Microsoft s overall vendor rating remains positive as the company adapts its strategy to battle nontraditional rivals and challenges.

Transcription

1 Vendor Ratings, David Mitchell (NH) Smith Research Note 13 October 2003 Vendor Rating: Microsoft Still Positive as Pressure Mounts Microsoft s overall vendor rating remains positive as the company adapts its strategy to battle nontraditional rivals and challenges. Microsoft Overall Rating: Positive What You Need to Know: Microsoft is strong financially and well-positioned overall, but is finding that its competition is different than before. The company must adapt to overcome substantial threats from Linux and Open Source, as well as pricing and security issues. Microsoft has been unable to replace the Windows and Office cash generators ; both products are coming under attack, which will slow growth and put increasing price pressures on Microsoft. Analyst Comments: Our Vendor Rating for Microsoft remains positive overall. Microsoft remains strong financially and is generally well-positioned, but must change its competitive tactics facing Open Source Software. Security issues also present challenges. Detailed Rating: Initiative Rating Change Corporate Viability Strategy Positive Down Financial Strong Positive No Change Marketing Positive No Change Organization Positive No Change Market Offerings Product/Service Positive No Change client OS Strong Positive No Change Office Positive No Change SQL Server Positive No Change Exchange Promising No Change Management Promising No Change E-commerce Promising No Change SharePoint Portal Server Caution No Change APS entry Jupiter Promising No Change Tools/Visual Studio Strong Positive No Change Tools/Java Strategy Caution No Change Business Solutions/SMB Promising No Change MSN Promising No Change Gartner Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 Mobile and Embedded Promising No Change Xbox/Gaming Promising No Change Media Center Edition Promising Up Technology/Methodology Promising No Change.NET/Web Services Positive No Change Security/Trustworthy Computing Caution No Change Tablet PC Promising New Pricing Structure Caution No Change Customer Service/Support Pricing/Licensing Caution No Change Sales/Distribution Positive No Change Support/Account Management Positive No Change Professional Services Positive No Change Developer Support Strong Positive No Change Corporate Viability: Strategy: We have downgraded Microsoft s corporate strategy from strong positive to positive. New developments and the acceleration of other factors caused this lower rating. Microsoft s prospects remain positive. It is beginning to address these new factors (described below) but has failed thus far to articulate full strategies for doing so. Pricing Pressure: Pricing issues are becoming more visible. Prices overall will likely drop as Microsoft recovers from its Licensing 6.0 experiences and continues to add value to Software Assurance to minimize these price drops. Pricing pressures are mounting as a result of business arrangements in developing countries. Piracy continues to be a big issue. In combating it and devising a strategy for dealing with developing countries, Microsoft has made some aggressive deals, essentially allowing consumers to acquire Windows and Office for less than $40 (only for the special Thailand Program). This price disparity is challenging for Microsoft to explain to consumers and enterprises that are paying regular prices for the software. In addition, the continued trend to lower hardware prices makes the price of Microsoft software a higher percentage of total system price. One possible strategy for Microsoft to consider is pricing the software as a percentage of the hardware. The problem with this model, however, is that hardware has real material costs per unit; with software sales, after a certain point, R&D costs are recovered and the remaining volumes become almost exclusively profit. Competition: Microsoft faces threats from many different sources relatively new and well-established. Overall, Microsoft has realized that Linux is its greatest competitive threat. Most important to Microsoft, Open Source is a movement, a culture, a development environment and a widespread community of interests based on a collaborative paradigm that makes it difficult to target one specific vendor or environment. Linux also represents different threats to Microsoft s server and desktop businesses. Some threats have been overestimated (for example, AOL Time Warner), some underestimated (portals) and some not yet fully understood (SAP and virtual machines). Some have matured (for example, Java) and some have run their course (antitrust). Some are increasing (most, although at different rates and comprising stronger threats) and some are lessening. Microsoft is well-positioned to deal with some threats (Java and AOL), some are under its own control (pricing and security), and it has strategies to deal with others (for example, Linux) although some of those strategies may not yet be complete. Microsoft has faced many types of competitors in the past and has actually thrived on this competition. It has done so by worrying about competitors to the point where 13 October

3 its strategy has, at times, been more driven by competition than by technology or user wants and needs. Microsoft s constant focus, and even obsession, with competition has kept the company remarkably agile for its size, but it has, at times, contributed to the company s sometimes overly aggressive tactics in dealing with competition. It has successfully deflected attempts to compete with its dominant products desktop operating systems and Office. One of those tactics involved bundling a fledgling offering with a dominant one. This landed the company in antitrust court, where it was found guilty of illegally maintaining a monopoly. At least for now, Microsoft has permission to bundle products any way it sees fit with relatively minor restrictions. Linux and Open Source are unlike any other competition Microsoft has faced, because there is no single company or even a group of companies against which Microsoft can compete. Linux and Open Source are more grass-roots type of movements that won t go away. Linux and Open Source will represent the most significant threats to Microsoft through 2011 (0.9 probability). Growth /Profit Prospects: Linux will be a barrier to server opportunities that Microsoft had counted on and, longer term, a threat to the company s desktop business. The applications advantage that Windows possesses on the desktop is less of a factor when it comes to servers. Linux is gaining ground on servers mostly at the expense of Unix and other operating systems. Much of the growth that would have gone to Microsoft appears destined for Linux. Of migrations from Unix to Windows or Linux, more than 60 percent will be to Linux through 2008 (0.8 probability). The hype around Linux on the desktop is increasing. Although we would not currently recommend enterprises replacing all their Windows desktops with Linux, there are areas that are more likely candidates than others. Although there is a thriving community of technical Linux home users, technical barriers will block adoption by mainstream home users in North America and Western Europe in the near term. By 2008, Windows will lose between 5 percent and 10 percent of worldwide market share to alternative client operating systems, such as Linux (0.7 probability). The most important application for most desktop users is Office. Few enterprises have demonstrated that it is possible to replace Office. For this reason, Microsoft Office will not be relegated to commodity status through 2008 (0.8 probability). Longer term, Open Source will have a powerful effect on this market. Investments by Microsoft in other areas have not paid off. Most of Microsoft s new entries and emerging businesses are rated promising, but few are close to profitability. It is unlikely that any will ever generate the kind of profits that the company s major products (Windows and Office) do today. Windows and Office are also coming under attack, which will slow growth and put increasing price pressures on Microsoft. Product Development: Microsoft s product development is technology-driven with business model reality infused. Typically, the vendor pursues technology that is enabled by a vision, such as integrated storage, voice recognition and tablet computing. Historically, Microsoft has also been driven by competition, with the primary goal of protecting its cash-generating applications Windows and Office. Although integration forms a critical piece of the company s strategy to deal with Linux and Open Source (via integrated innovation ), it is not new or unique to the Linux threat. Accompanying the benefits of integration are certain trade-offs. For users, the trade-offs will include less ability to integrate with third-party software and to use best-of-breed solutions. For Microsoft, the trade-off will be longer product development cycles and increasing complexity, making it difficult to ship new products. 13 October

4 Market Offerings: Media Center Edition: Microsoft announced Media Center Edition (MCE) 2004, the latest version of Windows XP MCE, on 30 September The most-significant capability of MCE 2004 is that it s an authentic platform, not just a bundle. Microsoft has leveraged its traditional platform and developer strengths to create a software development kit and is developing an ecosystem centered on MCE and its 10-foot user interface via remote control. MCE is now a viable option for use in family rooms, where the remote interface is more socially desirable than a keyboard, due to: Greatly improved functionality via the remote control (for example, ability to print photos) The availability of MCE applications that burn DVDs (Sonic PrimeTime) The ability to access and rent movies on demand (Movielink and CinemaNow) Access to music (Napster 2.0 and Musicmatch) and news (MSN TV) Microsoft s ehome group includes MCE and the Windows Smart Display product, which shipped in In Early ehome Consumer Technologies Are PC-Centric, Gartner suggested that the combination of MCE and the Smart Display could yield a potentially compelling configuration. Microsoft now seems to see the potential in such a combination, and resulting products should appear as early as As a result of Microsoft s progress with the MCE user interface, the emergence of the MCE platform and applications, and the availability of more choices of form factors from more original equipment manufacturers, we are increasing the Vendor Rating for Microsoft s MCE to promising. Although MCE is promising, much work needs to be done for it to integrate well with higher-end audio/video equipment. Support for high-definition TV (HDTV) and better integration with satellite and cable systems are needed. Tablet PC: With Windows XP Tablet PC, Microsoft aims to extend Windows and Microsoft applications to a variety of media types (ink, voice and video) and input methods (pen, speech and on-screen keyboard). The versatility of Tablet PCs should appeal to mobile workers. Demand for the new software capabilities will determine how the hardware develops. Since the failed Pen for Windows initiative in 1992, Microsoft has developed the underlying technologies for pen input, on-screen keyboard and handwriting recognition (for which it has set realistic expectations). With the newest media type, ink, users can write with a pen on the screen. They can save ink files, then index and search them. Ink has a number of useful applications for example, note taking, personalizing messages and annotating documents. Its ease of programming will encourage many application developers to support ink. Tablet PC is new in the Vendor Rating. We rate it promising. Customer Service/Support: There are no changes to our ratings for customer service and support. Related Research and Ratings: Whatever Happened to.net? Microsoft Must Work to Re-establish Customer Trust Rating Definition: 13 October

5 Strong Positive Positive Promising Caution Strong Negative Solid provider of strategic products, services or solutions. Customers: Continue investments. Potential customers: Consider this vendor a strong strategic choice. Demonstrates strength in specific areas, but is largely opportunistic. Customers: Continue incremental investments. Potential customers: Put this vendor on a short list of tactical alternatives. Shows potential in specific areas; however, initiative or vendor has not fully evolved or matured. Customers: Watch for a change in status and consider scenarios for short- and long-term impact. Potential customers: Plan for and be aware of issues and opportunities related to the evolution and maturity of this initiative or vendor. Faces challenges in one or more areas. Customers: Understand challenges in relevant areas and begin to assemble contingency exit plans as needed. Potential customers: Note the vendor s challenges as part of due diligence. Difficulty responding to problems in multiple areas. Customers: Exit immediately. Potential customers: Consider this vendor only if there are no alternatives. Acronym Key APS HDTV MCE MSN SMB SQL application platform suite high-definition TV Media Center Edition Microsoft Network small and midsize business Structured Query Language Core Topic Powerhouse Vendors ~ Powerhouse Vendors Microsoft Headquarters: Redmond, Washington Web Location: 13 October