Does Microsoft Understand the ‘Net?

My career in IT started pre-Internet so I have seen much of the history unfold with a near 50 yard line seats. But I have to ask does Microsoft really ‘get’ the Internet. This discourse pops up from time to time on the tech blogs. But now I have detected three events that tend to indicate a trend.

But do I need to remind folks we have sort of been here before? When the ‘Net burst on the scenes in the late ’80’s it was novel and a user supported affair. But it was not long before the NCSA browser was adopted by Netscape and off to the races. For well on 18 months Netscape had free reign in the marketplace with Microsoft sitting on the sidelines oblivious to the paradigm shift. Eventually they recognized the threat and developed IE.

Now? Well its what Microsoft is doing rather than not doing this time. –

A) The Yahoo non-assimilation. We have covered the Yahoo - Microsoft dance several posts. I won’t elaborate too much. Then rumors floated of a possible Microsoft - FaceBook match up. All these moves appear to be an effort to develop a ‘Net income producing presence separate from the desktop metaphor.
 
B) Shutting down the book search engine effort. We then get this from the blog Google Operating System.

“Given the evolution of the Web and our strategy, we believe the next generation of search is about the development of an underlying, sustainable business model for the search engine, consumer, and content partner. For example, this past Wednesday we announced our strategy to focus on verticals with high commercial intent, such as travel, and offer users cash back on their purchases from our advertisers.”  

In other words, the book search engine didn’t make enough money and Microsoft decided it’s better to focus on areas that are more profitable. Instead of improving their search engine with valuable content from books and offering better search results, Microsoft chose to make decisions based on the short-term profits.

C) Removing unpopular XBox games from the download site. Then from Wired we have this —

What on Earth is Microsoft thinking?

Consider the case of Asteroids Deluxe, above. Maybe it’s not the most popular game on Xbox Live Arcade, but surely there are some people out there who want to play a high-def version of Atari’s classic shooter, right? Last I checked, that was the whole point of digital delivery: You don’t have to only publish the hits. Zero cost of goods and just-in-time inventory means that you can sell a little of a lot of different things.

So why is Asteroids Deluxe in danger of being yanked from the Xbox Live catalogue?

Xbox Live general manager Marc Whitten told Next Generation this week that Microsoft will soon begin to delete some Xbox Live Arcade games from the service. The rationale is, to put it nicely, paper-thin: To “focus on quality over quantity” and “make it easier to find the games you are looking for.”

That is, Microsoft is going to reduce digital download games choices. That would be like iTunes dropping ‘By the Dock of the Bay’ because Sam Cooke only sells 2 tunes a day. But that is what Microsoft is preparing to do.

So what do all these events have in common? Short quarter thinking. Its the only thing that makes any sense. But let me lay the ground work for why.

Consider the games reduction. It makes no sense. The sunk cost for housing the games for download has already been paid. So even if a game only does 5-6 sales a week it is by this point nearly pure profit both for Microsoft and the game developer for their royalty payment. I would recommend the book the ‘Long Tail’ by Chris Anderson for a full explanation. But non-physical goods to do not incur warehousing costs like physical products so their retention does not impact the bottom line. Then we have Microsoft backing out of the book search concept. Ok granted it takes expense to keep feeding the machine but as a competitive move for LiveSearch its a bad move. It leaves the the concept totally to Amazon and Google. That indicates a brand retreat to consumer. Finally we have the Yahoo deal. It is interesting that Microsoft felt compelled to buy a revenue stream when there were supposed to be constructing one with LiveSearch. Now I will grant that sometimes it is cheaper to buy into a market than build your presence in that market from the bottom up. The Yahoo thing had a aura of desperation to it. It never made sense to me that Microsoft was going to battle the boardroom without the backing of the institutional investors first.

The conclusions? –

• Microsoft’s acumen outside the desktop/server environment lacks insight and in many cases is too much ‘me too’ in scope.
• Its ability to generate revenue is below that of its competitors. That is evidenced as part of the first bullet point.
• Microsoft’s pull back over these markets and its move to buy market may indicate a revenue shortfall and likely short term bad quarters for the giant for the balance of the year.
• Unable to get these revenue streams to a break even point Microsoft faces some tough choices. Couple that with all is not well in the desktop arena regardless of the rosy Vista projections. The Windows margins have been shrinking for two quarters now.

The bottom line? Is Microsoft the next Novell, like Novell was in 1995 having been speared by the Microsoft juggernaut in the server market? Wish I could ask THE question — “Bill did you know 3 years ago when you handed the COO job to Balmer that the franchise was running out of steam in the marketplace?”

I’ll put the crystal ball down now. Anyone have any other explanation for the events I have just outlined? I am all ears!