Redmonk’s Analysis of Microsoft Surface is Naive

Stephen O’Grady of Redmonk, an analysis firm, looked at Microsoft Suface and concluded that the business model around software is in long-term decline.

…another indication that software on a stand alone basis is a problematic revenue foundation.

Mr O’Grady’s analysis is naive. His analysis casts software as a business, rather than a tool that large companies use in support of their business strategy.

Arthur C. Clarke, the sci-fi writer, is reputed to have observed that “Any sufficiently advanced technology is indistinguishable from magic.”

In that spirit, I observe that any sufficiently advanced technology company uses a unique combination of software, hardware, and services in pursuit of its business strategy.

Mr O’Grady is hung up on how a company monetizes its intellectual property. He distinguishes Google from Microsoft on the basis of their monetization strategy: Google makes most of its revenue and profit selling ads, while for Microsoft, the revenue comes primarily from software product licenses.

It’s a naive, shallow distinction.

For a while, the “technology space” was dominated by companies that produced technology and then tried to make money directly, by selling technology – whether that was hardware or software. But things have not been so simple, for a long while.

Mr O’Grady accurately points out that early on Microsoft chose to hedge across hardware technology companies, selling software and making money regardless of who won the hardware war.

Less famously, IBM tried competing in the high-volume hardware and software arenas (PCs, OS2, Lotus, VisualAge, etc) before adopting a similar zag-while-they-zig strategy. IBM chose to focus on business services back in the 90’s, steadily exiting the PC business and other hardware businesses, so that regardless which hardware company won, and regardless which software company won, IBM could always make money selling services.

Microsoft and IBM adopted very similar strategies, though the anchors were different. They each chose one thing that would anchor the company, and they each explicitly chose to simply float above an interesting nearby competitive battle.

This is a fairly common strategy. All large companies need a strategic anchor, and each one seeks sufficient de-coupling to allow some degree of competitive independence.

  • Cisco bet the company on networking hardware that was software and hardware agnostic.
  • Oracle bet on software, and as such has acted as a key competitor to Microsoft since the inception of hostilities in 1975. Even so, Oracle has anchored in an enterprise market space, while Microsoft elected to focus on consumers (remember the vision? “A PC in every home”), and later, lower-end businesses – Windows as the LOB platform for the proverbial dentist’s office.
  • Google came onto the scene later, and seeing all the occupied territory, decided to shake things up by applying technology to a completely different space: consumer advertising. Sure, Google’s a technology company but they make no money selling technology. They use technology to sell what business wants: measurable access to consumers. Ads.
  • Apple initially tried basing its business on a strategic platform that combined hardware and software, and then using that to compete in both general spaces. It failed. Apple re-launched as a consumer products company, zigging while everyone else was zagging, and found open territory there.

Mr O’Grady seems to completely misunderstand this technology landscape. He argues that among “major technology vendors” including IBM, Apple, Google, Cisco, Oracle, Microsoft, and others, software is in declining importance. Specifically, he says:

Of these [major technology vendors], one third – Microsoft, Oracle and SAP – could plausibly be argued to be driven primarily by revenues of software sales.

This is a major whiff.  None of the “major technology” companies are pure anything. IBM is not a pure services company (nor is it a pure hardware company, in case that needed to be stated).  Oracle is not a pure software company – it makes good money on hardware and services. As I explained earlier, these companies each choose distinct ways to monetize, and not all of them have chosen software licensing as the primary anchor in the marketplace. It would make no sense for all those large companies to do so.

Mr O’Grady’s insight is that a new frontier is coming:

making money with software rather than from software.


Google has never made money directly from software; it became a juggernaut selling ads.  Apple’s resurgence over the past 10 years is not based on making money from software; it sells music and hardware and apps. Since Lou Gerster began the transformation of IBM beginning in 1993,  IBM has used “Services as the spearhead” to establish a long-term relationship with a client.

All of these companies rely heavily on software technology; each of them vary on how to  monetize that software technology. Add Facebook to the analysis – at heart it is a company that is enabled and powered by software, yet it sells no software licenses.

Rip Van O’Grady is now waking up to predict a future that is already here. The future he foretells – where companies make money with software – has been happening right in front of him, for the past 20 years.

Not to mention – the market for software licenses is larger now than ever, and it continues to grow. The difference is that the winner-take-all dynamics of the early days is no longer here. There are lots and lots of successful businesses built around Apple’s AppStore.  The “long tail” of software, as it were.

Interestingly, IBM has come full circle. In the early 90’s, IBM bought Lotus for its desktop suite including WordPro, 123, Notes, and Freelance. Not long after, though, they basically exited the market for high-volume software, mothballing those products.  Even so they realized that a services play opens  opportunities to gain revenue, particularly in software. Clearly illustrating the importance of software in general, the proportion of revenue and profit IBM gains from software has risen from 15% and 20% respectively, about 10 years ago, to around  24% and  40% today.  Yes: the share of IBM’s prodigious profit from  software licensing is now about 40%, after having risen for 10 years straight. They don’t lead with software, but software is their engine of profit.

It’s not that “software on a standalone basis is a problematic revenue foundation” as Mr O’Grady has claimed. It’s simply that every large company needs a strategic position.The days of the wild west are gone; the market has matured. Software can be a terrific revenue engine, for a small company. Also, it works as a high-margin business for large companies, as IBM and Microsoft prove. But with margins as high as they are, companies need to invest in a defensible strategic position. Once a company exceeds a certain size, it can’t be software alone.


Enderle on Microsoft’s New Tack

Rob Enderle demonstrates his fondness for dramatic headlines with his piece, The Death and Rebirth of Microsoft.  A more conservative editor might headline the same piece, “Microsoft Steadily Shifts its Strategy.”

Last week, Microsoft (Nasdaq: MSFT) effectively ended the model that created it. This shouldn’t have been a surprise, as the model hasn’t been working well for years and, as a result, Microsoft has been getting its butt kicked all over the market by Apple (Nasdaq: AAPL).

Well Microsoft apparently has had enough, and it decided to make a fundamental change and go into hardware.

Aside from the hyperbole, Mr Enderle’s core insight is correct: Microsoft is breaking free of the constraints of its original, tried-and-true model, the basis of the company for years. Under than plan, Microsoft provided the software, someone else provided the hardware. Surface is different: it’s Microsoft hardware, and it signifies a major step toward the company’s ability to deliver a more integrated Microsoft experience on thin and mobile devices. This aspect of the Surface announcement was widely analyzed.

This is what you may not have noticed: Azure is the analogous step on servers. With Azure, Microsoft can deliver IT infrastructure to mid-market and enterprise companies, without the  dependence on OEM partners, nor on the ecosystem that surrounds the phenomenon of OEM hardware installation – the networking and cabling companies, the storage vendors, the management software vendors and so on.

Just as Surface means Microsoft is no longer relying upon HP or Acer to manufacture and market cool personal hardware, and the rumored Microsoft handset would mean that Microsoft won’t be beholden to Nokia and HTC, Azure means Microsoft will not need to rely on Dell or HP or IBM to produce and install server hardware.

That is a big change for a company that was built on a strategy of partnering with hardware vendors. But times are different now. Microsoft is no longer purely software. In fact it is outgrowing its name, just as “International Business Machines” as a name has lost its meaning for a company that brings in 57% of its revenue through services. But while this is a big step, it’s not an a black-and-white thing. Microsoft maintains relationships with OEMs, for PCs, laptops, mobile devices and servers, and that will continue.  Surface and Azure are just one step away from purity of that model.

Microsoft’s Azure,  and Amazon’s AWS too, presents the opportunity for companies to completely avoid huge chunks of capital cost associated to IT projects; companies can  pay a reasonable monthly fee for service, rather than undertaking a big investment and contracting with 4 or 5 different vendors for installation. That’s a big change.

Very enticing for a startup, or a small SaaS company.

Mark Russinovich #TechEd on Windows Azure VM hosting and Virtual Networking

A video of his one-hour presentation with slides + demo.

Originally Windows Azure was a Platform-as-a-Service offering; a cloud-hosted platform. This was a new platform, something like Windows Server, but not Windows Server. There was a new application model, a new set of constraints. With the recent announcement, Microsoft has committed to running arbitrary VMs. This is a big shift towards what people in the industry call Infrastructure-as-a-Service.

Russinovich said this with a straight face:

One of the things that we quickly realized as people started to use the [Azure] platform is that they had lots of existing apps and components that they wanted to bring onto the platform…

It sure seems to me that Russinovich has put some spin into that statement.  It’s not the case that Microsoft “realized” customers would want VM hosting.  Microsoft knew very well that customers,  enterprises in particular, would feel confidence in a Microsoft OS hosting service, and would want to evaluate such an offering as a re-deployment target for existing systems.

This would obviously be disruptive, both to Microsoft partners (specifically hosting companies) and to Microsoft’s existing software licensing business.  It’s not that Microsoft “realized” that people would want to host arbitrary VMs. They knew it all along, but delayed offering it to allow time for the partners and its own businesses to catch up.

Aside from that rotational verbiage, Russinovich gives a good overview of some of the new VM features, how they work and how to exploit them.

Is Microsoft a Cloud-first Company?

Microsoft is a Cloud-first company, asserts Jonathan Hassell.

Not sure that’s completely accurate, or helpful.  He’s right that Microsoft is accentuating the cloud offerings, these days, and is really pushing to exploit what is a once-every-two decades kind of disruptive development in the industry.

On the other hand the lion’s share of Microsoft’s revenue still derives from on-premises software, in its “traditional strongholds.”

What does it mean? Microsoft upping efforts on Infrastructure-as-a-service

Wired is reporting a rumor that Microsoft will soon launch a new Infrastructure-as-a-service offering to compete with Amazon EC2, in June.

What Does it Mean?

I have no idea whether the “rumor” is true, or even what it really means. I speculate that the bottom line is that we’ll be able to upload arbitrary VHDs to Azure. Right now Microsoft allows people to upload VHDs that run Windows Server 2008.  With this change they may support “anything”.  Because it’s a virtual hard drive, and the creator of that hard drive has full control over what goes into it, that means an Azure customer will be able to provision VMs in the Microsoft cloud that run any OS, including Linux. This would also represent a departure from the stateless model that Windows Azure currently supports for the VM role. It means that VHDs running in the Windows Azure cloud will be able to save local state across stop/restart.

Should we be Surprised?

Is this revolutionary?  Windows Azure already offers compute nodes; it’s beta today but it’s there, and billable.  So there is some degree of Infrastructure-as-a-service capability today.

For my purposes “infrastructure as a service”  implies raw compute and storage, which is something like Amazon’s EC2 and S3. A “platform as a service” walks up the stack a little, and offers some additional facilities for use in applications. This might include application management and monitoring, enhancements to the storage model or service, messaging, access control, and so on. All of those are general-purpose things, usable in a large variety of applications, and we’d say they are “higher level” than storage and compute. In fact those services are built upon the compute+storage baseline.

For generations in the software business, Microsoft has been a major provider of platforms. With its launch in 1990, Windows itself was arguably the first broadly adopted “application platform”.  Since the early 90’s, specialization and evolution have resulted in an proliferation of platforms in the industry – we have client platforms, server platforms (expanding to include the Hypervisor), web platforms (IIS+ASP.NET, Apache+PHP), data platforms, mobile platforms and so on. And beyond app platforms, since Dynamics Microsoft has also beein in the business of offering applications as well, and it’s here we see the fractal nature of the space.  The applications can act as platforms for a particular set of extensions.  In any case, it’s clear that Microsoft has offerings in all those spaces, and more.

Beneath the applications like Dynamics, and beneath the traditional application platforms like Windows + SQL Server + IIS + .NET, Microsoft has continued to deliver the foundational infrastructure, specifically to enable other alternative platforms. Oracle RDBMS and Tomcat running on Windows is a great example of what I mean here. Sure, Microsoft would like to entice customers to adopt the entirety of their higher-level platforms, but the company is willing to make money by supplying lower-level infrastructure for alternative platforms.

Considering that history, the rumor that Microsoft is “upping efforts on infrastructure as a service” should not be surprising.  Microsoft has long provided offerings at many levels of “the stack”.  I expect that customers have clearly told Microsoft they want to run VHDs, just like on EC2, and Microsoft is responding to that.  Not everyone will want this; most people who want this will also want higher-level services.  I still believe strongly in the value of higher-level cloud-based platforms.

Platform differentiation in the Age of Clouds

It used to be that differentiation in server platforms was dominated by the hardware. There were real, though fluctuating and short-lived, performance differences between Sun’s Sparc, HP’s PA-RISC, IBM’s RIOS and Intel’s x86. But for the moment, the industry has found an answer to the hardware question; servers use x64.

With standard high volume servers, the next dominant factor for differentiation was on the application programming model.  We had a parade of players like CORBA, COM, Java, EJB, J2EE, .NET. More recently we have PHP, node.js, Ruby, and Python. The competition in that space has not settled on a single, decisive winner, and in my judgment, that is not likely to happen. Multiple viable options will remain, and the options that enjoy relatively more success do share some common attributes: ease of programming (eg, building an ASPNET service or a PHP page) is favored over raw performance (building an ISAPI or an Apache module in C/C++).  Also, flexibility of the model (JSP/Tomcat/RESTlets) is favored over more heavily prescriptive metaphors (J2EE). I expect the many options in server platform space to continue; the low-cost to develop and extend these platform alternatives means there is no natural economic value of convergence, as there was in server hardware where the R&D costs are relatively high.

Every option in the space will offer its own unique combination of strengths, and enterprises will choose among them. One company might prefer strong support for running REST services, while another might prefer the application metaphor  of Ruby on Rails.  Competition will continue.

But programmer-oriented features will not be the key differentiator in the world of cloud-hosted platforms. Instead, I expect to see operational and deployment issues to dominate.

  • How Reliable is the service?
  • How difficult is it to provision a new batch of servers?
  • How flexible is the hosting model? Sometimes I want raw VMs, sometimes I want higher-level abstractions. I might want to manage a “farm” of servers at a time, or even better, I might want to manage my application without regard for how many VMs back it.
  • How extensive are the complementary services, like access control, messaging, data, analysis, and so on.
  • What kind of operational data do I get out of that farm of servers? I want to see usage statistics and patterns of user activity.

It won’t be ease of development that wins the day.

Amazon has been very disruptive with its AWS, and Microsoft is warming to the competition. This is all good news for the industry. It means more choices, better options, and lower costs, all of which promotes innovation.