Recession Hits Microsoft?

Microsoft has announced a 32% slide in quarterly profits but the shock is that for the first time since 1986, their quarterly sales slid - and by 6% at that.

We can all point to the recession as surely less PCs are being bought and therefore not requiring as much of the core operating system supplied by Microsoft - this, along with core Office applications, is where Microsoft makes most of its money. It's solid, repeatable business, with a long upgrade path.

However, can we really apportion this rather profound aberration down to the recession alone? After all, Microsoft has gone through recessions before and the overall dip in PC sales is actually not massive. While businesses are indeed making cuts, it has not adversely affected Microsoft's sales before?

The Licencing Business

I don't pretend to be a professor of how Microsoft prices it products and sells them to Corporates but I have had enough of a whiff to know that it isn't actually as clear and helpful as it should be. I also know that there was a revenue time bomb looming and in the last year Microsoft people were not talking so much about new licence sales as a phenomenon called 'Deployment'.

The issue stems from that fact that many corporates purchase 'Enterprise Licences' which cover an entire suite of Microsoft applications for all employees. It is priced in a way to tackle all needs of all people and it also includes within the suites, products which may not currently be used but are delivered as part of the package. Good examples of this may be collaborative products like Groove or another example maybe that within a business that has a call-centre function which by and large runs bespoke systems, the staff may not actually use things like Outlook or other applications but the licence is notionally paid for.

Upgrades are part of this too. Many companies choose to stay at certain levels of the applications and operating system because their IT teams have settled at a level which harmonises applications across the business and is more easy to support. Yet large customers will be paying for the upgrades which helps Microsoft pay for the development in advance.

The real problems come when customers either do not deploy all the licences they pay for generally or do not utilise all the applications included in the licence cost or do not upgrade to the new versions. What it means is that the negotiations for the annual renewals become progressively harder.

They have been made harder still by new waves of rival or ancillary technology which are leading customers down different pathways. New operating systems, browsers, search engines, applications, messaging platforms and even 'The Cloud' have come into play and eroded part of Microsoft's hitherto impregnable position. For the first time in its history, the pressure is on.

Pushing The Accelerator

Microsoft has missed out on some of the more lucrative new waves of technology and one obvious one was Search. In reality, Microsoft had killed off Netscape as a rival and had a clear run of owning the entry to the internet via the browser. From there it should have controlled the rest. Google changed that by coming from exactly the opposite way, believing it was not the entry point that was crucial but the content and how it was accessed. Google's land-grab and technological advantages have made it a serious rival to Microsoft and they own 90% of the search market and with it, a large portion of the online advertising market.

Google is now advancing ambitiously down the pathway of applications with its own approach which makes it operating system agnostic by placing all the resources on the web, within 'The Cloud'. We are perhaps seeing the first major wobble of the mighty Microsoft and to some extent, Google has yet to even get a real grip of the market - the next 2-3 years could be crucial for both companies.

An added problem for Microsoft is that it is a company that has avoided the 'hard-nosed' sales types within its business. They have a mixture of evangelising people who just get so absorbed in the technology that they cannot see beyond their noses, and commercial people who just milk the base they have at corporations. Life has been very easy for them as you only have to show a product, make the client pay for it in the 'Stack' in advance, wait for them to upgrade, then hit them again. And again, ad nauseum.

Life has been so easy that there has never been a commission or heavy bonus culture at Microsoft. Stock options were plenty enough to reward the long servers and today Microsoft still has the highest proportion of millionaire employees than any other company in the world. That could change fairly soon but what that has arguably done is that everyone has been convinced by their own Bull. Like IBM in the 80's, managers are rated by who 'gives good slide' and bad news is not coped with well as no one has had to deal with it before, so generally it is not given. Positive attitudes in the face of issues are the order of the day - say it enough times and the customer will agree and everything will be ok.

The Steve Ballmer mantra is always, 'Microsoft is right - now what was the question?'.

The world is changing for everyone and even Microsoft. The recession is playing its part to exaggerate what may be underlying issues, but there was always a hole in the revenue just one step ahead on their way of working. Some day, someone would wake up and ask, 'Why are we paying for that if we do not use it?' or 'If I do not upgrade, why do I still pay?'

For Microsoft's sycophantic salesforce, reality may well bite. The question is, will the management have the fortitude to change?