT arena since the Mosaic browser. Also, Microsoft acts as a strict Gateskeeper of PC innovation - JPEG2000 and Java do not get in, but handwriting and voice do, on Microsoft's terms;
3)Hardware, communication and storage price/performance continue to improve dramatically - but the driver is fear of being displaced, as most developers and manufacturers barely eek out profitable returns;
4)Software costs and development are at transition - as the major player, Microsoft, raises its prices in contrast to just about every other software company.
It is this last phenomenon that I would like to examine in more detail.
In a Down Market - Raise Your Prices
In the DOJ/Microsoft antitrust trial, one of the expert witnesses testifying on behalf of Microsoft argued that the true test of monopoly power was not the holding of 60-, 70-, or even 80-per-cent market share; but the ability to do so for long periods of time - several years, if not decades - and then the ability to uniquely raise prices in markets while its competitors could not.
He then went on to argue that there was no evidence that Microsoft had done so in any markets where it had "large share positions."
What a difference a year and and few months make. Going into its seventh year of 80-per-cent-plus market share of Office Suites, Microsoft has been able, according to Gartner Group, to raise its prices by 30 per cent to more than 100 per cent, while imposing unwanted conditions of renewal and other product update conditions on its largest customers.
Now it its not my intention to debate the merits or drawbacks of the Microsoft Software Assurance Plan, but rather to examine the consequence of Microsoft boldy going where it has never gone before - being the highest-priced producer in some of its major markets.
Let us examine the notion that Microsoft has become like butter, the high-priced spread. For Office XP Standard Edition, CNET's November 18th average price was $390; for Corel Word Perfect 2002 Suite it was $270; for Lotus Smart Suite Millenium, $210; Sun Star Office was $80; and Open Office was and still is $0 (free download at OpenOffice.org). It is estimated that the Office Suite alone accounts for $10-billion of Microsft's $30-billion in annual revenue. For Windows XP Home the price was $190; for Mandrake Linux 8 it was $27 ($0 on direct download); for Windows 2000 Advanced Server it was $2,350 for one CPU 25 users; Redhat 8 Enterprise edition with unlimited users was $149; Solaris 9 on x86 with unlimited users, $90. The estimates vary from $8-billion to $12-billion for the revenue brought in by the Windows server and desktop editions. Microsoft's Visual Studio.NET was $750; GCC and other GPL developer software on Linux, $0.
So for more than two-thirds of Microsoft's software portfolio by revenue the company is no longer the best price/performance producer, but in fact often has one of the highest purchase costs. Now Microsoft might argue that they have the best features and functionality, and in the case of Visual Studio with its drag-and-drop designers and visual debuggers that may well be true.
But not so in the case of Office editions and both desktop and server operatings systems. The core features of Star Office/Open Office (they use 95 per cent of the same codebase) are very competitive with Microsoft Office. In addition, OpenOffice adds the the non-trivial virtues of cross platform performance including running on versions of Windows that Microsoft no longer supports, while supporting an open XML-based file storage format in contrast to Microsoft's proprietary format.
On the Windows side, Microsoft has set a hefty pace for including many free utilities and services with the operating system, but Sun's Solaris and many of the Linux distributions have matched most of those utilities and gone Microsoft two or three major systems better. For example, Solaris now includes an Application server plus complete Java development environ. Linux has not just a Java environ; but development tools for C, C++, Perl, PHP plus a very good MySQL database, along with a host of other utilities. So again, on the OS side the features and functionality of Solaris and Linux match if not exceed Windows.
But on total cost of ownership, both Solaris and Linux have much superior records for availability, reliability and especially security. In the past two years Microsoft shops have had a particularly onerous set of administrative- and cleanup-related costs associated with Windows desktop and server. Office, and especially Outlook and Internet Explorer, have racked up onerous TCO (Total Cost of Ownership) costs in the reliability and security areas.
So why does Microsoft raise its prices having surrendered one of its key competitive advantages - being consistently the best price/performance leader in many of its markets.
Well, as professor Schmalensee might argue, it's because as monopolists, they can.
Others would argue that Microsoft is taking advantage of the fact that software has entrenchment costs which now exceed almost all other IT costs. Companies don't want to switch because they might suffer high conversion and retraining costs. Then again, perhaps Microsoft executives believe that it has gained unmatched hypothetical leads in ease of use, manageability, and customizability of its software. And with the promise of better reliability and scalability largely delivered in SQL Server and to a lesser extent in the Windows OS, Microsoft managers might think why not raise prices when usable software easily displaces hardware as the crucial factor in delivering functional IT systems.
Or perhaps there is truth to the oft re-emerging rumour that Microsoft is determined to move much of its software over to an annual subscription model at the least and on-demand utility pricing models as the best for Microsoft and its customers as well.
But these are exactly the turbulent market conditions that famed Economist Joseph Schumpeter called capitalism's "creative destruction". Is eWeek right that given the increased prices, forced updates, and continued slow improvements to its core applications, Microsoft Office is courting a catastrophe? Stayed tuned - Microsoft may be like a teenager changing lanes on the Enterprise IT freeway before it has mastered delivering the requisite availability, reliability, scalability and security capabilities across its total product line.
And we haven't even whispered any words on interoperability, until now.
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