Microsoft Profits Down: End of an Era?

Microsoft Logo (image from damclean on flickr)

Microsoft posted its worst results last week. Profits are down 32%. For over two decades the company has dominated the software business. Microsoft practically invented the idea of selling packaged software. Now things are changing. The business model of selling packaged software product in versions using a retail channel is fading away and being replaced, at least for the consumer, by Internet applications sold as services.

The biggest part of the profit decline for Microsoft is Windows. Windows profits are down 16%. Of course this is mostly due to the the weak economy as PC sales are down. The Netbook is also causing disruption since Windows for small computers gives Microsoft lower profit margins. However, there is an important trend here. The Operating System is becoming a commodity. The first OS to become a customer product was Windows 95 with people in lines to buy the system. With Vista, no lines, nothing. People are not that interested in an OS, it just has to be there, a commodity. The real value is in the network and the “live” software, an on-line service.

Software as a product seem to be a declining model. At its best times, Microsoft would ship new versions of its products every 1-2 years, where each version adds new features, better performance, and of course bugfixes and usually new bugs. Indeed, Office and Business software profits are down 4,51%. The always-on connectivity of the Internet is changing the game. Compare the old style Powerpoint presentation software to Prezi. People buy into a service. There are no versions, you just get the software service as it is. And the upgrades come when they are ready.

This does not mean that the client on the desktop is dead. It means that the model is not client/server anymore, but is client-as-needed/server, or RIA/Service. The client can run on the user’s computer if needed, but is maintained online. And the documents are online instead of the cluttered and almost full hard disk. The key point is the ability to share. Consider Jing.

This means that the cloud has an increasing role. Indeed, the only software that seems to be growing for Microsoft is the Server and Tools part.

The software market is changing is some fundamental way. Operating Systems have become commodity. Packaged software for retail is declining. Versions are out and service subscriptions are in. No doubt this will cause some challenges to Microsoft, and make interesting case studies. However, if there is one big company that has been resilient and capable to adapt it has been Microsoft. Can they still change?