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Existing Situation

Microsoft (Microcomputer Software) was founded in 1975 to enable people and businesses throughout the world to realize their full potential by creating technology that transforms the way people work, play, and communicate. From 1975 to 2010, PC sales grew strongly with a CAGR of 25% YoY, 74% of them bought for business (professional or work related) and 26% for home consumers. Microsoft successfully captured up to 95% of this growth (see appendix 1 and 2). This explains the sustained growth of Microsoft’s revenue, 9% CAGR YoY for 13 years, peaking at $86.83B in 2014. Most revenues were generated with enterprise customers (appendix 3).

Microsoft designed pieces of software (mostly) and hardware (keyboards, mouses, webcams…) and sold them to either end-consumers (Small Office Home – Soho- segment) through a reseller ecosystem, or to enterprise customers through reseller ecosystem (Small Medium Businesses) or in-house sales forces (Large Enterprises) often packed with Enterprise Services for large Enterprise Customers to ensure proper deployment of solutions. Its two major cash cows are the “Windows Platform” (client and server), and the “Office” business productivity suite which created a de facto industry standard because of associated network externalities.

Given the breadth of its product line, almost any software vendor/editor can be a competitor for Microsoft. Most of Software Editors adopted the Microsoft’s business model of licensed software: customer bought the right to use the software on a per user basis (infamous End User License), or per computer basis while the code itself remained the property of the software vendor. This model enabled large margins (above 70%), while reducing the marginal costs to sell one more unit (especially when the Internet allowed customers to download the software instead of shipping tons of floppy disks or CD or DVD). It was a lucrative business model, with windows platform trapped customers due to high switching costs (aside software investment, the required learning curve of end users was a major exit barrier).

The disruptors and market relevancy erosion

First big disruptor in that legacy business model, was the “Open Source” business model. Software was provided for free. Under certain circumstances, GNU is Not Unix General Public License (GNU GPL) even gave the opportunity to modify the source code, allowing a community of developers to improve the source code. “Linux distributions” (attacking the windows platform revenues), and “Open office” (attacking the office suite revenues) with a business model turning software Capital Expenditure (CapEx) to services Operating Expenditures (OpEx), had the potential to disrupt Microsoft’s rent over the PC landscape. Open Source is more a shift in the business model than a technological disruption.

In 2007, Apple launched its iPhone, putting the internet in consumers’ pockets and with it creating a blue ocean of mobile devices, laying the foundation of the IT consumerization trend. In less than 5 years, Apple sold more than 250M iPhones, generating $250B of revenues. The lucrative blue ocean had attracted new entrants such as Google behemoth who launched its Android platform in 2008 and a huge partner ecosystem to become the leader in the smartphone OSes. In that new device and software space, PC market share has shrunk by 20% in 4 years with its relative weight in the device space decreasing from 15% in 2012 to an estimated 10% in 2015 (see appendix 4 and 5). Furthermore, the Microsoft OS footprint in the PC market has also slightly eroded (from 95% to 90% see appendix 2): Microsoft is losing its relevancy in the consumer IT space. Worse, developers are getting away from the Microsoft platform which was de facto losing value for end-consumers. Consumerization of IT mass market opened a new space for back-end services specifically design to serve these millions of mobile devices. Beyond proprietary platforms (AppStore & iTunes, Google Play); it was the dawn of public cloud services (Google, Amazon, Facebook, Twitter) and new business models (which are not mutually exclusive):

• Fremium in the software space: Generalization of market places leveraging zeroing storage/internet/compute (Moore’s law) costs made possible the development of the “Freemium” business model, because of marginal costs zeroing. Consumer could have basic version of software for free (despite the investment in infrastructures), and pay for advanced versions. Consumers/Enterprise Customers can test the software before making a buying decision and basic functionality are free. They can escape from feature bundling of the legacy business model to reduce their software expenditures. The rise of Social Networks also empowered the industry because of the “viral marketing” (Candy Crush game), and “captive online population” (Zinga online games for Facebook platform).
• Application/Services Subsidizing: Because of telemetry (cookie based/application based) web analytics, and Search Engines, Web Giants were able to generate huge revenues from online advertising and Search Engine Optimization (ranking) to subsidize other product lines including cloud services (Google Business Model). Users are not the payers anymore! Or rather they don’t pay using cash, but their own “consumer profiles”. Free commodities such a Gmail are given for free, but in return the end-consumer allows Google to analyze its data (including personal data) in order to provide “better quality services” through big data and machine learning (data analytics). Beyond consumerization, commodization of services require new business models as consumers are not ready to pay up-front for these services (which are considered to be free commodities): commodization requires subsidizing.
• Software usage subscription / Pay as you use services: Once again the Moore’s law enabled the generalization of cloud services. Instead of buying once for all a perpetual usage license, end-consumers/enterprise customers can now pay a fixed monthly fee to basically rent the usage of their software. Furthermore, embedded Application Programing Interface (API) telemetry (which is part of the “development pattern” of Platform as a Service – PaaS- approach) enabled accurate billing of usage and the development of the “Pay as you use” business model… either on a monthly basis (Software as a Service – SaaS-), or even down to a millisecond basis (Infrastructure as a Service – IaaS-, or PaaS). This business model is a win/win business model. It provides better revenue predictability for the software vendor and it turns CapEx into OpEx for end customers, i.e. improving operating free cash flows.

As we can see from examples above, it is not a single technological disruption which did harm to the Microsoft legacy business model, but the emergence of a new ecosystem which leveraged innovation in devices (Moore’s law for electronic components density, i.e. miniaturization) and friendly user interfaces, mobile internet performance improvements (2G, 3G and 4G), Moore’s law and economy of scale through deployment of giant datacenters (hundreds of thousands servers), ultimately giving birth to new business models. At the end, you can only defeat a business model, with a new business model which leverages technological changes/evolutions blended into an efficient ecosystem in which you can create added value through both technical and business model innovation.