Invasion of the body snatchers


Microsoft should be concerned.

The Tail

Like many great companies before it, it’s customer base is being snatched. It starts small, with a few customers, and may be not even Microsoft Customers, just a few on the fringe, inconsequential to the bottom line. The replacements are product offerings similar to theirs but significantly inferior to their own. They are not considered a threat. They are ignored. Such things have come and gone before. You have to pick the threats to deal with.

But while these products are ignored–under the radar–they undergo development, and with each cycle they get a little better. With each improvement, they snatch a few more customers. Customers that exist in the “tail.” With continuous effort and dedication the product improves and starts to snatch customers closer to the head and they become noticed. But it’s too late; the tail is fully consumed and carries enough weight to drive the end. The Invasion is complete [1].

The Prize (and exposure)

Microsoft Forth Quarter Results, 2007 offer some interesting pieces of information:

  • 61% of revenue comes from two divisions (Client and Business Division) which are responsible for the Windows Operating System and Office System + Dynamics
  • 120% of operating income comes from the same two divisions (meaning other division are running at a loss)
  • 80% of the Client revenue comes from OEM sales (i.e., pre-installed versions of Windows on new PCs) and growth is driven by demand of new PCs
  • About 20% of the Business Division’s revenue comes from consumers.

The Events

On September 18th IBM announced it would offer Lotus Symphony for free. There are three core applications that make up the Lotus Symphony tools: Lotus Symphony Documents; Lotus Symphony Spreadsheets; and Lotus Symphony Presentations [1].

On May 1st Dell announced it would offer Ubuntu as a pre-loaded operating system.

The Threat

The Bangkok Post declares IBM’s announcement as taking aim at Microsoft Office dominance. Whether this is true or not, IBM is just the latest in a growing list of free office productivity suites. Google has a suite, Open Office (and NeoOffice strictly for the Mac), Zoho, and I’m sure there are others.

Arguably such free open source versions of Office products are used by a small percentage of the 20% of revenue that is derived from the consumer market. But some of them, like Open Office are sufficiently functional for most needs and given their cost–free–their attraction is likely to spread. If this 20% of revenue is at risk what about the remaining that is derived from business customers. Microsoft’s strategy seems to be to evolve from the desktop to the server, incorporate collaboration and integration. Useful for the larger corporate, but is that true for the smaller, more cost-conscious ones? If not, it’s not clear what percent of revenues is at risk here.

On the operating system side, Apple seems to be making a come back. It’s market share has increase to about 6% with a 30% increase during in 2006 [2] which is at a rate faster than PC sales. Granted even a large percentage increase on a small market share doesn’t amount to much; it’s an indicator. But that may not be the real threat. Dell, HP and Lenovo have started to offer Linux as an alternative pre-loaded operating system. This is a much bigger threat. Why would a consumer want to pay extra for an operating system when he can get one for free?

Most revenue comes from two divisions: Microsoft Business Division and Client
Most income comes from the same two divisions. Of the 4 remaining devisions only Server and Tools is profitable and its profits are insufficient to over come the losses in the remaining ones.

For those who like numbers and tables


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