I hadn't picked this trend, it's quite important.
It squeezes their 2nd "birthright" (the other is the PC Operating System, I'd focussed on.)
Microsoft achieves around 90% "Gross Margin" on two product lines (O/S and Office), and these lines carry the rest of the business. There is also the "Enterprise" division: they leverage these two product lines and add server software like O/S, Exchange and SQL Server.
Perhaps Office 2007 was the zenith, even for Enterprises?
Microsoft has never embraced the idea that products can be complete.
To go forward, you can't add more frills.
You have to completely reinvent/redefine the product or the field - like the iPhone.
I can't do better than Wilcox's article - I suggest you read the link.
For a quicker read, I've picked out what I see as the most salient points.
There are two very good paras at the start and a cute last one. [Italicised]
To draw out the financial problem with "Gross Margin" - successful companies attain 20-30% in the long term - here's a small calculation using the Microsoft 6-month results for Q2-2010 (to 31-Dec-2009).
You'll note we aren't given per-product break-downs, only Divisional (Microsoft uses the word "Segment" or "Channel".). From a straight business perspective, 3 divisions account for 80+% of the Revenue, and 34% of the Expenses. If Microsoft killed the other Divisions, they'd improve their bottom line 11-fold. Which you'd expect them to do if pressed hard.
Obviously they have important divisions, (Research and Development, Corporate Admin) that aren't tied to specific Revenue streams. They would be subject to cost-cutting as well.
|Windows & Windows Live Division||$9,528M||$2,674M||$6,854M||72%|
|Server and Tools||$7,278M||$4,511M||$2,767M||38%|
|Microsoft Business Division||$9,149M||$3,282M||$5,867M||64%|
At 90% Gross Margin (GM), each $100 of Revenue is matched with $10 of Expenses, yielding a Profit of $90. At 20% GM, each $100 Revenue costs $80 to raise.
If Inputs (Expenses) for the same Sales Volume remain the same, but the Gross Margin drops from 90% to 20%, then $80 in Inputs that once yielded $800 Revenue, now only yields $100 Revenue and $20 of profits, not $720. Ouch!
So what would that look like in the Income Statement?
|Windows & Windows Live Division||$3,450M||$2,674M||$776.3M||22.5%|
|Server and Tools||$5,639M||$4,511M||$1,128M||20%|
|Microsoft Business Division||$4,376M||$3,282M||$1,094M||25%|
Reflecting on that scenario, it might take 5-10 years to slide down that far.
What's more likely in the next few years? The Business Division and "Servers and Tools" are going to slide a bit, maybe Windows will halve it's gross margin:
|Windows & Windows Live Division||$4,178M||$2,674M||$1,504M||36%|
|Server and Tools||$6,444M||$4,511M||$1,933M||30%|
|Microsoft Business Division||$3,282M||$3,282M||$3,282M||50%|
To remember that these things happen quickly and with high impact, here's what the NY Times wrote in early 1993 about IBM, their crisis still to run for a year:
For the quarter, the company reported a loss of $5.46 billion on revenues of $19.56 billion. In the quarter a year ago, I.B.M. posted a loss of $1.46 billion on revenues of $21.97 billion.
For the year, the company reported a loss of $4.97 billion on revenues of $64.5 billion. In 1991, I.B.M. posted a loss of $2.86 billion on revenues of $64.8 billion.
The full-year loss of $4.97 billion by I.B.M. is the largest in American corporate history.
Before they controlled the haemorrhage, IBM had lost $20Bn between 1991 and 1993.
What finally saved the company was the board replacing John Ackers with an industry outsider, Lou Gerstner.
Unisys has shown that large, badly managed I.T. companies riven with internal politics and dysfunction can survive on their own for decades.
Declining Revenues isn't necessarily the end of iconic brands.
This exercise in Gross Margin suggests that if Microsoft maintains the same Sales Volume and cost structures and ditches unprofitable Divisions, it's Revenues might more than halve, and it could increase it's profitability.
But it has to concentrate on its core business or face failure.
Unisys and IBM provide salutary lessons on what a board has to do and not to do.
This month's Office 2010 retail pricing announcement and ongoing discounts for Office 2007 Home and Student are Microsoft's tacit acknowledgment that the productivity suite isn't as valuable as it once was.
Office is tracking a course of unplanned obsolescence and the inevitable end shared by oh-so many other products: Commoditization.
Additionally, Microsoft faces a fundamental shift in what content people create and where.
Commoditization and the emerging mobile device-to-cloud services applications stack are Office killers.
I'll ask upfront: Do you really need Microsoft Office on a daily basis?
But in a Web-connected world, Office's value diminishes.
- Is Office vital to your work day?
- Do you use it at home?
- If you use it at work, how often?
- If you use it at home or for college, how often?
The pressing question: How low can Office's value go how soon?
For years, Microsoft has kept Office pricing fairly stable, mainly because of monopoly's power.
Since Office vanquished WordPerfect in the mid-1990s, no productivity suite could compete. [and competent alternatives have arisen since. SJ]
Word processing reached commodity status years ago, as more applications incorporated the basic formatting features most people use more than 90 percent of the time.
Be honest, how much of the writing you regularly do requires a dedicated wordprocessor?
In a January 2008 Microsoft Watch blog post I [Joel] asked "if Office 2007 would be a one-hit wonder"?
Reasoning: With the Ribbon interface, v2007 will be good enough for most businesses to skip next Office version or the one after.
The new applications stack, which is outside of Microsoft monopolies, is mobile device to cloud service.
[on content types] ... Blogs, photos, videos, tweets and social network postings, among others.
These content types have little or nothing to do with wordprocessing, spreadsheet or presentation applications.
The mobile handset market dwarfs the PC market by 4.6 times.
IDC asserts that the mobile Internet is only 450 million users, which is expected to top 1 billion by 2013.
PEW Internet predicts that by the end of the decade cell phones will replace PCs as primary Internet devices.
As the mobile Internet install base increases, natural user interfaces
will further supplant productivity suite functionality.
For me, Microsoft Office already is obsolete.
The question remains: When will Office be obsolete for you?