Ever since Microsoft® was founded in 1975, the company has been instrumental in shaping the way in which businesses and consumers conduct their activities. It’s hard to imagine how different our world would be today if not for Microsoft® but their ability to dominate and dictate actions may be coming to an end. Historically, Microsoft® was an innovative technology leader with the resources and business plan that created sustained growth for themselves while creating countless business opportunities for others. The strategy of licensing their software to anyone willing to pay for it, either as an end user or in partnership with OEMs, for example, enabled MS to build and maintain an ecosystem in which Microsoft® received revenue from multiple sources while creating an industry standard with which no one could compete. This served them well for many years, particularly with flagship products such as Windows® and Office®. Unfortunately for MS, the technology and user habits they were so instrumental in developing are evolving and Microsoft® now often finds itself in the unfamiliar territory of trying to compete in markets which are often not their area of expertise. This is bad news for MS partially because they are losing customers, but also because they are being forced to compete in markets where there is little or no direct sales revenue. If we consider Windows® and Office®, MS is now being forced to compete with the Android™ and Chrome™ Operating Systems and with Google Apps™ for business productivity. While Microsoft® Office® remains the industry standard for professionals, Google Apps™ are much less expensive and are particularly well suited for cloud distribution. As for Windows®, Google is employing the same business model that made Windows® the industry standard for so many years, but Android™ and Chrome™ are each an Open Source OS that requires no royalty payment. Google® can afford to do this because their product is not the software itself but rather, advertising and capturing user habits for marketing and other purposes. In other words, Microsoft® is now attempting to compete in markets with little or no revenue potential for some of their traditional products.

This doesn’t necessarily mean Microsoft® is in trouble. It should be noted that they continue to report record earnings with very enviable profits. They also have huge cash reserves and can afford sizeable acquisitions or product development. Their global presence and diverse product line offers sustainable growth in many areas, but the future role of the company may be much less ground-breaking than in the past.

Of course Microsoft® will continue to maximize their revenue in every way they can, and one way in which they will do that is to find new ways to sell the same (and future) products. Perhaps the most notable example of this is Office®365 which offers a cloud based subscription model, rather than the traditional locally based perpetual license. The increasing popularity of tablets and thin clients is fueling a rapid migration to cloud computing and the cloud represents a perfect scenario for subscription based licensing. Customers have a lower cost of entry and only pay for software as long as they need it. They are also assured of the latest version of the product and may not need multiple licenses for multiple devices. Microsoft® benefits from a recurring revenue stream and reduced software piracy.

Another way in which Microsoft® will adapt to the changing market is with increased emphasis on their server products and on Device and User CALs. We will also likely see increasing pressure to purchase Software Assurance and other support and service offerings.

Most application software should be able to be modified to be cloud based, whether licensed as a subscription or perpetually. This will be just one of many ways Microsoft® attempts to adapt to a changing marketplace.

Nov 2016