Monday, November 18, 2013

Inefficiency as a business model: Microsoft

Unemployment has been higher than 7% since Obama was elected in 2008. The captains of industry and finance have done little to nothing to help ease the pain for consumers while helping themselves to enormous profits at the expense of the worker. Certainly, they have no interest in moving legislation that would ease the pain. But the entire fracas around the decline of the economy since the credit freeze of 2008 highlights something I began to observe a few years ago. Inefficiency is a business model.

Hard to believe, I know. I got the idea while reading a fascinating article on American business practices a few years ago. In that article, the author makes an interesting claim: For the most part, American business, especially big business, creates profits by subtracting value from what they sell - rather than adding value to it. For the most part, it's rare to see a business increasing profits by adding value to their products. It seems like executives take pride in being able to continue to make money while their customers hate them with a passion.

So lets look at one of my favorite examples, Microsoft. Microsoft makes most of their money licensing software. They also make money from the confusion surrounding their licensing practices. There is so much confusion about the complexity of Microsoft licensing, that very large organizations actually hire consulting firms that specialize in Microsoft licensing.

Back in the days when I did some consulting on the side, I remember talking to others in the same trade. They pointed out that the reason Small Business Server was so popular as a seller among consultants was that it breaks often. It generates billable hours like nothing else for consultants. Microsoft's mantra, exclaimed by Steve Ballmer at their annual meetings was, "developers, developers, developers!" This means create opportunities for developers, not consumers. Vendor lock-in is a source of pride to Microsoft executives.

Result: Microsoft is steadily losing market share. Microsoft stock has been going sideways for more than a decade (around $34 a share these days). The only future I see for Microsoft is a life as a patent holding company because they have lost the will or the desire to innovate. I see this future because Microsoft now rakes in $2 billion a year on patent royalties for software patents. This extra cash is reducing Microsoft's incentive to truly innovate and create products that people actually want.

For more than 20 years, they've been relying upon very bad licensing practices to wipe out or preclude competition from the consumer desktop market - all with government protection at its beck and call. For these reasons above, I will never buy a computer with Windows on it and actually use Windows. Why?  The subsidies for Windows computers are substantial and Microsoft makes most of their money on business licensing of business application servers like Exchange Mail Server, MS-SQL server and of course their office suite, Microsoft Office. I don't need it when I can run Linux.

Linux, in the mind of Microsoft executives, is a cancer. When they find that a company is using Linux, they call it an "infestation" that must be killed. Having killed off all credible competition, Linux is recognized as a threat to their inefficient business model that they could not control. Linux is not owned by any particular person, yet everyone who uses it has a voice in the development of Linux, should they choose to use it.

The anti-Microsoft is Google. Google has been adding value to search for at least a decade. First, they got really, really good at search. I use Google because my search experience with Google is far better than with the competition. Then they came up with Gmail, a very reliable email service with very complete spam filtering. Sure, they scan the email for keywords to tailor ads in their email application, but I hardly ever see them.

Then Google added Google Docs, Hangouts with SMS, blogger and a host of other features and applications that I don't use very much, but someone out there wants them. The Chrome browser is what finally nailed everything together. Fast, secure, open source, easy to use. I can use Chrome on Mac, Windows and Linux and get the same look because Chrome uses open standards. Once Google put Gmail on a phone running Android in 2007, I no longer had any need for Windows. By the way, Google shares are trading at more than $1000 a share.

The biggest difference between Google and Microsoft is in the licensing of their software. Google is the creator of Android. Android is free and open source software. If you don't want to use the operating system on your phone, you can root it and install CyanogenMod, an alternative operating system for your phone. Why? It's open source software that anyone, even Microsoft, could use, if they adhere to the license. Android powers 80% of the new phone market now and activates more than a million phones a day. Every day. By using open standards and open source software, Google holds the feet of their engineers to the fire by letting them know that customers have a choice up and down the stack of software. From search to phone.

Microsoft, on the other hand, relies upon closed source, proprietary software, with confusing license language and difficult to follow licensing rules. They depend on patents and strict copyright rules to create a captured audience to survive. While Google treats people like a true customer, Microsoft treats their customers like criminals. At least Microsoft is efficient about the way they treat their customers.
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